ANNUAL – per Yahoo/Finance
QUARTERLY – per Yahoo/Finance
ENTERPRISE VALUE/TTM ADJUSTED EBITDA per Lipton Financial Services
MOST RECENT CONFERENCE CALL TRANSCRIPT
https://seekingalpha.com/article/4624436-fat-brands-inc-fat-q2-2023-earnings-call-transcript
MOST RECENT CONFERENCE CALL PRESENTATION
https://seekingalpha.com/article/4624424-fat-brands-inc-2023-q2-results-earnings-call-presentation
Twin Peaks, FAT Brands’ largest contributor to corporate EBITDA, with a current estimated EBITDA run rate in the mid to upper $30M range, is a chain of 100 (currently about 70% franchised) “sports bar” lodges. As the Company has previously described, the unit level economics are compelling, with systemwide AUV’s north of $5.5M, “with some of our highest volume locations in Florida generating AUVs between $9M and $12M each.” We estimate that these 6-8000 square foot locations are generating a cash on cash return among the best in the restaurant industry, predictably generating a pipeline of an additional 109 locations to be built over the next several years. The chain has grown almost 40% in units since its acquisition by FAT, less than two years ago in late ’21.
The indication by FAT Brands’ management is that they would file for an IPO in early ’24, at which point the EBITDA run rate could be north of $40M, heading to $50M by the end of ’24. Comparing what we know about the unit level economics at Twin Peaks, the demonstrated credentials of their operating management, the franchise model which allows for substantial earnings leverage as the system grows, it appears to us that an Enterprise Value of a billion or more could be justified. The valuation is naturally dependent upon the state of the general market and valuations of peer franchising restaurant companies. Our model just below, built from publicly disclosed information, provides our attempt at a “realistic” estimate of Twin Peaks’ growth over the next few years.
WHAT WILL TWIN PEAKS BE “WORTH” WHEN OFFERED TO THE PUBLIC?
No two companies are the same, obviously, and current valuations within the restaurant industry, in terms of Enterprise Value versus trailing twelve month corporate EBITDA, range from multiples in the single digits for mature, slow growing chains with mediocre unit level economics to that of Wingstop (over 50x trailing EBITDA), Dutch Bros (in the mid 40s), Chipotle (about 35x), and Shake Shack (about 30x). Especially interesting right now is the pending IPO for CAVA Mezze Grill, with a contemplated valuation approximating $2 billion.
There are too many differences between CAVA and Twin Peaks to discuss here. Moreover, the biggest single difference, in terms of CAVA’s credibility in the marketplace, is that Ron Shaich, the long term “visionary” behind Panera, is Chairman of the Board and a major shareholder. Joe Hummel, long time President and driving force behind Twin Peaks is not nearly as well known, but his record speaks for itself, he is widely respected by those who know him, and (without “blowing smoke”) we can vouch for the fact that he “presents” just fine.
Management appearances aside, Twin Peaks’ unit level economics seem to be at least as good as those of CAVA, which has a 20.3% unit level EBITDA in calendar ’22 (with a big jump to 25.4% in Q1’23) and a year two targeted cash on cash return of 35%. Both companies are growing units at 15-20% rate, but Twin Peaks has an advantage in terms of the EPS leverage and potentially faster growth contributed from its successful “asset light” franchising effort. Moreover, CAVA, as promising and well positioned and managed as it is, in only the most recent quarter, Q1’23, did the corporate Adjusted EBITDA “pop”, to $16.7M vs ($1.6M), annualized to a $68M Adjusted EBITDA “run rate” that the marketplace seems prepared to pay 29x for. Adjusted Corp EBITDA in calendar ’23 was $12.6M vs $14.6M in ’22.
We need not dwell on CAVA/Twin Peaks comparisons, except to suggest that the fundamentals at Twin Peaks are as good or better than most.
CONCLUSION
We believe that Twin Peaks, as a company, has a realistic likelihood of being worth $1B, and more, at some point within the next several years. If they produce the results as outlined above, it then becomes a question of timing and perception. Only time will tell.
