Tim Hortons owners aquire Popeyes in US$1.8-billion cash deal.
Popeyes acquisition not likely the last
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, Ontariobased 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 US$ 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.
“With this transaction, Restaurant Brands is adding a brand that has a distinctive position within a compelling segment and strong U. S. and international prospects for growth,” Daniel Schwartz, the company’s chief executive, said in a statement.
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.”
3G’s track record of aggressive cost cutting, combined with an promising growth strategy, is a big reason why Restaurant Brands has been such a big winner, and its management team is considered the best in the business.
The Brazilian firm created beer giant Anheuser- Busch InBev through a massive buyout in 2008, and it teamed up with Buffett to bring Heinz and Kraft together.
They drove EBITDA up 35 per cent within the first year of the Heinz- Kraft merger, and cut capex at Tim Hortons by more than 85 per cent since 2013. Kraft Heinz Co. recently tried to buy rival Unilever Plc for US$143 billion, and while that transaction was abandoned with the price tag deemed too low, there is surely more to come, both in the packaged food sector and the fast food space.
“I think these guys may be better than Warren Buffett,” Aaron Cowen, chief investment officer at Suvretta Capital Management, told the Capitalize for Kids Investors Conference in October. “One of the upsides in (Restaurant Brands) ultimately is that they’ll continue to do more M&A, and the cost-cutting opportunities are pretty significant.”
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 7 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.