Can FAT Brands’ two new CEOs outrun the company’s financial and legal troubles?Can FAT Brands’ two new CEOs outrun the company’s financial and legal troubles?

Joanna Fantozzi

Less than two months after former FAT Brands CEO Andy Wiederhorn announced that he was stepping down from his role as head of the company in connection with an ongoing federal investigation, the Fazoli’s and Johnny Rockets parent company announced his two successors.  Co-CEOs Ken Kuick and Rob Rosen will helm FAT Brands moving forward, while maintaining their respective roles in the company as chief financial officer and executive vice president of capital markets.

Meanwhile, Wiederhorn is continuing in his role as chairman of the board. He and his family’s company, Fog Cutter Capital, still maintain a controlling interest (55.5%) in FAT Brands, even while they are being investigated by federal authorities on accusations of securities and wire fraud, money laundering, and attempted tax evasion.

So, what exactly have the two new CEOs of FAT Brands inherited as they step into their new roles at the company?

This is the latest chapter in an increasingly complex financial and legal journey for FAT Brands, which began making headlines in 2021 for the company’s rapid-fire acquisition of four companies in five months, including Global Franchise Group, Twin Peaks, Fazoli’s and Native Grill & Wings. By Jan. 2022, FAT Brands had grown from a small restaurant group anchored by its flagship Fatburger in 2018, to a ballooning restaurant company with 12 acquisitions in three years under its belt.

Related:FAT Brands appoints co-CEOs

At the time, Andy Wiederhorn had said that the aggressive acquisition strategy is focused less on brand synergy and more on rapid growth. In late 2021, analysts called this bulldog strategy “opportunistic” especially as Wiederhorn was able to “take advantage of market conditions” to snap up aging and struggling brands.

This massive portfolio expansion was anticipated when, in 2020, Andy Wiederhorn’s company Fog Cutter Capital merged with FAT Brands, allowing the company to use its stock to make future acquisitions instead of just using debt or cash.

But as financial analyst and FAT Brands advisor Roger Lipton said following Fat Brands’ massively transformative year in 2021, the risk of acquiring so many struggling smaller brands is that you’re also acquiring their debt.

This is exactly what has happened to FAT Brands, which, according to the company’s latest public filing for the fiscal year ended Dec. 25, 2022, has accumulated 2.8 times the amount of debt as income — with $95 million in current assets and $267 million in current liabilities.

FAT Brands’ plan, meanwhile, is to continue to whittle away its debt by growing EBITDA, or operational performance.

Related:FAT Brands CEO Andy Wiederhorn is stepping down

“EBITDA is continuing to grow organically at FAT Brands with a 1,000-unit new store pipeline and our manufacturing facility running at only 33% capacity,” a FAT Brands spokesperson told Nation’s Restaurant News via email. “Our EBITDA will grow by over $60 million over the next few years to $150 million. By definition, this will cut our debt-to-income ratio dramatically. … There should be no cash burn before dividends for 2023/2024 on a combined basis. Additionally, the faster our new stores open, the faster we become cash flow positive including dividends.”

Despite having a plan in place to tackle long-term debt through increased operational growth and opening more stores, FAT Brands’ financial and legal situation remains precarious. According to SEC documents, the shareholders’ deficit more than tripled from Dec. 2021 to Dec. 2022, ballooning from $52.5 million in the red to a $178.8 million deficit. However, the company is still paying dividends to its investors.

“If a company is making a profit, a dividend makes sense,” L. Burke Files, financial investigator and Unicus Research advisor, told Nation’s Restaurant News. “You're distributing profits of the company to the investors because you have profits. So, that cash that could otherwise pay down debt is being distributed to shareholders. ... Wiederhorn has more than 50% control of the company through Fog Cutter, so every time you declare a dividend out of the company, his company gets half of that.”

This cycle of FAT Brands acquiring companies and debt and paying out more than half of regular dividends to Wiederhorn’s company has provoked the ire of shareholders. Three separate lawsuits have been filed by investors against FAT Brands, claiming variations on “breach of fiduciary duty, unjust enrichment and waste of corporate assets” as a result of the company’s merger with Fog Cutter Capital. In one of the lawsuits, Delaware Chancery Court denied a motion to dismiss the complaints of plaintiffs James Harris and Adam Vignola and FAT Brands was granted a stay by the court following the appointment of a Special Litigation Committee. The actions are ongoing, with a trial date scheduled for Feb. 2024. In a March 2022 earnings call, Wiederhorn addressed the allegations, calling the most recent lawsuit “a derivative suit” based on the 2020 merger of Fat Brands with Fog Cutter Capital.

This is all on top of the U.S. General Attorney’s ongoing federal investigation into FAT Brands’ merger with Fog Cutter Capital. After federal authorities raided Wiederhorn’s son Thayer and daughter-in-law Brooke Wiederhorn’s home in Feb. 2022 as reported by the Los Angeles Times, there have been few updates on the status of the ongoing federal investigation.

Besides dealing with multiple legal entanglements, FAT Brands appears to be focused on new store openings and reducing debt. The spokesperson for the company told Nation’s Restaurant News that FAT Brands intends to sell one or two brands between 2024-2025, which should pay off most of the debt. The spokesperson added that “investor sentiment is high” at the moment.

“Our long-term strategy is to create value through the organic growth of our brands, acquire additional brands that are strategic to our portfolio make-up, realize value when appropriate to manage any debt outstanding, and increase long-term value for our stakeholders while giving them a consistent dividend along the way,” the spokesperson said via email.

Although Wiederhorn stepped down as CEO, he and his family still remain involved with steering the short and long-term success of FAT Brands.

“Mr. Wiederhorn will continue as chairman of the board and will focus on the strategic direction of the company, the allocation of capital, and making sure the management team executes our business plan while maintaining quality restaurant operations,” the FAT Brands spokesperson told Nation’s Restaurant News via email. “His family office remains our majority and controlling shareholder.”

Meanwhile, FAT Brands’ newly promoted co-CEOs are tasked with staying the course of growth for the company, focusing on new store openings, growing the company’s manufacturing facility, and driving “high-growth brands” in its portfolio like Twin Peaks.

Contact Joanna at [email protected]