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PAUL BROWN – OVERSEEING 5 MAJOR BRANDS, 32,000 RESTAURANTS, WHAT’S NEXT, and WHY?

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PAUL BROWN – OVERSEEING 5 MAJOR BRANDS, 32,000 RESTAURANTS, WHAT’S NEXT, AND WHY?

Paul Brown, 53, IS CEO of Inspire Brands, which is controlled by Roark Capital Group, and Roark is the owner of Arby’s, Sonic Drive-in, Buffalo Wild Wings, Jimmy John’s and Dunkin’ Brands. Paul can be considered a young man in a hurry.

I met Paul just once, after he spoke at an industry conference.  It was clear, as he spoke to the group, that his presentation skills were complementary to his undeniable operating credentials. Since Inspire Brands had just purchased Buffalo Wild Wings, and I was a Director of their publicly held largest franchisee, I introduced myself in that context.

His educational background, and two decades of working experience prior to Roark and Inspire Brands provide impressive credentials. He earned a B.S. in management at Georgia Tech., an MBA from the Kellogg School at Northwestern and a Masters in Engineering Management. He has worked at Boston Consulting, McKinsey, InterContinental Hotels, Expedia North America and Hilton Worldwide.

He “made his bones” in the foodservice industry when Roark hired him in 2013, where he did an outstanding job leading the effort that turned around Arby’s. In February 2018, Brown and Neal Aronson of Roark founded Inspire Brands when Arby’s acquired Buffalo  Wild Wings. Inspire subsequently purchased Sonic Drive-In in December, 2018, Jimmy John’s in October, 2019, and Dunkin’ Brands in 2020. Paul is also on the Board of Focus Brands, Inc., also controlled by Roark.

Apart from his substantial responsibilities in conjunction with Roark, Paul sits on several non-profit boards, including Children’s Healthcare of Atlanta and the Georgia Tech Foundation. In the public domain, he has been on the Board of Directors of H&R Bloch since 2011.

THE NEW CHALLENGE

The following discussion is not designed to take anything away from all that Paul Brown has accomplished, or will achieve in the future, which will no doubt be substantial. Also, none of the “stakeholders” in this situation (other than H&R Bloch) are in the public domain, so the following is only of “human interest”. We enjoy following the progress of dynamic individuals, trying to learn from their success and even their stumbles. Could help to minimize our own.

Considering his emergence over the last eight years as a giant within the restaurant industry, one can wonder why (1) Paul Brown would agree (2) why Roark Capital would bless his involvement and (3) why bankrupt Neiman Marcus would want  Paul Brown to become non-executive Chairman of the Board,  announced in December.

Dealing with number (3) first: Paul Brown is a great new “face” of the Board. Neiman Marcus is raising a great deal of money in the course of emerging from bankruptcy. Investors need to be sold, which Paul Brown does as well as anyone. His background is not in luxury retail, but he doesn’t have to become “Merchant Prince”, Mickey Drexler, anytime soon. For the moment, he just has to sell. As for the future, nobody knows how long he will be there and what his role will be.

(1) next: Paul Brown is in his prime, still creative and capable. It’s possible that he has become sufficiently restless and feels ready to take on a new challenge. His employment history prior to Roark seems to support that pattern, and that is admirable in many ways. He’s also, no doubt, being compensated very well for his effort, which doesn’t hurt.

(2) has a few more possibilities. We can understand why Aronson, at Roark, would “allow” Paul to take on a non-operating Executive Chairman role at Neiman Marcus, because you don’t want to stifle a great talent. A couple of other possibilities occur to us. Perhaps Roark owns equity or debt in the bankrupt Neiman Marcus, and suggested Paul Brown as Executive Chairman. It is also possible that Roark thinks Brown, with or without Neiman Marcus, can lead them into  luxury retail goods.

THE DANGERS

The above possibilities aside, I would not be in favor of Brown’s new position. Even a “non-executive” Chairmanship takes a great deal of time, especially when dealing with the bankruptcy process, and continuing if Neiman Marcus should become publicly held again. I would want the CEO of my $25 billion of system wide sales, generated from my 3,200 franchised partners, multi-branded and worldwide, to be working full time for me.

Franchisors, to lead their franchisee partners effectively, must maintain their ability to relate to them. We haven’t been to the “Ivory Tower” that Inspire executives occupy  in Atlanta, but they are also probably flying “private”, no doubt highly compensated and many of the franchisees are enjoying none of the above. Franchisees are working hard twenty four hours a day, don’t want to feel that their 5% royalty, plus 2-3% advertising, plus miscellaneous other fees are paying for the luxurious lifestyle the franchisor enjoys. The Neiman Marcus affiliation could feed into that. My CPA Father always drove Pontiacs because he didn’t want his clients to resent the Cadillac that he could have afforded.

There will be an obvious dilution of the effort that Paul will be providing to Inspire Brands, which seems like a full time job to me. We have cited a number of his non-Inspire efforts, some of which sound reasonably time consuming. We have no idea what Paul’s family situation is like, but could, and should be an important part of the equation.

CONCLUSION – you can call this article “therapeutic”, for all of us

A front page interview, in Franchise Times, with a picture of Paul Brown in a good looking Neiman Marcus sport jacket, acknowledging the Inspire/Dunkin’ transaction as “the deal of the year”, spawned the discussion above.

Peer recognition is very satisfying, and it’s great to be in demand to play important professional roles, like Board seats and the like. However, lasting personal success and satisfaction requires resistance of the temptation to try to do too much. From a personal standpoint, don’t get so “puffed up” that you lose touch with the people and the process that earned you all that respect. One more Board seat might not be as important as supporting your team at work or your loved ones at home. When all is said and done, it’s obvious what is most important.

