ROGER’S 9/15 COLUMN IN RESTAURANT FINANCE MONITOR – INSIDER BUYING AND STOCK BUYBACKS, FRANCHISOR/FRANCHISEE RELATIONSHIPS (and FAT Brands)( FAT), SPACs (and FAST Acq.Corp. II (FZT), and IGNORE HISTORY AT YOUR PERIL!
Insider Buying and Stock Buybacks are good leading indicators of better times ahead. In these ongoing difficult times within the restaurant industry, with the stocks selling at historically inexpensive prices, one might expect both insiders and companies to be taking advantage. However: through the end of August there has been no material insider buying within publicly held restaurant companies over the last six to twelve months. From the standpoint of stock buybacks, on the other hand, Denny’s and Dine Brands have bought material amounts in this current year. Denny’s spent $37M in the last quarter (6% of the market cap), bringing the YTD total to $46M. The remaining authorization of $168M is about 30% of the current market cap. Dine Brands bought $63M worth in Q2 (about 5% of the market cap), after purchasing $41M in Q1. There is $74M still authorized. It is interesting that both Denny’s and Dine Brands are primarily franchising companies, with free cash flow available even as their franchised operators are fighting to control food and labor while searching for affordable new locations. The absence of buying programs where most stores are company operated may be telling us something about their confidence looking ahead.
Relative to Franchisor/Franchising relationships, we spent an educational several days last week at FAT Brands’ multi-branded convention in Las Vegas, with almost 2,000 attendees representing seventeen brands. Management of FAT Brands not only provided a first-class event, top management, administrative staff, and Directors as well, all “walked the talk” throughout, as gracious hosts and, most importantly, appreciative partners of their franchisees. One of the themes enumerated throughout by CEO, Andy Wiederhorn, and his team, is that the purpose of the conference was not to “congratulate ourselves” but to “make ourselves collectively better”. The overriding most important aspect of the event was that management of FAT Brands (and their entire organization) communicated effectively their primary dedication to the long-term success of each franchisee. There was every indication, including a conversation we had with a supervisor that has been with Fatburger (and Andy Wiederhorn) for seventeen years, that the message provided to franchisees in Las Vegas represents deeply held principles. We’ve previously been critical of some franchisors being relatively unresponsive to franchisees’ problems, Dunkin’ Donuts spending over $1B to buy back stock while Starbucks was “eating the lunch” of their franchisees, and how Restaurant Brands hollowed out their field organization to cut G&A after buying Burger King. Based on everything we observed in Las Vegas, there is no such risk to franchisees at FAT Brands.
The SPAC market is generally moribund, as the shakeout which we predicted continues apace. Hundreds of billions of dollars were raised, as Sponsors of all stripes, including show business and athletic celebrities joined the dance. Today, however, hardly any new deals are being filed and 115 SPACs in registration are still hoping to raise about $19B. Amazingly enough, there are today 566 SPACs, with $148B “in trust”, actively seeking acquisitions with total buying power, including leverage, approaching a trillion dollars. The problem is that the shareholders of those 566 SPACs have to approve the proposed deal. With the stock market down so much, it is very tempting for investors to redeem and redeploy the funds into more well-established situations. The Business Combinations most likely to be approved will be those where the surviving company is profitable and growing. An example would be Getty Image Holdings (GETY), still trading at a 25% premium over the original $10.00 IPO unit price, which no doubt has something to do with GETY’s $74M of Adjusted EBITDA in Q2’22. Within the hospitality industry, the only completed deal over the last couple of years was BurgerFi(BFI) but disappointing results as a public company have produced a stock at $3.00 and change, down from a high in the teens. More to the current point, we have written about Doug Jacob’s and Sandy Beall’s FAST Acquisition II (FZT), their improvement of the typical SPAC structure, and their plans to merge with Falcon’s Beyond, a growing and profitable hospitality/entertainment company. Though historical financials have not yet been filed, current Falcon Beyond operations, according to the Investor Presentation, are cash flow positive (similar to GETY), and available for the development of brick & mortar assets. This feature, along with the banking relationships of joint venture partner, Melia’ Hotels, should allow for growth as planned, even without a broad vote of confidence from current FZT shareholders. The possibility of $150M annualized EBITDA in only about 2.5 years, combined with the potential to build billions of value attached to brick-and-mortar assets makes the current $1B starting point appear reasonable. Time will tell, of course, and we will comment further after historical financials are provided and as fundamentals develop.
Ignore History at your Peril. This publication and this column make a conscious effort to look beyond the headlines and the consensus, hoping to put current economic trends in a longer-term context. Nobody can call every twist and turn, especially in the very short run, but we’ve warned about more than ten years of suppressed interest rates encouraging investors in both equity and debt to reach for “return/yield” and misallocating capital in the process. We’ve discussed with trepidation stocks trading at sixty or seventy times sales, SPACs being pumped out like there is no tomorrow, and twenty thousand different cryptocurrencies, Bitcoin being just one, that amounted to almost $3T of new currency at the top ($1T today). Within the restaurant industry, we’ve warned investors about the ridiculous valuations at the start of trading of new issues including Sweetgreen (SG), Portillo’s (PTLO), Black Rifle Coffee (BRCC) and Dutch Bros (BROS). Sometimes, in the world of investing, it’s about the pitches you don’t swing at, rather than those you do.