FAT Brands, Inc. (FAT) PREPARES FOR “PRICE DISCOVERY” AND “LIQUIDITY EVENT”.
On or about January 30th, trading will commence in the A common shares of Twin Hospitality Group, Inc. (TWNP), FAT Brands’ (FAT) largest and most rapidly growing brand. Below we have provided the following information:
- Summary of a “Solvency Opinion” that values both parent and subsidiary, as well as opining on financial soundness.
- A summary of announcements FAT Brands has made since their Q3’24 report, basically Business as Usual.
- A link to our third quarter summary of FAT Brands’ operating results.
- Our recent report describing Twin Hospitality Group, Inc. (TWNP)
In conjunction with the pending 5% spinoff of Twin Hospitality Group, Inc., preceded by the restructuring of TWNP’s long term debt ($417M), FAT Brands engaged Santi Pastore & Hill (“SP&H”) to provide a solvency opinion, applying to FAT Brands after the spinoff. SP&H, established in 1992, with six offices from LA to Brussels, provides, as they describe themselves, “expert financial opinions in high stakes circumstances”.
In support of their opinions: SP&H considered “a range of fundamental information, including franchise growth, updating and leverage of Intellectual Property, and operational considerations driven by a seasoned management team”. SP&H also performed a Balance Sheet Test, Capital Surplus Test, Cash Flow Test and Capital Adequacy Test. The equity value derived for FAT Brands is based on an Enterprise Value of $3.48B (base case), based on three methodologies (45% weight to DCF based on 31.0 exit multiple and 10.0% discount rate, 45% weight to 2025 EBITDA Multiplier of 33.0x and 10% weight to 2025E Revenue Multiplier of 4.25x).
SP&H concluded that “FAT will remain solvent following the 5% spinoff of TWNP’s Class A common stock, retaining 85% of the Class A common stock (after TWNP management’s 5% and bondholders’ 5%) and 100% of the Class B common stock. SP&H further concluded that the current fair market values of FAT equity and TWNP equity are $$2.1-$2.6B and $1.04-1.28B, respectively
For better or worse relative to the valuations provided by SP&H (valuing FAT north of $100/share), the current market applies a much lower value to the equity of FAT, only about $6/share, or $100M for the 18M shares outstanding. This very large discrepancy could be considered an arbitrage opportunity for long term investors who believe in the long term value of the FAT Brands’ portfolio that extends to 17 brands in addition to TWNP, and/or for short term traders who see about 3 shares of TWNP underlying every share of FAT Brands outstanding. It is also worth noting that once FAT’s ownership of TWNP falls below 80%, the debt on TWNP’s balance sheet ($417M currently) (which is not guaranteed by the FAT parent) would no longer be consolidated within FAT’s financial statement.
We will see in a week or so how TWNP’s equity value initially compares to SP&H’s judgement. As the TWNP valuation applies to FAT Brands, day traders we are not, so we believe the current very large discrepancy is unwarranted and the spread will narrow considerably over time.
FAT Brands, inc. —- BUSINESS AS USUAL – WITH EIGHTEEN BRANDS
Buffalo’s Cafe Brings a Herd of New Drinks to Bar Menu
GlobeNewswireToday, 10:15 AM
Quench Your Thirst with Native Grill & Wings’ New Bar Menu
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Great American Cookies, Marble Slab Creamery and Pretzelmaker Team Up to Open New Location in Texas
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Round Table Pizza to Provide Free Pizza to First Responders in Los Angeles
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FAT Brands to Provide 10,000 Meals to First Responders and Fire Evacuees in Los Angeles
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Wave of New Drinks Crash into Hurricane Grill & Wings
GlobeNewswireWed, Jan. 08
Round Table Pizza Debuts Pepperoni, Grilled Chicken & Bacon Pizza
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FAT Brands Inc. Announces Participation in the 27th Annual ICR Conference
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Great American Cookies and Marble Slab Creamery Add Five Locations in Texas
GlobeNewswireWed, Dec. 18, 2024
Johnny Rockets Closes 2024 With Continued International Growth
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Round Table Pizza Opens Fifth Reno-Area Location
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FAT Brands Foundation Launches Holiday Giving Campaign
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Celebrate National Cookie Day with Buy One, Get One Free Cookie Cake Slice at Great American Cookies
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Oh, Johnny! Johnny Rockets Celebrates National Johnny Day with Free Shakes
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Fatburger Announces Opening of Second Chicago Area Location
GlobeNewswireWed, Nov. 27, 2024
Pretzelmaker® Announces Latest Opening in Clear Lake, Iowa
