It’s amazing how much we’ve learned over the past year. Either that, or it’s been positively flabbergasting to discover just how little we knew and to be no further along than when we started.
It really just depends on the day.
However, if we’ve learned nothing else, it’s that things can change far more quickly – and far more drastically – than we’d ever assumed.
Take, for instance, the havoc wrought on the restaurant industry by COVID-19 – which we’ve discussed here. To their immense credit, many great restaurants have mitigated some damage by creatively utilizing whatever outdoor space is at their disposal, while also shifting to a more delivery-/takeaway-centric business model. Sadly, despite all of their efforts, the minefield that restaurants are navigating seems unending.
You may notice that those previous discussions of the devastation in the industry occurred with the United States reporting a then-unthinkable 60,000-70,000 new COVID-19 cases per day. Tragically, the pandemic not only persists in North America and Europe but has gained momentum in its second wave. At the time of writing, the U.S. has reported fewer than 80,000 new cases just once in two weeks, and cases have exceeded 100,000 for eight consecutive days, topping 120,000 on six occasions.
And there’s really not much to suggest that the cavalry is on its way.
Not only is COVID more rampant than ever, but government leaders have also repeatedly failed to deliver another stimulus package, which is expected to include direct aid for small and independent eateries. Against this backdrop, Congress, as well as the head of the administration’s COVID task force, the Vice President, have all just adjourned for vacation. And the weather is about to become inhospitable to outdoor diners in most of the country.
Other than that, everything’s great!
Unsurprisingly, this perfect storm has left several casualties in its wake. Sadly, there will be others. Of course, one wouldn’t really know it by looking at the stock market, as the vast majority of survivors’ shares are up well over 50% from their spring lows.
This rebound can be attributed to a variety of factors: dogged optimism about economic stimulus and a forthcoming vaccine – which was further bolstered early this week. The relative success of efforts to quickly pivot to outdoor and offsite (delivery and takeaway) models has also restored some faith. And then there’s the understandable, but ill-advised “COVID fatigue” that’s skewed many people’s internal risk-reward calculations.
Whatever the reasons, the screaming bargains presented by the initial shocks to the industry have largely been cleared out. However, that’s not to suggest that opportunities for acquisition, for strategic and private equity buyers have dried up entirely. The bounce-back has simply brought about a shift in focus.
On October 25, Dunkin’ Brands Group – franchisor of Dunkin’ Donuts coffee shops and Baskin-Robbins ice cream shops in more than 60 countries – confirmed news reports of preliminary talks to be acquired by Inspire Brands, an affiliate of Atlanta-based PE firm Roark Capital Group. According to the reports, Inspire sought to add Dunkin’ to its restaurant portfolio – which includes Arby’s, Buffalo Wild Wings, Sonic Drive-In and Jimmy John’s – for $106.50 per share. This represented a 20% premium to the $88.79 share price at the time, and a 177% gain from the March low.
Five days later, on October 30, the sides announced a merger agreement, under which Inspire will acquire Dunkin’ for $106.50 per share (“DNKN” on Nasdaq), or approximately $11.3 billion. Under the terms of the deal, Inspire will pay $8.76 billion in cash for all shares, and assume roughly $2.5 billion of existing debt. On completion, the deal will be the industry’s largest since Restaurant Brands International’s August 2014 purchase of Canadian coffee chain Tim Hortons for $14.6 billion.
With healthy implied multiples of 23 times 2019 EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) and 21 times estimated 2021 EBITDA, Inspire isn’t shopping in the bargain bin. At a glance, one might be tempted to question why one of the preeminent investors in the restaurant space would pay a premium for 12,500 commuter-focused coffee and donut shops and nearly 8,000 ice cream parlors, at a time when commuting is way down (and may never rebound to previous levels), and people aren’t hosting ice cream cake parties.
A satisfactory answer requires a look at both buyer and target.
Inspire Brands was formed in February 2018, when Arby’s and Roark Capital acquired Buffalo Wild Wings for $2.9 billion, with ex-Arby’s CEO Paul J. Brown named CEO of Inspire. In the years since, Brown has proven an aggressive buyer, snapping up “drive-in” burger brand Sonic for $2.3 billion in December 2018, and sandwich chain Jimmy John’s in October 2019, for an undisclosed sum. Pre-Dunkin’, Inspire’s global portfolio consists of more than 11,000 locations, generating approximately $15 billion in annual sales.
Broadly, Inspire’s philosophy is to acquire strong brands and reinvigorate them through scale and strategic savvy. That scale has allowed Inspire to achieve efficiencies through the sharing of technology, marketing, franchisee relations, and corporate overhead resources across its brands.
It’s been assumed for some time that Brown and Inspire would look to establish a greater presence in the breakfast day-part. Needless to say, Dunkin’, with a global footprint, and a pair of top-tier brands – including a premier grab-and-go breakfast brand – is as enticing a target as one could imagine. As an added bonus, the Company is also quite adept at navigating minefields.
On October 28 – with deal speculation rife but no official agreement in place – Dunkin’ announced its Q3 2020 results. For the three months ending September 30, the Company reported net income of $74 million, or $0.89 a share, up from $72.4 million ($0.86/share) the year prior, with adjusted EPS ($0.93) well ahead of the $0.81 consensus estimate. Revenue, meanwhile, rose nearly 2%, to $361.5 million, easily topping estimates of $345 million, with U.S. same-store sales up 0.9%, far better than the 3.8% decline that had been expected. It’s a solid quarter by normal standards.
The thing is, not much these days qualifies as “normal”. How exactly does a brand that specializes in serving commuters actually grow in the absence of most of those commuters?
Now more than ever, well-run companies are demonstrating a rare ability to not only survive in a hellish environment but to actually grow their businesses. The secret – as previously noted with Wingstop – lies in the willingness to be self-critical and proactive in the best of times, in order to be prepared and nimbly adaptable in times of crisis.
According to CEO Dave Hoffman, a couple of years ago, having observed certain changes in consumer behavior, Dunkin’ put into place a strategic blueprint. In the interest of attracting more afternoon traffic and appealing to younger consumers, the Company adapted its menu, introducing more “snacky” items, and invested in new espresso equipment, while offering new, premium espresso drinks and iced beverages.
Most importantly, however, the Company brought its digital development team in-house, to provide customers “an even faster, frictionless experience” through more efficiently developed menus, drive-through tools, and digital apps. It’s paid to be prepared. In Q3, digital accounted for more than 21% of total sales, up four-fold year-over-year. Obviously, this massive growth is a function of this strange reality. However, that Dunkin’ had already taken the steps to weather this unforeseen storm is noteworthy.
Upon the deal’s completion – expected by year-end, pending certain approvals – Inspire Brands will be the world’s fifth-largest restaurant company, with a combined portfolio of nearly 32,000 restaurants, $26 billion in system-wide sales, and more than 25 million loyalty members. In Dunkin’, it’s found not only a strong breakfast brand that rounds out its portfolio, but also a proactive and strategically forward-thinking partner that could elevate its entire portfolio.
