DC Advisory
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There has been a sudden flurry of M&A activity in the restaurant space, and we expect this to continue. Within just the last two weeks, it has been announced that:  Panera is selling Au Bon Pain, FAT Brands is buying GFG  Group that owns five different brands, Famous Dave’s is buying Village Inn and Baker’s Square, Lee’s Famous Recipe was sold again, A Jack in the Box franchisee is buying Taco Cabana from Fiesta Restaurant Group and J.Alexander’s is going private by way of SFP Hospitality. This is on top of the $500M IPO of Krispy Kreme and the multi-billion dollar SPAC transaction that is taking Tilman Fertitta’s hospitality empire public.

The reasons for all of this include:

(1) Interest rates are still very low.

(2) There is a great deal of dry powder in the hands of private equity as well as half a dozen SPACs  (sitting on a billion dollars plus borrowing power) with a time pressure to complete an acquisition. The restaurant space has always been seductive, even in the worst of times. Everybody thinks it is a simple business, which is true;  simple but uniquely demanding, especially with adolescent labor being a major part of the equation. We could write a book, and maybe we will, about the poorly conceived acquisitions  that have been made over the years In the restaurant industry,  but that doesn’t dull  the appetite of the new, often younger, players.

(3) The industry is now recovering almost daily from the pandemic, so buyers feel they can opportune the recovery, especially since off-premise sales (including curbside pickup, delivery, and digital applications) provide new growth possibilities. Beauty is in the eye of the beholder, and the buyers of the brands listed above have the financial muscle and the ego to give it a shot.

(4) The restaurant industry has been traumatized in the last fifteen months so it is natural for some single brand owners to have “had enough”. At the same time, professional multi-branded operators have had ample time to study their portfolio and decide which portions of the tree are worth pruning. Sales are returning, but a labor crisis lingers, and it is unclear how the new sales and service initiatives will affect future operating margins. This provides an ongoing pool of willing sellers.

(5) Valuations have returned to relatively high levels among publicly held chains. This provides a reference point for private valuations, which is supported also by the availability of capital at historically low interest rates. A degree of rationality has begun to return, as evidenced by the SPAC index trading 25% off its high and the lukewarm reception of the recent Krispy Kreme IPO, but there is still huge liquidity within the capital markets.

(6) The talk, by the Biden administration, of much higher capital gains taxes, 43% federal and state tax on top of that, provides a strong motivation for a potential seller to get a deal done this year. Time will tell whether, or how much, taxes will go up, but they are not coming down.


Our expectation is that virtually all of the above drivers of currently high level of M&A activity will remain in place for the foreseeable future. Additionally, campaign season for the crucially important mid-term national election is already upon us. That being the case, the Treasury and the Federal Reserve, openly working in tandem (ignoring the supposedly mandated independence of the Fed), will do everything in their power to keep interest rates low and money available.

If you are a potential seller, get your power point presentation ready and, as Bernard Baruch advised, leave a little on the table for the next guy.  If you are a buyer, be careful out there. It’s not as easy as it sometimes looks, and leverage works both ways. One last thought for would be restaurant brand builders: Every brand you own needs a really great operator to lead, by experience and example,  and they are not easy  to find. Many years ago, we met Ross Perot, who became eccentric by the time he ran for President , but, in his youth (founding and building EDS) was a spectacular leader. He had a sign above his desk which said: “Eagles Don’t Flock, You Have to Find Them One at a TIme”.

Roger Lipton