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Fatburger and Buffalo’s Express Continue Rapid Expansion in Mexico
GlobeNewswireTue, Nov. 26, 2024
Johnny Rockets Lands at Soaring Eagle Casino
GlobeNewswireTue, Nov. 19, 2024
FAT Brands Announces Refinancing of Twin Peaks Credit Facility
GlobeNewswireMon, Nov. 18, 2024
Hollywood Favorite, Fatburger, Opens 10th Location in Texas
GlobeNewswireThu, Nov. 14, 2024
Hurricane Grill & Wings Now Open at Six Flags Great Escape Lodge
GlobeNewswireThu, Nov. 07, 2024
FAT Brands Files Form 10 Registration Statement for Planned Listing of Twin Hospitality Group
GlobeNewswireMon, Nov. 04, 2024
Great American Cookies and Marble Slab Creamery Debut Co-Branded App and Loyalty Program
GlobeNewswireFri, Nov. 01, 2024
Q3’24 SUMMARY
THE SPINOFF OF TWIN PEAKS
INTRODUCTION
On or about January 29, 2025, about 5% ownership of the equity in Twin Hospitality Group, Inc., now 100% owned by FAT Brands, Inc. (FAT), will begin public trading. This will be accomplished by the issuing of a dividend to FAT shareholders, who will receive about .15 (fifteen hundredth) shares of TWNP for each FAT common share. There will be about 2.8M shares distributed, so there will be about 56M total shares of TWNP outstanding.
SUMMARY AND CONCLUSION
Based on Twin Peaks’ Adjusted EBITDA of about $28.3M in calendar’23, and the growth in units since then, we conclude that (“ex-Smokey”) the current run rate of Twin Hospitality’s Adjusted EBITDA is about $33M. Considering the many predictable aspects of the business plan, as described below, we consider our “base case”, building Twin Peaks’ EBITDA to $72M over the next five years to be reasonably conservative. Especially considering that the first Smokey Bones (“SB”) conversion to Twin Peaks is annualizing at about 50% more than current system AUVs and more than double its previous volume, we believe there is the possibility that both Company and franchisees will expand more rapidly than our base case suggests.
We believe that the highly predictable aspects of this situation, compared to growth company peers (excluding upside outliers such as CAVA Group, Kura Sushi or Wingstop) justifies an EV/ EBITDA multiple at least in the high teens. In particular: (1) Historic Cash on Cash Unit Level Returns are comparable with top performing peers (2) The chain has been embraced by consumers in a wide variety of markets (3) There is “white space” for hundreds of additional locations (4) Signed development contracts for 100 units are in hand, 75% of which are with existing franchisees.(5) 30 of the next 100 units system wide are already owned, by way of Smokey Bones conversions (6) The existing successful management team has long been in place.
Projecting the valuation possibilities for the new TWNP common stock: Since the TWNP balance sheet is carrying about $417M of long-term debt, the value of the 56M shares outstanding (2.8M of which will be publicly owned) will depend on the extent to which the Enterprise Value exceeds 13x the trailing twelve months of Adjusted EBITDA ($33.0M). As suggested at the end of this report, the Enterprise Value could conservatively be about 19x TTM Adjusted EBITDA, which would, after deducting the $417M of debt, today value the equity of TWNP at about $210M (about $4.00 per share). However, we suggest that the business plan’s unusually high predictability could allow for a much higher valuation. With an Enterprise Value of 30x the $33M trailing twelve-month EBITDA, the equity would be worth $590M or $10.20/share. With an EV of 40x, the equity would be worth $920M $16.20/share. While these valuations may seem high, they are dwarfed by today’s favored situations such as CAVA Group, Wingstop, Sweetgreen, Kura Sushi or Dutch Bros.
The Bottom Line: We believe Twin Peaks should be considered among the “Best of Breed” full-service experiential restaurant companies, which along with their predictability may well result in an above average valuation. The investment opportunity can obviously be more accurately evaluated at the end of January once the public marketplace has cast its initial votes.
BACKGROUND
Twin Hospitality Group, Inc., operator and franchisor of the Twin Peaks chain of sports bars, is about to become publicly held, as 5% of its equity is paid as a dividend to the shareholders of its parent, FAT Brands, Inc. (FAT). The Twin Peaks chain, then with 84 units system wide, was purchased in 2021 from Garnett Station Partners and has since grown by 37% to 115 locations across 27 US states and Mexico. There are 33 company operated and 82 franchised units, including 7 in Mexico. With a franchise development pipeline of about 100 locations, Twin Hospitality is primed to accelerate the recent unit growth, especially since the Smokey Bones barbeque chain, purchased by TWNP in September 2023, provides about thirty locations (20 for franchisees, 10 for company) suitable for conversion to the Twin Peaks brand.
