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Sale-leasebacks Represent a Dangerous Strategy for Restaurateurs

July 30, 2010

Analysis of:Restaurateurs turn to sale-leaseback deals to convert assets into capital for expansion | www.nrn.com

Sale of commercial property, especially during this period of depressed valuations, puts operators at risk over the longer term. The ultimate cash flow implications of such a transaction make it a dangerous strategy indeed. It should be considered a last resort to raise development capital.

Asset write-offs are a good idea; will strengthen future earnings for restaurant companies

March 3, 2009

Analysis of:DineEquity 4Q loss widens on charge | www.nrn.com

Hand-wringing abounds over recent impairment charges being absorbed by restaurant companies.  The concerns are overwrought.  In fact, the current round of write-downs will serve to strengthen survivors as the economy eventually recovers.  

Sale-leasebacks are short term fix with negative long term implications for restaurateurs

April 29, 2008

Analysis of:Restaurateurs turn to sale-leaseback deals to convert assets into capital for expansion | www.nrn.com

There are better ways to raise capital to fund operations and growth than divesting precious real estate assets.  The cash flow implications of sale-leaseback transactions are daunting over the long haul, and will ultimately have a negative impact on many operators.  Restaurateurs should resist this method of capital formation if at all possible.

Questionable Trade-off for Spicy Pickle

October 12, 2007

Analysis of:Spicy Pickle(R) Serves Up Its Initial Public Offering | money.cnn.com

Such a very early IPO effort may well not provide the strategic advantages extolled by managment.  The tradeoffs implicit in a foray into the public marketplace are significant; why a company of this size, still in the relative infancy of its development, would want to carry that baggage is puzzling.

Restaurant M&A activity: pendulum swinging to strategic buyers

August 27, 2007

Analysis of:Control of Yard House is sold to growth-minded equity firm | www.nrn.com

Restaurant M&A activity will continue to proliferate, though in a different model than predicted by many analysts earlier this year.  Private equity buyers seem far less interested in the restaurant space than was anticipated, partly due to macro developments, partly due to industry trends.  Strategic buyers, however, will continue to add to their portfolios at reasonable costs due to depressed valuations.  Acquisition will increasingly become the primary growth vehicle for restaurant companies. Even recent private equity buyers (cf. source article) display more strategic components to their deals than traditional financial acquirers.

Restructuring inevitable, hostile takeover unlikely.

August 6, 2007

Analysis of:Arby's Parent Outlines Terms for Wendy's Bid | online.wsj.com

The sale and/or restructuring of Wendy's International is all but a foregone conclusion.  Peltz's Triarc is an interesting combination of a strategic buyer and a purely financial player.  It will be difficult for the WEN Board to pass on a $41 offer, but don't be surprised to see other strategic buyers surface during the process.

M&A activity will continue and accelerate, though in different forms and for different reasons

July 31, 2007

Analysis of:IHOP Buys Applebee’s: A Look at the Numbers | www.chainleader.com

M&A deals will proliferate in the restaurant industry, in spite of perceived skittishness in the wake of the IHP/APPB (proposed) transaction.  For strategic buyers, acquisitions will necessarily replace organic growth as the development method of choice.  This is a result of looming macroeconomic trends which will change dramatically the face of the industry moving forward. Private equity will be unable to resist compelling valuations as both short- and longer-term factors drive down acquisition costs of publicly traded concepts. There will be tremendous opportunities for both acquirers and operators who understand the dynamics of the industry and its future.  For investors, identifying likely candidates on both fronts will provide attractive returns.

An important sales-to-investment caveat

June 12, 2007

Analysis of:Not fast food, not casual, but it tastes like profits: CMG and PNRA | www.jsonline.com

Sales-to-investment ratios for Quick Casual may be superior to traditional QSR in NEW locations, but that is not the case in locations which have been in existence for an extended period.  Remember that many QSR units currently operate under terms of leases signed a decade ago; although typical leases contain a "percentage of sales override" provision, these older leases still provide a significant fixed cost component advantage.  This advantage is even more pronounced in locations where the land is owned.  In those cases, the occupancy cost is essentially capped (and may be fully amortized), and the underlying property value has likely increased, providing a potential capital source. The cost to upgrade such older locations to provide improved products and service is not insignificant, but the lower initial investment and resultant cash flow makes it a plausible strategy.  Expect more and more QSR concepts to move upstream in their brand offerings, squeezing fast casual players. 

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