In lender TD Bank’s annual survey, taken during the Restaurant Finance and Development Conference in November, 84% of restaurant operators and financial professionals said they expected merger and acquisition activity to increase over the next 12 months.
It certainly couldn’t get much worse than it’s been over the past couple of years. Despite headlines about giant deals for chains like Subway and Jersey Mike’s, the market for restaurant deals has been mostly slow.
But there are already signs that the market is moving again. For that, we go to the bankruptcy of BurgerFi, where Jeff Crivello’s TREW Capital Management was able to quickly find buyers for Anthony’s Coal-Fired Pizza and then BurgerFi itself. Anthony’s in particular generated considerable interest from prospective investors, who viewed the chain as an opportunity.
The restaurant market is largely divided into two: Franchised brands and restaurant operations. Those restaurant operations are further broken down to two parts, company-operated restaurant brands and franchisees.
The market for franchised brands has been thriving. The past two years have featured major deals, including two of the largest restaurant deals of all time in Subway ($9.6 billion) and Jersey Mike’s ($8 billion). There was also the sale of the perpetually underrated Tropical Smoothie Café ($2 billion). Look at those deals and you’d have zero idea there was anything wrong with anything.
Unsurprisingly, other franchised brands are looking at these numbers and are thinking of jumping in, notably Freddy’s Frozen Custard & Steakburgers, which is apparently jumping back into the market just three years after it was sold.
The rest of the restaurant market, however, has been tight, unless we’re talking about franchisees of Taco Bell or McDonald’s.
For the most part, any company that actually operates its own restaurants has struggled to find buyers, with the exception of the periodic chain engulfed by the acquisitive casual-dining operator Darden Restaurants.
Operating restaurants is more difficult and capital intensive and less profitable than operating franchised brands, and both lenders and investors shied away starting in late 2021, when it was clear inflation was not transitory but was the worst in 40-some years.
A string of failed private-equity investments, rising interest rates, profitability and traffic challenges all conspired to freeze the market. Brand owners had few exit ramps but bankruptcy. Lenders often unloaded debt on these companies at discounts, which provided opportunities for investors like Crivello or big Burger King operator Sun Holdings, both of which acquired brands by first buying debt.
But the market wasn’t going to be like that forever. Interest rates are heading back down. The U.S. Federal Reserve is expected to cut interest rates again this week, and lower interest rates mean buyers have more money to buy chains with.
The outlook for restaurant sales, meanwhile, appears to be improving and, we’d argue, has been far more resilient than truly understood. Much of the 2024 bankruptcy rush was more of a leverage and market problem than it was a sales problem. What’s more, the bulk of said bankruptcies were smaller chains.
The big, headline-grabbing names like Red Lobster and TGI Fridays both had long-term issues, compounded by management lapses, that likely would have put them into that position at some point.
In any event, you can put us on the side of those 84% who believe that the market for restaurants will be better over the next 12 months. As we said, it can’t get much worse.