Restaurant Brands Seals Deal to Acquire Popeyes

Deal will likely value Popeyes Louisiana Kitchen at more than $1.7 billion

Restaurant Brands International Inc. (NYSE: QSR), the Oakville, Ontario-based company that owns and operates restaurants under the Burger King and Tim Hortons brand names, has agreed to purchase Popeyes Louisiana Kitchen Inc. (NASDAQ: PLKI) for about $1.8 billion, as reported by Bloomberg on February 22nd, 2017. The $79-per-share deal reflects a 27% premium on the 30-day average of the company’s share price. The deal is expected to close by early April 2017.

Restaurant Brands International is one of the world’s largest quick service restaurant (QSR) companies with more than $24 billion in system-wide sales and over 19,000 restaurants in more than 100 countries and US territories. It owns and operates restaurants under the Burger King and Tim Hortons brand names.

Restaurant Brands was formed in 2014, when the private investment firm 3G Capital-backed Burger King acquired Canadian coffee and doughnut chain Tim Hortons Inc. for $11 billion. 3G Capital’s long-time partner, Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B), committed $3 billion of preferred equity to finance that deal, and therefore holds stake in Restaurant Brands. 3G Capital, controlled by Brazilian billionaire Jorge Paulo Lemann, owns about 43% of the voting shares in Restaurant Brands. 3G Capital also holds 23% stake in US-based packaged food giant Kraft Heinz Co. (NASDAQ: KHC).

The Atlanta, Georgia-based Popeyes Louisiana Kitchen operates and franchises QSRs under the brand names of Popeyes Louisiana Kitchen and Popeyes Chicken & Biscuits. The company operates in two segments, Franchise Operations and Company-operated Restaurants. As of October 2nd, 2016, Popeyes had 2,600 operating restaurants in the US, the District of Columbia, three territories, and 26 foreign countries. The company has benefited from strong customer loyalty, as well as from a restaurant refurbishment program.

Deal could expand Restaurant Brands’ footprint

The deal is a bet by Restaurant Brands that it can use its international reach to introduce Popeyes’ Louisiana-style fried chicken and buttermilk biscuits to more diners globally. Popeyes has a market value of about $1.37 billion, while Restaurant Brands is worth $25 billion. The average Popeyes location has $1.4 million in annual revenue. Franchisee profitability averaged $340,000 per location in 2015, according to a public filing, up from $188,000 in 2008. The company opened 216 net new stores in 2016 after opening 219 in 2015.

Both companies held talks last year, but were unable to reach an agreement at that time. Burger King renewed its interest in Popeyes late last week and made an offer that was mainly cash. The fried-chicken chain accepted the offer since no competitive offer materialized.

The deal represents a consolation prize of sorts for 3G Capital, which lost a $143 billion bid on February 17th, 2017, to merge its biggest holding, food conglomerate Kraft Heinz with UK-based Unilever NV (NYSE: UN), the owner of Lipton and Dove brands. The proposed deal would have created a company with combined sales of $84.8 billion in 2016, second only to Switzerland-based Nestle S.A.

Popeyes in midst of strategic transformation

Popeyes is in the midst of a strategic transformation that will focus on three pillars: Louisiana Heritage, the company’s key differentiator from competitors; Passionate Teams in which people drive profitability; and Routine Excellence, which entails delivering consistent operational excellence at Popeyes restaurants. As part of this strategic roadmap, the company plans an incremental spending of approximately $2 million towards team members and development of a single technology platform for Popeyes restaurants. Popeyes also plans to expand globally by increasing its restaurant count to 4,000 over the next few years.

To spearhead this transformation, Popeyes announced in 2016 that it has selected Steven Fricker as senior vice president of development. Fricker is an industry expert with more than 35 years of experience as a senior corporate executive and a former franchisee with several national restaurant brands. Fricker’s responsibilities include new unit development, franchise sale and development, architecture and design and new construction and restraint opening processes. He is also responsible for seeking and overseeing new franchise and company opportunities in strategic markets.

Burger King joins drug-free poultry bandwagon

In recent months, Burger King plans to make the switch to chickens raised with fewer antibiotics in the US in 2017. The company will also to expand this decision to include chickens in Canada in 2018. In this regard, health advocacy group As You Sow has been working with Restaurant Brands on its antibiotics policy for more than a year. The company’s latest move comes after its rivals McDonald’s Corp. (NYSE: MCD), The Wendy’s Company (NASDAQ: WEN), Chipotle Mexican Grill Inc. (NYSE: CMG) and Five Guys Burgers and Fries have also taken similar steps after being faced with backlash from investors and consumers in recent months. Public health experts have long been concerned that routine feeding of certain antibiotics to poultry and livestock could lead to antibiotic-resistant superbugs, seen as a health hazard for humans.

Fried chicken witnesses resurgence

Chicken accounts for about 10% of the fast-food industry, according to data service IBISWorld, and Popeyes’ market share in this category is growing. The largest brands in the sector include privately held Chick-fil-A and YUM! Brands Inc.’s (NYSE: YUM) KFC. Fried chicken is witnessing a resurgence of sorts, as Americans are set to eat more of it this year than ever before on record, 91.7 pounds per person, according to the National Chicken Council. Consumption has surged more than 225% since 1960, even as the amount of red meat people eat has declined.

Many fast-food restaurants are jumping on the chicken bandwagon to cash in on the recent trend. Taco Bell, a division of YUM! Brands, introduced a new chalupa in January 2017 with a shell made out of fried chicken rather than corn or flour. Shake Shack Inc. (NYSE: SHAK), famous for its milkshakes and hamburgers, started selling a fried-chicken sandwich in 2016 that already has become one of its top sellers.

More importantly, the food service industry witnessed an increase in deal-making activity in 2016, with a total of $7.3 billion of acquisitions announced, compared to $4.2 billion in 2015, according to Bloomberg. JAB Holding Co., the investment company of Austria’s billionaire Reimann family, agreed to buy Krispy Kreme Doughnuts Inc. for $1.35 billion in May 2016, while Heineken N.V. teamed up with Patron Capital to bid for UK pub operator Punch Taverns PLC’s shares in December 2016. Sweet deals indeed!

Stock Performance

Restaurant Brands International’s stock stood at $56.01, slipping 2.76%, at the close on Wednesday, February 22nd, 2017, having vacillated between an intraday high of $57.49 and a low of $55.85 during the session. The stock’s trading volume was at 1,324,982 for the day. The Company’s market cap was at $13.12 billion as of Wednesday’s close.

Popeyes Louisiana Kitchen’s stock stood at $79.02, gaining 0.37%, at the close on Wednesday, February 22nd, 2017, having vacillated between an intraday high of $79.16 and a low of $78.79 during the session. The stock’s trading volume was at 1,338,195 for the day. The Company’s market cap was at $1.64 billion as of Wednesday’s close.

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