Restaurant Finance Monitor
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FAT Brands (FAT) announced this morning an agreement to acquire Global Franchise Group (GLG), which is the franchisor and operator of five quick service concepts: Round Table Pizza, Great American Cookies, Hot Dog on a Stick, Marble Slab Creamery and Pretzelmaker. This appears to be a potentially transformative transaction for FAT Brands, a rapidly emerging multi-brand franchisor of quick service and fast casual restaurant concepts.

We refer readers to our previous articles describing FAT Brands (use the SEARCH function on our Home Page). In summation, FAT currently owns nine restaurant brands: Fatburger, Johnny Rockets, Buffalo’s Café, Buffalo’s Express, Hurricane Grill & Wings, Elevation Burger, Yalla Mediterranean, Ponderosa and Bonanza steakhouses. Of note is that FAT Brands approximately doubled the size of their portfolio with the acquisition last September of Johnny Rockets. Of equal importance is that a new securitized credit line raised $144M this past spring, reducing the interest rate on the existing long term debt by about 300 bp to 5.92%, while providing about $50M for future acquisitions.

The new transaction appears to be transformative in terms of scale and cash flow generation per share. There is no doubt a great deal more information to be provided to shareholders but today’s release indicates that systemwide sales for the FAT portfolio will approximately double to $1.4B. Management stated this morning that “the acquisition is expected to eventually increase annual EBITDA by approximately $40M to approximately $55-$60 million….the five new restaurant concepts have been very resilient coming out of the pandemic….furthermore we will acquire GFG’s manufacturing operations, which will provide greater efficiencies and incremental revenue opportunity to our company.”

We have provided a table below which, based on the guidance so far provided, appears to more than double the free cash flow per share of FAT Brands. We took the current post pandemic guidance of $15-20M of EBITDA, and added the $40M from GFG, subtracting our estimate of new debt expense (@5.92%) and newly issued preferred dividends (at 8.25%). As the table shows, FAT free cash flow generation could grow from about $0.84/share to $1.70/share. This estimate is admittedly rough, based on a limited amount of information so far available, but provides an order of magnitude of the acquisition’s effect.

FAT Brands common stock, while trading at an all time high, is selling at an obviously modest level relative to the new potential $1.70 of FCF per share, about double previous expectations.

Roger Lipton