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Franchise ServicesSummer 2012 UpdateThe McLean Group 7900 Westpark Drive, Suite A320 McLean, VA 22102 (703) 827-0200 www.mcleanllc.com
Summer 2012 Update Franchise ServicesA World ViewAs the second quarter of 2012 closed, the US recovery threatened to falter in the wake of three straight months’disappointing jobs reports. Even so, the US Franchise and Restaurant Franchise sectors appeared to be enjoying a mildresurgence, especially among Quick Service Restaurants (more below). Very strong recent attendance at the FranchiseExpo in New York was reminiscent of franchise shows from years ago. While the European Union appears to be putting itsfiscal house in order, major US stock indices fell in June 2012 from April/May 2012 highs. As the 2012 US election seasongears up, the US economy, taxes and ObamaCare likely will be major issues as US taxpayers face the possibility of anunprecedented 494 billion in tax increases on January 1, 2013. The so‐called “fiscal cliff” could cost average families 4,138 annually (boomer families [ 4,223]; low‐income families [ 1,207]; millennials [ 1,099], and retirees [ 857]).In his July 17, 2012 Senate testimony, Fed Chairman Bernanke cautioned, “recovery could be endangered by the confluence of taxincreases and spending reductions that will take effect early next year if no legislative action is taken. The Congressional BudgetOffice has estimated that, if the full range of tax increases and spending cuts were allowed to take effect‐‐a scenario widelyreferred to as the fiscal cliff‐‐a shallow recession would occur early next year and about 1.25 million fewer jobs would be createdin 2013. These estimates do not incorporate the additional negative effects likely to result from public uncertainty about howthese matters will be resolved.” In other words, Congressional intransigence and posturing must end and action must be taken tominimize economic uncertainty.Likely 2013 Tax Increases, ObamaCare Drive Increased 2012 M&A ActivityWith the fiscal cliff on the one hand (see above) and the Supreme Court upholding ObamaCare’s constitutionality(including 20 new healthcare related taxes) on the other, the US economy likely will face serious headwinds in a secondObama administration as new ObamaCare taxes and capital gains tax increases kick in on January 1, 2013. 2012 mayprove ideal for executing an exit strategy and middle market M&A activity has increased significantly. With sales ofmiddle market businesses taking six to nine months, very little time remains for owners to close transactions in 2012.QSRs Match Casual Dining Satisfaction in June 2012Where Quick Service Restaurants are concerned, a 1.3% increase to an all‐time high score of 80 (out of 100) on the University ofMichigan’s American Customer Satisfaction Index (ASCI) was big news with huge ramifications. The same index tracked a 2.4%decline – to the same score of 80 – for Casual Dining Restaurants. QSRs never before matched Casual Dining Restaurants inoverall consumer satisfaction, which factors in perceived food quality, price and overall value. Industry leaders observe that, inrecent years, QSRs have made significant progress improving quality, products and value perception while also updating theirstores. Relatively cash‐strapped consumers responded with increased patronage and realized that QSRs’ overall value propositionmatched that of the Casual Dining restaurants. QSRs’ dramatic ASCI gains arguably are epitomized by McDonald’s own progress.McDonald’s scored 59 on the ASCI in 2000 but soared to a record 73 by 2012 on the merits of improved product offerings(including coffees, lattes and healthy food options) and overall value. (Wendy’s scored a 78.) Casual Dining Restaurants maydeliver higher food quality (though many new QSR/fast casual concepts today enjoy higher quality food perceptions than CasualDining competitors) but in uncertain economic times, consumers seeking to stretch their budgets find it harder to draw materialdistinctions between the overall value propositions of QSRs on the one hand and Casual Dining Restaurants on the other.2
Summer 2012 Update Franchise ServicesBurger King Goes Public for the Third TimeIn June 2012, Burger King went public for the third time in its corporate history following a reverse merger with JusticeHoldings, a blank check company controlled by activist investor Bill Ackman. Justice received a 29% stake in Burger King inreturn for a 1.4 billion investment that valued the overall company at 5.5 billion. (Burger King was taken private by 3GCapital for 4.4 billion in 2010.) Burger King’s largest franchisee, Carrols Restaurant Group, purchased 278 company‐ownedrestaurants in March 2012 and agreed to remodel 450 of its restaurants in a major overhaul of the US base. Carrols alsopurchased, for 3.9 million in cash to be paid over five years, the franchisor’s right of first refusal on any Burger King to besold in 20 US states (very likely to the future chagrin of would‐be sellers). Burger King received a 28.9% equity interest inCarrols as part of the overall transaction.Single-Branding: A New Trend Among Restaurant FranchisesWhen Restaurant Franchise Monitor released its Monitor 200 listing of the US’ largest restaurant franchisees, it reportedthat such franchisees were increasingly less likely to own multiple restaurant concepts. In 2008, more than 50% ofcompanies listed in the now‐20‐year‐old survey owned multiple concepts. By 2011, only 44% owned multiple concepts. Inthe wake of the 2008/2009 global recession, it is believed that diversification amongst a portfolio of restaurant conceptshas become less attractive than focusing on one concept to optimize scale economies and managerial efficiencies.Restaurant Franchise Monitor also noted that Monitor 200 franchisees grew faster in 2011 than the overall restaurantindustry both in terms of sales and unit counts. Acquisitions have been a key growth driver as Monitor 200 franchiseescapitalized on market uncertainties to purchase aggressively priced restaurant properties.3