Roger Lipton
XPONENTIAL FITNESS (XPOF)
https://www.liptonfinancialservices.com/2023/05/xponential-fitness-inc-xpof/
POTBELLY CORPORATION (PBPB)
https://www.liptonfinancialservices.com/2023/05/potbelly-pbpb-in-process/
RUTH’S HOSPITALITY (RUTH)
https://www.liptonfinancialservices.com/2023/05/ruth/
FAT BRANDS (FAT)
https://www.liptonfinancialservices.com/2023/05/fat-brands-inc-fat/
GOOD TIMES RESTAURANTS (GTIM)
https://www.liptonfinancialservices.com/2023/05/good-times-restaurants-inc-gtim/
RESTAURANT FINANCE MONITOR – 4-15-23 – Follow the Money by Roger Lipton
A Macro-Monetary-Storm is blowing, with broad ramifications. Just over a month ago there was a “run” on Silicon Value Bank and others, requiring Fed rescue. It turns out that more than twenty years of reckless fiscal/monetary policy have unintended consequences. What a surprise! Almost all banks have purchased fixed income securities (US Treasury Bills, Mortgage Backed Securities, etc.) that when marked to market price would show an unrealized loss, in turn jeopardizing the banks’ equity. We have not heard the last of this problem – but we need not fear. The Federal Reserve has stepped in to guarantee even uninsured deposits, essentially putting in place a mechanism by which the entire US banking system can be nationalized — a long term probability. Taking into consideration the timing uncertainty, the necessary monetary accommodation will spur inflation well above the Fed’s 2% objective. Also increasing inflation is the weak US Dollar, as foreign nations increasingly transact in other currencies and diversify reserves away from Dollar denominated assets. When the USA, by way of sanctions, froze Russia’s US Dollar assets in ‘22 the “weaponization” of the Dollar created a new urgency for China and others to reduce Dollar holdings. China, Russia, Brazil and India (the BRICs), plus Middle Easterners, South Africa and others, are transacting with gold, oil, or non-Dollar currencies. It should be lost on nobody that the US is no longer energy independent, is the only important trading nation that is not increasing its holdings of gold, and is running larger trade deficits than ever. There are too many economic, political, military and even social areas of tension to discuss here, but there is trouble brewing on all fronts. Our focus is the “money” and we believe that financial strength is paramount if the US is to exert influence within the other venues.
Leverage Works Both Ways and we have written extensively on our website about FAT Brands. They have assembled, largely during Covid, a portfolio of seventeen franchised restaurant brands, financed by monetizing (for about $1B) future royalty streams. This was based on anticipated post-Covid Adjusted EBITDA of about $100M, from brands led by Twin Peaks, Round Table Pizza, Fazoli’s, Johnny Rockets and Fatburger. While the original overall interest rate was just above 7% the expectation was for a re-rating of the debt in late ‘22, reducing interest expense by perhaps 200bp or $20M annually. With only $50M of interest expense in ’23 (down from about $70M in ’22, excluding transaction costs), $100M could provide a comfortable cushion of “free cash flow”. Expectations continue to be for about 1,000 new locations, already in the development pipeline, which could increase corporate EBITDA to roughly $150M in five years or so.
However: Interest rates have spiked much higher, and, while other options exist, the re-rating of the debt will not help. Adjusted EBITDA came in at $88M in ‘22, not far from the $90-95M projected run rate, which was absorbed by interest expense and other non-recurring items, legal expenses in particular. In that regard, CEO Wiederhorn, his family still a major shareholder, has recently stepped aside as CEO and the Board has been restructured, apparently to distance the Company from Wiederhorn’s personal legal issues.
Legalities aside, which do not seem to be affecting operations, the “new age” result is that “free cash flow” is dependent on top line growth in the portfolio, fortunately moving in the right direction. Cash at Dec. ‘22 was $29M (unrestricted). $40M more was raised in January from further royalty securitization, with room for more, allowing for liquidity to be maintained while free cash flow generation moves toward breakeven. An “ace in the hole” is the ability to sell some portion of the dough manufacturing plant, which generated about $15M of EBITDA in ’22 while operating at about one third of capacity, as well as equity in one (or more) of the major brands.
