Jollibee Foods Now Majority Owner of Smashburger in $100M Deal

Smashburger announced this week that Jollibee Foods Corporation has agreed to acquire an additional 45 percent of the Smashburger brand for $100 million, bringing its ownership stake to 85 percent.

The Denver-based hamburger chain had entered into a strategic partnership with Jollibee Foods (JFC) in October 2015. Smashburger, then at 335 corporate and franchised units, said it had a definitive agreement to sell 40 percent of the company to Jollibee, which valued Smashburger at a $335 million. The announcement stated, "Approximately 60 percent of Smashburger is company owned and operated. Smashburger continues to grow at a rate of 20 percent annually."

Jollibee Foods (PSE:JFC) operates a large food service network in the Philippines. As of December 31, 2017, it had 2,875 restaurant outlets in the country under various brands; for example: Jollibee, Chowking, Greenwich, Red Ribbon, and Mang Inasal to name a few. Jollibee operates 924 restaurants abroad, bringing its total to 3,799 stores for the JFC Group's entire network.

"Jollibee has been an invaluable strategic partner to date," said Tom Ryan, co-founder and CEO of Smashburger. "Our momentum in 2017 around improved guest experience, iconic and record-setting product launches, and innovative marketing provide JFC a tremendously strong brand to enter the North American market. Our entire team couldn't be more excited to grow the Smashburger brand and share the great tastes of Smashburger with the world."

The burger chain says Jollibee's majority stake positions the brand for continued growth. CFO Bradford Reynolds explained, "This reinforced strategic partnership with JFC will allow Smashburger to continue to focus on growth in both existing and new markets including the opportunity to bring our great tasting burgers, fries and hand-spun shakes to Southeast Asia. We look forward to building upon our successful relationship to further bolster the brand as an international leader in the better burger segment."

Smashburger wants to grow, grow, grow

Smashburger began in 2007 in Colorado "with the vision of Rick Schaden and funding by Consumer Capital Partners, a private equity firm that Rick Schaden and his father Richard own, the company press release said." It added that Smashburger currently has 360 corporate and franchise restaurants operating in 38 states and nine countries.

In November 2011, Forbes magazine interviewed founder Tom Ryan, asking the question, "Does the world really need another burger joint," pointing to all the other brands that "clog strip malls and highways." Ryan eagerly responded saying the hamburger is American's favorite food and, in the midst of a severe recession, his company will have grown to 143 locations (half company-owned, half franchisee-owned) and $54 million in annual revenue by the end of 2011. Ryan said another 450 franchise agreements were already on the books.

That commitment to "such torrid expansion" earned Smashburger top honors on Forbes list of America's Most Promising Companies, "privately held up-and-comers with compelling business models, strong management teams, notable customers, strategic partners and precious investment capital."

Smashburger announced in April 2015 that it was looking to boost its marketing program. In an email to Ad Age, it said, "With our continued growth of adding new restaurants at about 25 percent annually, we are also looking to increase our marketing efforts." At that time, Technomic rated it as the 20th largest burger chain in the U.S., and estimated systemwide sales of $268.1 million, up nearly 25 percent from the prior years. At the end of 2014, it had an estimated 280 units in the U.S., a 16.7 percent increase from the unit count in 2013. Smashburger touted, "In total, the company founded in 2007, has more than 310 locations in 34 states and seven countries. Then in June 2015, the hamburger chain announced that it had added three franchise partners that planned to open 61 new restaurants in Florida, New York and North Carolina.

But growth was slow to come and Smashburger's management team seemed to be caught in a revolving door at the company's headquarters in Denver. The company was constantly shuffling top executives from one position to another, and in May 2016, Smashburger announced that Tom Ryan would be at the helm of the company as CEO/president, as the company "continues making moves to evolve its business and grow more aggressively."

According to franchise disclosure documents (FDD), Smashburger has not reached its goals. As of the end of its 2014 fiscal year, there were 288 Smashburger restaurant in operation in the U.S., of which 166 were company-owned and 122 were franchisee-owned. As of the end of its 2016 fiscal year, there were 355 Smashburger restaurants in operation in the U.S., of which 209 were company-owned and 146 were franchisee-owned. (FDD 2017 pg. 56).

Because Richard "Rick" Schaden and his father Richard F. Schaden are on the Smashburger board of directors, Smashburger's FDDs continue to list in its Item 3, Litigation, all pending and completed lawsuits for the required period of time, not only for Smashburger, but also Quiznos and its other brands.

The only pending litigation listed is Avenue Capital Management II, L.P., et al vs. Richard F. Schaden, et al, a civil lawsuit filed in district court for the City and County of Denver, filed January 12, 2017. Avenue Capital alleges Quiznos and the named executives, including Rick Schaden and Tom Ryan and others, violated the Colorado Securities Act, aided and abetted fraud and engaged in a civil conspiracy to deceive Avenue Capital plaintiffs by making or facilitating certain misrepresentations and omissions on which the plaintiffs relied in deciding to consummate certain investments and debt restructuring they made in the Quiznos entities in January 2012." The claims in the case arose from part of the reorganization plan approved in the bankruptcy proceedings filed by various Quiznos entities. It states, Quiznos defendants intend to defend against the allegations. (Click: Smashburger FDD 2017)

Smashburger has been operating for over ten years and has not increased its number of franchisee locations, now at 146. Its Smashburger website discloses, "Currently, the following states in the United States regulate the offer and sale of franchises: California, Hawaii, Illinois, Indiana, Maryland, Michigan, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin. If you are a resident of one of these states, we will not offer you a franchise unless and until we have complied with applicable pre-sale registration and disclosure requirements in your jurisdiction."

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Janet Sparks