Summer 2012 Update Franchise ServicesNoteworthy Recent Franchise & Franchise Restaurant Chain TransactionsClosed DateTargetValue ( MM)7/2/2012P.F. Chang's ChinaBistro, Inc. 1,109.31TBD(Announced6/25/12)J. Alexander'sCorp. (NasdaqGM:JAX) 012)5/7/20124/4/2012EdibleArrangements Party CityUndisclosed 2,690.00Bay Bread (LaBoulange)278 Burger KingRestaurantsMotel 6 100.00NA 1,900.00Fogo de ChaoChurrascariaHoldingsMendocino Farms 400.00 4.78Saxby's Coffee 2.00Huddle House,Inc.NABuyers/InvestorsSellersTransaction CommentsCenterbridgePartnersBlackRock, InvescoAdvisers, KornitzerCapital Management,Morgan StanleyInvestment BankingAndreeff EquityAdvisors, DimensionalFund Advisors, PrivetFund Management,Rutabaga CapitalManagement, SolidusCompanyNACenterbridge purchased P.F. Chang's at a 30% premiumto Chang's prior day stock price ‐ or 8.2 times EBITDA.American BlueRibbon HoldingsCattertonPartnersCorporationThomas H. LeeNAStarbucksCorporationNext World GroupCarrolsBurger KingCorporationAccor North AmericaBlackstoneThomas H. LeePartnersGP InvestmentsCattertonPartnersCorporationMVP CapitalNASentinel CapitalPartnersAres CapitalCorporation, AresCapital ManagementPlexus CapitalJ. Alexander's generated 157 million in 2011 revenues.Transaction takes American Blue Ribbon public as a 1.5 billion (revenues) firm operating 700 restaurants.Edible Arrangements' strategic partnership withCatterton, the leading consumer‐focused PE, shouldaccelerate the next phase of growth for the pioneer inhand‐sculpted, fresh‐fruit arrangements. Catterton'sinvestment will support brand expansion worldwide.Terms were not disclosed.Thomas H. Lee Partners agreed to acquire anundisclosed majority stake in Party City Holdings Inc.for 2.7 billion (including debt assumption). SellersAdvent International, Berkshire Partners, WestonPresidio and company management will holdsignificant minority stakes.Bay Bread operates San Francisco's 19‐unit La BoulangeBakery.NAAccor agreed to sell its US Economy Hotels Division to aBlackstone Real Estate Partners VII affiliate for 1.9billion. The network includes Motel 6, Studio 6(extended‐stay economy chain), and 1,102 hotels(107.347 rooms) in the US and Canada.Fogo de Chao is a 25‐unit Brazilian steak chain.Los Angeles‐based, 5‐unit franchise chain specializes insandwiches and salads including local, seasonalingredients.MVP Capital Partners completed the acquisition ofSaxbys Coffee Worldwide, LLC from Joseph Grassorecently.Sentinel Capital and Huddle House management (as aminority investor) acquired Huddle House from AresCapital on 4/4/12.Mark Your Calendars!The McLean Group’s Burt Yarkin will be speaking at the Capital Roundtable conference, “Private Equity Investing in FranchiseCompanies: Finding Excitement in Scalability, Recurring Revenue & Low Capital Needs” in New York on October 18, 2012.4
Summer 2012 Update Franchise ServicesFranchise Services TeamBurt YarkinManaging Director, San Francisco, CAbyarkin@mcleanllc.comJoe GoldenPrincipal, Headquartersjgolden@mcleanllc.comMark DaymanManaging Director, Atlanta, GAmdayman@mlceanllc.comTHE MCLEAN GROUP FRANCHISE SERVICESPRACTICEThe McLean Group’s Franchise Services division provides advisory services for sellside and buy side M&A transactions, for corporate financial restructuring,refinancing and capital formation. Led by seasoned bankers with extensiveexperience as senior franchising industry executives, our team understands theunique qualitative and quantitative value drivers impacting franchise companiesin the marketplace. Our bankers are supported by research, analysis andvaluation staff who have broad expertise with a wide array of leading middlemarket franchise companies and state‐of‐the‐art research databases.Joe LoughranDirector of Research & Special Projects,Headquartersjloughran@mcleanllc.comThe McLean Group has completed transactions with many of the industry’s mostprominent strategic buyers and private equity firms. We maintain close workingrelationships with key decision makers in all of the sector’s strategic, large andmid‐tier public and private firms and are well‐positioned to help you address yourcompany's financial requirements.THE MCLEAN GROUPOVERVIEWThe McLean Group has provided advisory services to the following companiesThe McLean Group is an investmentbank providing mergers andacquisitions (M&A), businessvaluation and strategic consultingservices to middlemarket businesses. Headquarteredin the Washington, DC metropolitanregion, the firm has a presence inmore than 30 cities in the US,serving domestic and internationalclients with a broad resume ofsuccessfully consummated financialtransactions. Our research staffleverages state‐of‐the‐art,proprietary corporate informationand transaction data, providing ourclients with unmatched informationon which to make transactiondecisions.5
Franchise Services Summer 2012 Update The McLean Group 7900 Westpark Drive, Suite A320 McLean, VA 22102 (703) 827-0200 www.mcleanllc.com