Regarding the stock, FAT Brands (FAT), worth about $120M represents an equity “stub” or “option”, compared to debt of about one billion dollars. The Enterprise Value, at about 12x the current rounded $100M run rate of Adjusted EBITDA is less than some pure franchising peers with multiples in the high teens. If FAT is generating something like $150M of Adjusted EBITDA in five years, the Enterprise Value at that point could be 15-20x, or $2.2B to $3.0B. If there are still 16M shares, with similar debt, the common stock would be worth $1.2B to $2.0B or $75 to $125/share. More conservatively, if free cash flow of $50M were to represent a hefty 10% free cash flow yield, the stock would sell at $30/share, or $60/share at a 5% free cash flow yield. Investors can make assumptions in terms of operating projections and more stock and/or debt being issued, but the upside is perhaps surprisingly substantial. Relative to the risk, the existing lenders seem comfortable, reportedly willing to lend more, “to help out”. The fact remains that the upside possibilities for FAT are an order of magnitude larger than the $7 share at risk.
FAT Brands’ UPDATE: THE BOARD OF DIRECTORS IS RESTRUCTURED, AS UNIT DEVELOPMENT DEALS AND NEW PRODUCTS ARE ANNOUNCED
An 8K filing on April 3rd described a restructuring of the Board of Directors at FAT Brands. While not referenced in early March, when CEO, Andy Wiederhorn’s revised role (from CEO to strategic advisor) was announced, this move to help separate the company from ongoing legal issues seems logical. Below the listing of recent fundamental developments, we have provided a link to our description in early March of that development. We see no reason that the Board restructuring will affect the outlook for the business fundamentals.
Of the former directors, only Andy Wiederhorn and Lynne Collier remain. Five insiders (including Wiederhorn’s three sons, all with leadership positions at the Company) are joined by three independent directors; Mark Elenowitz, Kenneth Kepp, and Tyler Child. We have provided just below a link to the 8-K filing.
https://seekingalpha.com/filing/7387585
RECENT ANNOUNCEMENTS REGARDING BUSINESS FUNDAMENTALS
On April 5th: FAT Brands’ Elevation Burger chain unveiled fresh baked Chocolate Chip Cookies and Chocolate Chip Cookie Ice Cream Sandwiches. Complimenting Elevation Burger’s hand-spun shakes and ice cream, this new offering demonstrates the opportunity to more fully utilize the dough manufacturing facility that, already generating approximately $15M of annual EBITDA, is operating far below capacity. As the release points out: “Following this rollout, we will look into similar collaborations with the other burger brands in our portfolio”.
On March 23rd: FAT Brands’ Johnny Rockets change announced a new development deal for 20 franchised locations in Mexico over the next 10 years, on top of the 25 restaurants that debuted there in 1991.
On March 22nd: FAT Brands announced the official launch of their newly formed 501 © (3) charitable foundation. Seeded with a $250,000 donation from the Company, FAT is obviously reaching out to serve the employees and communities within their 17 brand portfolio of worldwide franchised restaurant brands.
On March 21st: FAT Brands’ Pretzelmaker brand opened its first drive-thru location, in Mason City, Iowa, with its Fresh Twist brand, which was launched in 2018 to fulfill breakfast and late-night options, especially aimed at small footprint locations
On March 16th: FAT Brands’ announced a 10-unit development deal for co-branded (35 year old) Great American Cookie and (40 year old) Marble Slab Creamery locations. They will be opened in Puerto Rico over the next five years, the first two by 2024.
On March 9th: A co-branded Fatburger/Buffalo’s Express location opened in Orland Park, Illinois by a franchised partnership including NBA athletes, Anthony Davis, Jr., Derrick Rose and Tim Hardaway, Jr. Joined by two successful African American female entrepreneurs, Toi Salter and Jackie Jackson, this partnership is anticipating further development in the area.
On March 6th: FAT Brands announced that founder, Andy Wiederhorn would step aside as CEO and transition to a strategic advisory role in May ’23. Our website described that development per the link below:
FAT Brands, Inc. announced last week that founder and CEO, Andy Wiederhorn will step aside as of May 5th, transitioning to a new role as “outside consultant and strategic advisor”.