Stated concisely: Twin Peaks is a chain of sports bars, currently averaging 7,800 square feet, and generating about $5.4M per location system wide. The chain has distinguished itself within the sports bar segment (as Hooter’s, Bombshell’s, TGI Friday’s, Bar Louie’s & Walk-Ons have all stumbled to varying degrees) by growing Average Unit Volumes and generating attractive cash on cash returns. The Company suggests that the USA could accommodate 650 locations nationwide, with another 250 abroad.
MANAGEMENT
TWNP management scores high in terms their individual longevity with the Brand. The Company is led by Chairman, Joe Hummel and CFO, Ken Kuick, who is also co-CEO of parent, FAT Brands, Inc. The operating team consists of:
SMOKEY BONES – provides attractive conversion prospects.
Twin Holdings’ ownership of the Smokey Bones 58-unit company operated dinner house chain, (EBITDA historically positive with a $2.8M AUV), was purchased for $30M in September 2023. The potential conversion of about half the locations to the Twin Peaks brand continues to be the primary attraction. Smokey Bones (SB), founded in Florida in 1999 by Darden Corp, owned in recent years by private equity, operates within 16 states in the eastern United States. As an indication of ongoing potential: from fiscal year 2019 to fiscal year 2023, Smokey Bones’ revenue increased from $149.1 million to $172.3 million, representing a CAGR of 3.7%, and AUVs grew from $2.5 million to $2.8 million, representing a CAGR of 2.9%. Since alcohol beverages comprised only 11.8% of revenues at Smokey Bones in ‘23, far less than the 48% at Twin Peaks (with their famous 29-degree beer served in frozen mugs, etc.), there seems to be a material opportunity in this regard. That said: as discussed below, the control of about 30 well located SB units that can be economically converted in a timely fashion is the primary appeal.
With the first conversion, in Lakeland, Florida, now open for about four months, operating at more than double its previous volume as a Smokey Bones and about 50% above TWNP’s system average, the opportunity seems substantial. (It brings to our mind the success that the CAVA Group (CAVA) has experienced by way of their purchase of Zoe’s Kitchen.)
While the consolidation of Smokey Bones in the last twelve months has diluted the recent reported EBITDA of Twin Holdings, it is expected that the conversions will be quicker and possibly cheaper than building from scratch, therefore accretive long term. The Smokey Bones locations that are not converted will be franchised, company operated, or sold for their leasehold value.
With the above in mind, our financial assumptions and modeling within this report ignore the short-term effect of TWNP temporarily operating 58 Smokey Bones locations. The SB “adjustment” should be steadily reduced over the next 2-3 years as (1) the company converts locations (2) existing franchisees take on SB sites for conversion (3) new franchisees are attracted to some SB units and (4) some leaseholds are sold. We expect the investment community to allow for this adjustment to short term reported results.
THE TWIN PEAKS BRAND
The consumer appeal of Twin Peaks is a great deal more than its “engaging” wait staff. It is more about the made from scratch food, craft beverages including their famous 29-degree cold beer, the sports lodge experience with wall-to-wall televisions that provide curated pay per view as well as network and cable events, and seasonal events that are often coordinated with specific holidays. The Company offers game day, lunch, happy hour and holiday specials across both food and beverage items. The extensive menu and diverse price points result in a per person average spend of a modest $22.18. The following pictures are self-explanatory. Joe Hummel, CEO, concisely describes Twin Peaks as: “The Best Kitchen in Sports and The Best Bar in Sports”.
Twin Peaks is an “experiential” brand, offering an environment difficult for customers to replicate at home, confirmed by Black Box surveys measuring a 95% “intent-to-return score. The restaurants are designed to look and feel like a natural and rugged escape, such as a mountain lodge. No two restaurants are alike, and many include amenities such as outdoor patios, fire pits and cigar rooms, offering guests unique socialization opportunities while watching their favorite sporting events. Each location has between 60 and 100 television setups, separate seating sections are established to accommodate the variety of rooting interests, designed so “there is not a bad seat in the house”. Twin Peaks also curates special events and promotions around high-profile sporting events, including major boxing and mixed martial arts pay-per-view events. Each local management team coordinates marketing and staff scheduling around NFL, college football, fantasy football, MLB, NBA, March Madness and many other events throughout the year. Based on our personal “shopper’s surveys”, we can confirm, at the risk of “protesting too much”……the girls look good, but Twin Peaks is first and foremost a sports bar, with unusually good food in an appealing environment.
