Appetite for acquisitions energizes 3G Capital
Whopper of a deal adds Popeyes to fast-food empire
It’s been more than two years since the $12 billion merger between Tim Hortons and Burger King, so it was probably only a matter of time before 3G Capital made its next deal in the fast-food industry.
The Brazilian private equity firm controls Restaurant Brands International Inc. — the Oakville, Ont.-based parent to the coffee and hamburger chains — which on Tuesday added fried chicken to the mix with a US$1.8 billion cash deal to buy Popeyes Louisiana Kitchen Inc.
Given 3G’s history as a serial acquirer, the $79 per share deal is unlikely to be its last.
“It seems like Restaurant Brands is just getting started here,” said Jayson Moss, a research analyst at Franklin Bissett Investment Management. “They’re going to look to build the company through accretive acquisitions.”
The 45-year-old Popeyes, with more than 2,600 locations in the U.S. and 25 other countries, has for months been considered a potential target for Restaurant Brands. Other companies rumoured to be of potential interest include privately held Subway and Berkshire Hathaway Inc.’s Dairy Queen, particularly because Warren Buffett is fond of partnering with 3G.
One of the things that makes Popeyes attractive is the opportunity for expansion, as it only had 621 international locations at the end of 2016. That compares to more than 16,000 for its biggest competitor, KFC, and upwards of 8,500 for Burger King.
Even more compelling, perhaps, is the fact that Popeyes is nearly full franchised, with roughly 98 per cent of its locations operating under this model. Restaurant Brands has found this approach very successful with Tim Hortons and Burger King, as it generates high margins and strong cash flows.
“I can’t stress enough how powerful the business model is because they essentially just take royalties, while all the funding and building of new restaurants is done by the franchisee,” Moss said. “They are just generating so much free cash flow and not having to put any money to work to get that growth.”
In the meantime, Restaurant Brands stock is up more than 90 per cent since Tim Hortons was sold to Burger King in December 2014.
It hit a fresh all-time high on Tuesday, as investors drove shares up $4.98, or seven per cent, to $75.65 in Toronto trading.
Popeyes shares surged 19 per cent to US$78.73 on the Nasdaq, just below the offer price.