Having followed, and written of, FAT Brands’ emergence as a franchisor of seventeen restaurant brands, the largest, and likely most promising, being Twin Peaks, we are surprised but not shocked.
Wiederhorn, over several years including the heart of Covid related disruptions, creatively assembled a collection of growing franchising brands, including Twin Peaks, Round Table Pizza, Fazoli’s, Johnny Rockets and Fatburger, the brand he started with. This assemblage was accomplished by borrowing over $900M long term, securitized by the royalty streams. The expectation, and the reported results in calendar ’22 ($88.8M of Adjusted Corporate EBITDA), support the Company’s previous estimates that these brands would generate upwards of $90M of Adjusted Corporate EBITDA, once Covid ran its course.
It should be noted that the $88.8M of Adjusted EBITDA in ’22 was after adding back almost $19M of legal expenses, incurred dealing with a variety of legal actions. While management has indicated that some portion of the legal expense reported could be covered by insurance, the Company has accrued them to date. As discussed by Wiederhorn, on the most recent (February 22nd) conference call:
“SEC investigations are never good for shareholders just because of the cost. And we are — we made significant progress in terms of responding to the inquiries that we received related to the government investigation. I don’t think that there’s much more to respond to. I think that, hopefully, we’ll be able to see some sort of resolution as we finish the year. These things go slow. They can take years, as you know. But hopefully, we’ll see the legal expenses shrink here significantly. We do have opportunities for insurance defense coverage and recovery for some of these things but none of that is reflected in our financials. We haven’t seen insurance companies write checks yet, although we firmly believe that we’re covered under our policies. And we are pursuing recovery against those carriers.
“So you know how that goes sometimes where you have to actually file an action or commence arbitration and mediation to get coverage. We have done all those things. And we think that we will move it along nicely because there is also — it is not just the government investigation. We also have 2 derivative cases outstanding. Remember, in Q3 of last year, we settled 1 shareholder class action case which was good to get behind us to save further legal fees. But we’ve had plenty of discovery and things like that in the 2 derivative cases. We hope that those cases will be resolved during this calendar year and to get all this legal expense to go away once and for all.”
The implication we derive from this announcement is that Wiederhorn and his Board of Directors have concluded that his reduced role might facilitate an earlier resolution of the legal matters than would otherwise be the case.
While it remains to be seen what management adjustments will be made, calendar ’23 has already been described as a “consolidation year”, with the major brands performing well and the royalty stream expected to grow nicely. As we have previously described in our update as of February 27th, the cash position seems adequate to service the debt while the major brands expand and the royalty stream grows.
In terms of further risk to FAT stock at this point, we would be concerned if (1) lenders were somehow disillusioned and putting an unanticipated pressure on the Company or (2) there were further legal issues against the Company that would cause expanded, rather than reduced, legal exposure. Regarding (1) there seems to be no indication of that and the Company seems able to continue meeting their obligations to lenders. Regarding (2) from Wiederhorn’s commentary, as provided above, on February 27th, there has been no indication to that effect.
CONCLUSION:
Based on the information available, we do not believe that Wiederhorn stepping aside, should be construed as an important negative at this point and this action appears to have a productive logic behind it. Since he and his affiliates continue to be major shareholders of FAT Brands, in his absence as day-to-day CEO, his strategic guidance will likely continue to be available, as stated.
Without question, FAT Brands common stock, (FAT), worth about $120M represents an equity “stub” or “option”, compared to the debt of close to one billion dollars. The Enterprise Value, at about 12x the current rounded $100M run rate of Adjusted EBITDA is less than some pure franchising peers with multiples in the high teens or even higher. This can be considered justifiable, in the context of the shorter operating history of the “new” FAT Brands, as well as the legal “hair” on the situation. It is also obvious that leverage works both ways. On the positive side, the business seems to be going well and the pipeline of stores to be developed seems capable of creating an additional $50-60M of Adjusted EBITDA over the next five years. If FAT is generating something like $150M of Adjusted EBITDA, the Enterprise Value at that point could be 15-20x, or $2.2B to $3.0B. If there are still 16M shares outstanding, and the debt were the same, the common stock would be worth $1.2B to $2.0B or $75 to $125/share. From a more conservative standpoint, if free cash flow of $50M were to represent a hefty 10% free cash flow yield, the stock would sell at $30/share, with a 5% free cash flow yield at $60/share. Investors can make their own assumptions in terms of the possibility of the Company accomplishing its projections, and/or the likelihood of more stock or debt being issued. The bottom line remains that the upside possibilities are an order of magnitude larger than the $7.50/share at risk.