There is a culinary team in place that coordinates between “corporate”, a F&B Committee and the restaurant level. Select franchisees and stakeholders help test new items, then trainers step in to coordinate system wide introduction. The menu is continuously evaluated in terms of customer demographics, brand fit, costing and pricing considerations. Finally, marketing takes over to launch new menu items, track results and continuously update, including the use of digital menus that are in place at all restaurants.
The beverage offerings include up to 32 different ice-cold draft beers, craft cocktails and spirits. The Company has spent years perfecting the process of serving the array of (29 degree) ice cold beers on tap, including the washing and freeze drying of the mugs. Twin Peaks also offers a selection of proprietary draft beers at all Texas locations, brewed at their brewpub in Irvine, generating above average profit margins in the process. There is also an extensive collection of appealing premium craft cocktails and spirits. Approximately 48.0% and 47.0% of Twin Peaks’ food and beverage revenues were derived from the sale of alcoholic beverages during the year calendar ’23 and ’22, respectively.
UNIT LEVEL ECONOMICS
It is noteworthy that about 91 of the current 115 Twin Peaks locations (80%) were conversions, costing between $2.0 and $5.0 million, and taking nine months to complete. New construction from scratch costs between $4.0 and $6.0M and take as much as 18 months, supporting the appeal of the Smokey Bones conversion pipeline. While the current units average 7,800 square feet, the new domestic prototype is 6,500 square feet, plus a 2,100 square foot patio.
New locations opened over the last several years, in a broad array of markets, have generated AUVs well above the $5.4M AUV in ’23-24, indicating $6.5M as s a reasonable 3rd year target AUV. Also modeled is a 16% store level EBITDA margin that generates a 28.9% cash on cash return for conversions and 37.1% for new-build units. As indicated earlier, the first Smokey Bones conversion, open since mid-September ’24, is already generating an AUV well above the $6.5M 3rd year target.
The following table is excerpted from the Form 10 SEC document:
The following table is our summary of unit level expenses, using percentages from the 39 weeks ending September ’24 (adjusted for the Smokey Bones expenses as defined in the Form 10). The 16.7% result was exactly the same as in calendar ’22, the last year that did not reflect ownership of Smokey Bones (purchased in September ’23). We note below that within the 39 weeks of ’24, there is $7.541M reflected in the Form 10 both as credit within the “Royalties and Other Fees” and an equal offset included within Marketing Expenses. In our “Base Case” model over the next several years, as presented in our concluding remarks above, we have used a a presumably conservative 16%. If our Base Case results in an AUV of $6M, rather than the $5.2M which generated the 16.7% below, our 16.0% Base Case assumption should prove conservative
.
TWIN PEAKS FRANCHISING
Franchisees pay a $50,0000 initial fee on the first unit, $25,000 on additional units, a 5% ongoing royalty, and a 2.5% contribution to the national advertising program. An important feature of the Twin Peaks franchisee system is the longevity, success, and continued expansion from existing franchise partners. Each current franchisee on average operates about four locations, has been a franchisee (since originally signing) for about seven years, and 73% of the 100-store development pipeline is with the existing group. Management currently targets franchise prospects who will commit to open at least three locations
PREDICTABLE LONG-TERM EXPANSION
During fiscal year 2023 franchisees opened 12 franchised locations. 8 locations opened in ’24, six by franchisees and two by the Company. Going forward, the Company is targeting 10-12 new franchised units (including Smokey Bones’ conversions) per year, plus a handful of Company operated Smokey Bones’ conversions. The long-term objective is to have the system 75% franchised. A crucial part of the investment equation is the established group of multi-unit franchise partners that have successfully not only introduced Twin Peaks to their DMAs, but done so 80% of the time by way of conversions. In terms of the SB conversions, the upfront cash investment should generally be lower and, at least equally important, the current control of the real estate should save time and provide predictability for the expansion plan.
The map below describes the broad successful sweep of the Twin Peaks system. While Texas and Florida are obviously important, both have room for further expansion and there are a raft of already successful markets that would be relatively easy to build out further. The low risk back-fill strategy, combined with already successful franchised operators, experience with a variety of build-out techniques, and the inventory of conversion ready SB locations should minimize the risk of disappointing investors, perhaps even allowing management to “meet, beat and/or raise” expectations over time.
