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Just Because You Can Does Not Mean You Should

Corporate Restructuring Group – November 2013 newsletter

The Deloitte CRG Newsletter addresses the current state and outlook for the CRG practice, including recent engagements, announcements, case studies, and upcoming events.

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It is a great time to be in the restaurant industry

By Gene Baldwin

Publicly held stocks are trading at high multiples. IPOs have been all the rage. The success of the Potbelly and Noodles & Company IPOs and the dramatic increase in share price that followed reminds us of the hype around the Facebook and Twitter IPOs. Additional restaurant chains will be coming to market soon. Money is flowing to the industry from lenders and private equity investors faster than a roaring river, with many lenders financing large chains at rates under 5% with minimal covenants. 

Private equity is investing like they never have before. Some sophisticated PE shops are investing in very small startup chains in the Fast Casual space. One example is the rush of money to the fast pizza segment, with service systems similar to Chipotle and 800-degree ovens that can bake a pizza in under three minutes. There are at least ten startup chains with PE backing rushing to become the first national player in this segment. Private equity is also willing to own large franchisees. There was a time several years ago when private equity would not own a franchisee at any price. Now, word on the street is that one of the large franchisees of a YUM Brands company sold for seven times EBITDA and a lender financed five times EBITDA. These dynamics are unheard of in recent history for the restaurant industry – they are certainly higher than anything we saw in the 2005–2007 timeframe. 

These financing and investing trends are happening despite headwinds of almost no positive traffic growth in the casual dining segment, low single digit traffic gains in the QSR and Fast Casual segments, higher commodity prices (especially beef), and higher labor costs coming in the form of minimum wage increases and Obamacare. 

For restaurant chains with stable to increasing sales, it is a great time to refinance existing indebtedness at lower rates with fewer covenants. The critical question is: just because you can, should you? Restaurant chains need to consider whether it's truly the right time to secure financing for other purposes, such as remodeling and reimaging, new unit development, acquisitions or, a PE firm's favorite, funding a recapitalization and dividend to owners. And even if it is the right time for new financing, how much is enough? At what point do returns diminish such that greater leverage becomes excess – and therefore riskier – leverage? 

This may be a once-in-a-career time to refinance and lock in low rates in ways that will propel growth for years to come. However, too much leverage committed for the wrong purposes could mean disaster in the future. We have worked with many companies who have essentially sold their companies for that extra amount of debt taken on – just because they could.

Featured engagements

Deloitte CRG’s featured engagements this month include work with the following selection of clients: media company, EZE Trucking/Rig Runners, large faith-based health care system, protein processor and a grain cooperative. For an in-depth look at Deloitte CRG’s recent engagements, check out featured engagements.

As used in this document, 'Deloitte' means Deloitte LLP [and its subsidiaries]. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.


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