Roger Lipton
QUARTERLY
The following articles describe the progress made at FAT Brands over the last several years.
We have written extensively about FAT Brands and our reports can be accessed using the SEARCH function on our Home Page.)
All reported results were an order of magnitude larger in Q3’22 vs. a year ago, largely as a result of acquisitions, also influenced by openings, higher same store sales and average unit volumes. Recall that FAT Brands now oversees a 17-brand portfolio of franchised restaurant concepts, comprised of over 2300 locations that generate $2.2B of annual sales. The five largest brands are Fatburger, Johnny Rockets, Round Table Pizza, Fazoli’s and Twin Peaks. Twin Peaks is the only brand with a material number of company operated locations, 28 out of the 92- unit current total, with AUVs above $5M and compelling store level profits and return on investment.
THE QUARTER
Adjusted EBITDA in Q3’22 was $24.6M (up from $7.2M in ’21) with a GAAP loss of $23.4M. The material reconciling adjustments were addbacks of: Interest Expense of $24.5M, D&A of $6.9M, Share Based Compensation of $2.0M. Additional non-recurring adjustments were Acquisition Costs of $2.0, Provision for Bad Debts of $5.5M and Litigation Costs of $6.9M, the last two of which are expected to be at least partially recoverable
Management has, since late ’21, been guiding to a post-Covid run rate of $90-95M of Adjusted EBITDA with over 100 openings in ‘22, and both objectives are being met. In Q3’22, systemwide sales growth was 57% vs. ‘21, with SSS growth of 7.0% and there were 38 new store openings, the new total for ’22 expected to be 125. For nine months, Adjusted EBITDA was $69M, and guidance of about $25M in Q4 would take it to $94M for the full year. Importantly, franchisees signed for over 180 new locations during Q3, bringing the development pipeline to over 1,000, “expected to represent a 60% increase in EBITDA over the next several years”.
THE DEBT
While management continues to work to reduce its debt service, anticipating a re-rating and a lower interest rate, a process that was expected to be well under way by now, the current volatility in debt markets has predictably inhibited this effort. While marking time in this regard, $43M of Series B Preferred Stock has been redeemed by the use of one of its securitization facilities that carries a lower rate. The savings will be material and the plan is to convert another $95M in the next two or three quarters. Fortunately: unit growth, sales growth, and efficiencies inherent in operating a multi-branded administrative platform are steadily improving operating cash flow, so the current debt structure can be serviced even if the terms are not improved. Moreover, FAT owns at least five brands that could be monetized over time in a variety of ways to materially reduce the debt. At the same time the factors above, augmented by increased cash flow from dough manufacturing should generate a steadily increasing amount of free cash flow.
THE OUTLOOK
According to commentary on the conference call, more than 90 new locations are currently under construction, with 130-150 due to open in ’23. The portfolio wide pipeline of over 1000 locations represents forty three percent unit growth and an incremental $60M of EBITDA. Regarding Twin Peaks, the single most important brand, there are over 100 locations in the franchise development pipeline, with 15-20 franchised and 3-4 company operated to open in ’23 and in each subsequent year. The newest class of stores is generating about a $6M AUV, and same store sales are running up about 13% through nine months of ’23. In the Fast Casual segment, the pipeline has 350 new Fatburger’s and Johnny Rockets. Within QSR there are over 400 restaurants, including Fazoli’s, Round Table Pizza, Great American Cookies and Marble Slab Creamery. Co-branding is an important focus, which spreads the cost of the physical facility and increases sales per square foot. There are over 100 pairings of Buffalo’s Express and Fatburger, 225 co-branded Great American Cookies and Marble Slab Creamery, and one tri-branded Fatburger, Hot Dog on a Stick and Buffalo’s Express. Non-traditional locations are also a new focus, with 13 opened in the past year.