THE BALANCE SHEET
The balance sheet as of September 29, 2024, is provided below. Shown below that is a summary of a refinancing, closed on 11/21/24, amounting to a total of $417M, with an “maturity date” of 10/26/54, but an “anticipated repayment date” of 10/25/27. We have provided what we consider to be the most relevant terms, as disclosed in the 8-K filing, including a 5% penalty on funds not repaid by 10/25/27. Our evaluation of the relevant terms of the new financing are provided below.
On November 21, 2024, FAT Brands Inc. completed the refinancing of the whole business securitization credit facility of its Twin Peaks and Smokey Bones restaurant brands, and restructured those brands under a new holding company, Twin Hospitality Group Inc., a Delaware corporation and direct subsidiary of the Company, in anticipation of the planned listing of Twin Hospitality as a standalone public company. The aggregate principal balance of the new notes is $416,711,000, with a weighted average interest rate of 9.5% per annum. The legal final maturity of the Notes is October 26, 2054, but it is anticipated that, unless earlier prepaid……, the Notes will be repaid on October 25, 2027. If the Issuer has not repaid or refinanced the Notes by the Anticipated Repayment Date, additional interest equal to 5.0% per annum will accrue on each tranche of Notes.
In addition, the terms require that TWNP use 75% of any Qualified Equity Offerings, after the original spinoff, to repay up to $75M of the notes. If at least $25,000,000 of the proceeds of such Offerings are not used to prepay the Notes on or prior to each of April 25, 2025, July 25, 2025 or October 27, 2025, or at least $75,000,000 of proceeds of Qualified Equity Offerings are not used to prepay the Notes on or prior to January 26, 2026, then a “Cash Flow Sweeping Event” would occur upon which 50% of certain excess cash flows from operations will be used towards amortization of the three most senior tranches of Notes.
Our take: The financial leverage that has been in place at FAT Brands, and Twin Hospitality Group, is no surprise. The parent has made no secret of its desire to deleverage the balance sheet when it can and the above stated terms of the latest refinancing reinforce those incentives. The “price discovery” of TWNP by way of the pending spinoff is an important step in that direction. TWNP equity, on its own, will predictably be saleable at a much better valuation than the current valuation of multi-branding parent, FAT Brands, would allow. On the debt side of the balance sheet, once TWNP has been able to report steady fundamental progress to the public marketplace, they should be able to borrow on much better terms.
VALUATION EXPECTATIONS – PEER COMPARISONS
In an effort to provide a reasonable objective for the future valuation of TWNP, we provide the following analysis. In terms of peer comps, we set aside what we consider to be unusually high ” market darling” companies, including: CAVA (over 100x Trailing Twelve Month Adjusted EBITDA), Sweetgreen (almost 200x), Wingstop (over 40x), Dutch Bros (about 50x), Kura Sushi (over 60x) and Chipotle (about 35x). We do not include “mature” very slow growing companies such as BJ’s, Bloomin’ Brands, Brinker, Cracker Barrel, El Pollo Loco and Cheesecake Factory (with historically low valuations) and we also eliminate low valuations that are clearly the result of obvious recent disappointment, including Dave & Buster’s (about 5x) & Starbucks (18x, which is low for them).
We choose companies that are growing steadily in units, at least 4-5% annually, with attractive store level economics (no better—sometimes worse than TWNP). The list consists of Darden (14x), Domino’s (20x), First Watch (11x), Restaurant Brands (15x), Shake Shack (34x), Texas Roadhouse (19x), McDonald’s (20x) & Yum Brands (19x). The average Enterprise Value divided by Trailing Twelve Month Adj. EBITDA is 19x. In fairness, none of these peers is as financially leveraged as is TWNP, but we view TWNP’s asset light franchising aspect, the generally superior store level economics, the predictable 10-12% unit growth, the established core of successful franchisees, and TWNP’s superiority within the experiential sports bar segment to be more than adequate offsets. We therefore conclude that an Enterprise Value of about 19x TTM Adjusted EBITDA is a conservative objective for TWNP’s future valuation.
Applying the average 19x TTM Enterprise Value to the most recent run rate of about $33M (for Twin Peaks TTM Adjusted EBITDA, ex Smokey Bones adjustments), subtracting about $417M of debt provides TWNP equity value of $210M. However: we believe that the proven management team at TWNP, the strong unit level economics for this “Best of Breed” experiential concept, and a development pipeline in place to almost double the chain, 75% populated with already successful franchisees – should all encourage a higher valuation. It remains to be seen to what degree TWNP follows the path of CAVA, Wingstop, Kura Sushi, Sweetgreen and other market darlings, but a large number of the necessary elements are in place.
CONCLUSION: Provided at beginning of this report