Private equity flexes its musclePrivate equity flexes its muscle

Jonathan Maze

This post is part of the On the Margin blog.

It’s relatively common for the end of summer to yield a number of acquisitions in the restaurant industry. But the past week has been ridiculous.

Let’s start with last Friday, when Yum! Brands Inc. said it would sell an interest in the Yum China unit it’s spinning off to a pair of investment groups that will give the fledgling unit some local ownership. 

The same day, the private-equity firm CenterOak Partners bought a majority stake in Wetzel’s Pretzels from Levine Leichtman Capital Partners. Levine, by the way, got a 7x return on investment in the chain, as my colleague Lisa Jennings reported, while some early angel investors received an 11x return.

And Velvet Taco received an investment from private-equity firm L Catterton.

This week started off with news of a couple of modest deals. Subway bought assets from Avanti Commerce to help build its digital presence. And Capriotti’s received key investments from a trio of franchising veterans.

Deals just kept coming. On Wednesday, Arlon Group announced that it bought the Dallas-based pizza buffet chain Cicis.

On Thursday, Roark Capital Group announced an agreement to buy Jimmy John’s. 

And then today, MTY Food Group Inc. paid $27 million for Baja Fresh. 

Restaurant industry merger and acquisition activity is typically robust, and certainly has been in recent years thanks to the preponderance of lending and the presence of a lot of private-equity investors. Plus, there are a lot of restaurant companies to buy and sell.

Deals frequently pick up in September because investment bankers and restaurant executives are like everybody else: They take vacations over the summer and then get to work after Labor Day. Still, it’s difficult to recall a seven-day period when there was this much activity, at least since 2012, when a lot of deals got done in advance of potential tax law changes.

Private-equity firms are behind many of the recent deals, which is typical in most years except this one. Many of the acquisitions in 2016 were from strategic buyers or new entrants rather than investment firms, which seemed to take a back seat in recent months.

In April, for instance, truck-stop company TravelCenters of America bought the casual-dining chain Quaker Steak & Lube. 

And in June, Pieology acquired competitor Project Pie. 

All that said, there have been some big deals so far in 2016, most notably the acquisition of Krispy Kreme by the conglomerate JAB Holding Co.

Private-equity firms seemed to be mostly on the sidelines recently as desirable targets held out hope for an initial public offering, or prices grew expensive, or the deals available were considered unattractive. Many of these firms instead looked at smaller, high-growth targets that command high multiples but are still relatively small deals.

That private-equity groups are buying again could be a sign that prices are coming down as the market for restaurant IPOs has dried up — a restaurant chain has not gone public in a year, the longest drought since 2010.

Roark’s deal for Jimmy John’s might be the perfect example. Jimmy John’s looked for private equity last year, and then planned an initial public offering. It ultimately backed off. Nearly a year later, it was sold to Roark, traditionally one of the more active buyers in the restaurant and franchising space.

Yet this was Roark’s first restaurant deal since its investment in the growth chain Naf Naf Grill more than a year ago. And it was Roark’s first big purchase of a restaurant chain since it bought CKE Restaurants Holdings Inc. in late 2013. Roark instead focused on investments outside the restaurant industry.

Contact Jonathan Maze at [email protected]
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