Another important opportunity is the dough manufacturing facility that was purchased in mid’21. It generated $7.8M of revenues in Q3, $25M for nine months, and is generating about $15M of EBITDA while operating at only 33% of capacity. The 55 acquired Nestle Toll House Café stores are being converted to Great American Cookies (GAC) and will take the manufacturing facility to 38% of capacity with materially improved cash flow. At the same time, franchisees of Nestle (to become GAC) will be able to purchase dough at 20% less than previously. More broadly relating to FAT’s multi-branded portfolio, based on $600M of total purchasing power, franchisees will be able to save 200-300 bp within their cost of goods.
THE BOTTOM LINE
The run rate of improving EBITDA and free cash flow generation should continue to build quarter by quarter, with contributions in ‘23 as follows: (1) Corporate efficiencies amounting to $2M at least (2) New franchised units open, at the rate of 5-6% per year, generating about $5M of new royalties annually (3) Higher royalty generating sales, from inflation at least, generating an incremental $2M (4) At least 2 new corporate “store years” at Twin Peaks, out of 3-4 planned openings, which should generate $2M of EBITDA, depending on timing of openings (5) Manufacturing facility, improved utilization, $3M. In total, our estimate is that total Incremental operating EBITDA phasing in during ’23 could amount to $14M. The Company has so far made no estimate, and we are not including the effect of “fill in” acquisitions, but our analysis above takes the annualized run rate of EBITDA in ’23 to about $108-110M.
Roger Lipton
FAT Brands (FAT) TO REPORT Q3 THIS AFTERNOON – WITH SEVENTEEN BRANDS – ONE OF EARLIEST LOOKS AT SEPTEMBER QUARTER
Today at 5pm, FAT Brand will conduct their Q3 (September) earnings conference call. Considering that FAT is the franchisor of seventeen different brands, directing over 2,000 outlets from QSR concepts through full service casual dining, and represents one of the first reporters of September quarter results, this will provide analysts with some interesting data points. The link to the call is provided below.
Analysts will be interested to hear about FAT’s progress in building “post-Covid” Adjusted EBITDA toward the $90-95M run rate objective. Sales trends and unit openings will of course be interesting, as well as further build-out and visibility of the franchised unit development pipeline. Considering the recent rapid rise in interest rates, commentary regarding the strategy and likelihood of reducing debt service will also be of interest.
While there is little doubt that almost all brands are growing, we are particularly interested in hearing about the progress at Twin Peaks, by far their largest brand in terms of contribution to total corporate cash flow. Average volumes at Twin Peaks are approaching $5M and were at last report comping positively over last year and even more so over 2019. With total units approaching 100, public announcements summarized below have indicated that the development pipeline is rapidly building. Since every location, with a 5% royalty, generates about $250k to FAT’s cash flow, the cumulative effect of Twin Peaks’ unit growth is material.
On September 12th, Twin Peaks announced an area development agreements with Music City Consulting to open eight franchise locations in North Carolina and a deal with JEB Food Group to open four more locations in the Louisville area. On September 8th, Twin Peaks announced that the brand has executed an area development agreement with JEB Food Group to open four more locations near the River City. JEB already operates Twin Peaks locations in Beavercreek and West Chester, Ohio, as well as Florence, Kentucky, and owns the iconic Circle M Crawfish Restaurant in East Texas. By extending its previous agreement JEB will now be able to develop and operate a total of 12 restaurants. The plans are to expand more around Cincinnati and Columbus, while also growing in Louisville and southern Indiana.
On August 08, 2022, Twin Peaks CEO Joe Hummel announced that Vice President of Franchise Development Glenn Moon and his team are seeking development opportunities overseas in Brazil, Canada, Columbia, India and more countries throughout the world. After inking multiple development agreements totaling 21 incremental new lodges last year in the U.S., Moon’s team has already eclipsed that number in 2022 with 22 new lodges signed year to date and another 10 to 16 in the final stages of execution.
We will summarize FAT Brands’ Q3 results and conference call commentary in the near future.
Roger Lipton
https://viavid.webcasts.com/starthere.jsp?ei=1574400&tp_key=c3f2777812
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.
Roger Lipton