Roger Lipton

INSPIRE BRANDS ABOUT TO PAY 22X ’21 EBITDA AND 34X ’21 EPS FOR DUNKIN’ BRANDS – ARE THEY OUT OF THEIR MINDS? NOT QUITE !!

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INSPIRE BRANDS ABOUT TO PAY 22X ’21 EBITDA AND 34X ’21 EPS FOR DUNKIN’ BRANDS – ARE THEY OUT OF THEIR MINDS? NOT QUITE !!

It has been widely reported that Inspire Brands, controlled by private equity firm, Roark,  is negotiating to buy Dunkin’ Brands (DNKN) for about $8B, which, including approximately $3B of debt, values DNKN at about $11B. This amounts to about 22x EBITDA in calendar ’19, and the same multiple of consensus 2021 estimates. Franchising companies are attracting investors, including private equity owners, largely because of their supposedly free cash flow from the royalty stream. We have written many times that the cash flow is not entirely “free” because some of that income stream should be reinvested in the system to maintain its relevance and franchisee profitability. For the moment, let’s put that concern aside for the moment, since interest rates are close to zero, the music is playing and investors are dancing. More relevant in the short term is that the $3B of debt is about 6x trailing, and projected, EBITDA, so the debt load is already at the top of the range currently viewed as comfortable by the marketplace. There is therefore not too much more leverage that can be currently squeezed out of this situation.

However, executives at Roark, and Inspire Brands, are far from ignorant or reckless, so let’s think about the potential appeal. It is no secret that Dunkin’ is surviving better than most, not as well as some, due to the preponderance of drive-thru locations, while limited during the pandemic by less breakfast traffic. Indeed, same store sales in Q2 were down 18.7% at US stores. It is also well known that this fifty year old worldwide brand (forgetting about it’s much smaller sister brand, Baskin Robbins) is most heavily concentrated in the northeast, with expansion opportunities out west and abroad. On the other hand, the Dunkin’ brand can no doubt benefit from continued reinvention, as they have consistently lagged a little company called Starbucks in terms of growth, sales comps, and store level profitability. With those broad brush thoughts out of the way, it occurs to us that:

  • The $500M of historical and projected EBITDA for DNKN is after spending $507M in ’19 on advertising and $237M on G&A. Inspire Brands owns about 11,000 stores among its subsidiaries, including Sonic, Jimmy John’s, Buffalo Wild Wings and Arby’s. No doubt there are certain “synergies’ that could be achieved as advertising and SG&A are consolidated with the DNKN system that includes almost 10,000 stores within 21,000 distribution points. It wouldn’t surprise us if the numbers crunchers at Inspire have figured out that somewhere between $100 and $200M could be saved, out of the total of over $700M in ads and G&A.
  • Dunkin’ can sell coffee to 10000 new locations. If coffee is only 1% of $10B in sales, and the profit margin is 25%, that would be $25M of additional profit.
  • There is no other major brand in public hands that could as easily (and inexpensively) be rolled into Inspire’s existing ten thousand locations than Dunkin’s COFFEE and other offerings, whether or not a new daypart is desired. Dunkin’s coffee alone has a great deal of consumer acceptance and could be a meaningful addition at Inspire’s other brands. So: Dunkin 21,000 points of distribution could become more like 31,000, with minimal incremental investment by various franchisees. If 10,000 existing Inspire locations do something over $10B systemwide, a 5% addition to sales (throughout the day from Dunkin’ products) would add $500M to sales. A 5% royalty rate would amount to $25M of additional royalties, plus about $10M of additional advertising contributions. We could be high or low with these broad brush suggested numbers, but this seems like a material opportunity to us.
  • Dunkin’ franchised units an be cross sold to other Inspire brands. The same strip center housing a Jimmy John’s can house a Dunkin’ or and even a Baskin Robbins next store. Hard to quantify but another plus.

It is not hard to imagine (on a spread sheet, at least) that $500M of past (’19) and future (’21) EBITDA (forget about ’20) could become $650-$700M after G&A and advertising efficiencies, with another $50M thrown in from additional profit margin, royalties and ad contribution by way of Dunkin products spread through Inspire’s other brands. That brings the debt, as a multiple of EBITDA, down quite a bit, allows for new borrowing that can be reinvested in the business or paid out to equity holders.

The only other suitor that comes to mind is Yum Brands, large enough to absorb Dunkin’ without “betting the company”, with enough scale to get administrative synergies, and enough existing units to get a material benefit from the addition of Dunkin’ products. Wendy’s already has a breakfast program and adequate debt, and doesn’t have enough units to get a material benefit from adding Dunkin’ products. Domino’s or Papa John’s or Wingstop couldn’t put Dunkin’ products to enough use. Jack in the Box is nowhere near large enough. Restaurant Brands already has Tim Horton’s. Chipotle, with their company operated locations, enjoys being debt free and wouldn’t tolerate 25-30% dilution of their equity. McDonald’s doesn’t need it, and is not in an acquisition mode.

Conclusion: The acquisition of Dunkin’ by Inspire makes more sense at a record high valuation for DNKN than is apparent on the surface. Unless Yum Brands competes for it or Inspire Brands gets discouraged somehow, Inspire will be in the coffee business, to be spread to their currently owned franchise systems, and current Dunkin’ shareholders will say “thank you very much.”

Roger Lipton