FAT Brands, Inc. (FAT) TO EXPAND PORTFOLIO SYSTEMWIDE SALES FROM $1.4 TO $1.8 BILLION

CONCLUSION:

FAT Brands, Inc. continues to materially expand its current portfolio, soon to be 2100 locations among fifteen brands, generating  $1.8B in portfolio systemwide  sales. While the purchase price of $300M may appear to be materially more than previously paid, and not a particular bargain, based on the unit level economics and growth prospects as described below, the purchase price of Twin Peaks can be viewed much more favorably. The initial debt (and Preferred Stock) service, which will start off close to 8% (expected to be re-rated later) would be $24M. The incremental  EBITDA, as described below, will start close to $30M and expand from there, so the addition to corporate free cash flow would quickly become $10M or more. Re-rating of the $250M would obviously  improve the corporate free cash flow further, just as the re-rating of the previous securitizations would to FAT more broadly.  Overall, we view the Twin Peaks acquisition to be well considered, and should provide additional value to shareholders over time.

THE TWIN PEAKS ACQUISITION

We have provided previous articles describing FAT Brands, which can be accessed by way of the SEARCH function on our Home Page.

FAT Brands, Inc. announced today an agreement to acquire Twin Peaks, an 82 unit chain of “sports lodges”, full service casual dining restaurants selling “scratch made”food and craft beer. The purchase price will be $300M, paid for with $50M of series B preferred stock and $250M of new securitization notes. Systemwide sales of the 82 current locations are approximately $400M, which indicates an AUV just under $5M. The announcement indicated that FAT Brands’ post-Covid normalized EBITDA will be increased by $25-30M. (Recall that the previous guidance for post-Covid normalized EBITDA has been $55-60M.) By 12/31/21 there are expected to be 6 new locations, to be a total of 100 within the next eighteen months. The transaction is expected to be consummated by the end of September.

Per  management on the Conference Call:

From an overview  standpoint, management feels that “Polished Casual Dining” is a very attractive segment and future acquisitions may well expand this portion of the 2100 unit portfolio, including Twin Peaks. There are currently 26 company operated locations, which may or may not be franchised, depending on the available sale price relative to the current cash flow return.

The unit level economics of Dallas based Twin Peaks are impressive. The AUVs were $4.7M in 2019 and are running solidly ahead of that in 2021. Store level EBITDA is over 15%, after a 4-5% royalty, generally providing a sales/investment ratio of over 2x. If the average investment is $2.5M, and the store level EBITDA is 15%, $750k would represent a 30% cash on cash return for franchisees, obviously higher on the newest locations, which are generating closer to $6M annually.

Same store sales at Twin Peaks have been consistently strong since the Covid “re-opening” in March, with comp sales up 10,13, and 18% in periods 5,6, and 7 versus 2019. More broadly in the FAT portfolio, the casual dining concepts have been lately running up 10-15% and QSR up 9-12%.

Twin Peaks is considered a growth vehicle, perhaps the strongest in the enlarged FAT portfolio. Management feels that the 100 units within eighteen months can double or more within 5-7 years, including strong interest from abroad. In addition to dine-in sales, management feels that food items can be sold “virtually”, expanding the previous modest 5-7% of sales. Especially considering the attractive unit level economics at the newest  locations, there is the potential for cross selling of Twin Peaks’ locations to other franchisees within the FAT portfolio.

The indicated $25-30M of incremental EBITDA to FAT, purchased for $300M, implies a purchase price of about 11x, but the growth that is in place should quickly reduce the multiple to the range of 8-9x, reasonable for a strong concept with well above average growth characteristics.

The G&A with Twin Peaks’ organization runs $6-7M per year, expected to be largely retained, since FAT management thinks very highly of the existing Twin Peaks team.

SUMMARY

Our back of the envelope calculation goes like this:

26 company operated locations at $4.7M per location, generates  $122M of revenues, with an EBITDA of 19% (without a 4%, the low end, royalty) is providing about $23M of EBITDA. Fifty six franchised stores are generating about $263M of sales, which (at 4%) would provide $10.5M of royalties, for a total revenue stream of $33.5M. Subtracting $6-7M of G&A brings the corporate EBITDA within the $25-30M guidance. However, we have used $4.7M (running higher now) with a (low end) 4% royalty, and new units are running materially higher.  Management indicated that the $25-30M is the current run rate, which our calculation confirms,  also supporting management contention that a materially higher contribution is likely within the next year to eighteen months.

CONCLUSION: Provided at the beginning of this article