Vice President: Leonardo Bassino
Analysts: Joshua Cayaban, Raashi Parekh, Heehun Seol, Shagun Shrivastava, Darrel Tan
Deal Overview
Acquirer: Restaurant Brands International
Acquiree: Carrols Restaurant Group
Deal size: $1.0 billion
Buy Side Advisors: J.P Morgan (financial) and Paul, Weiss, Rifkind, Wharton & Garrison (legal) Sell Side Advisors: Jefferies LLC (financial) and Milbank LLP (legal)
Introduction
Restaurant Brands International Inc. (RBI) has announced the acquisition of Carrols Restaurant Group, Inc. (Carrols), in a deal valued at $1.0 billion, aiming to revitalise Burger King's presence in the fast-food market. Carrols, the largest Burger King franchisee in the U.S., operates over 1,000 restaurants and is set to undergo a comprehensive remodelling effort over the next five years. Led by RBI's "Reclaim the Flame" strategy, this acquisition seeks to modernise Carrols' establishments, with an investment of $500 million, while emphasising a shift towards local franchisee ownership to enhance community engagement.
This strategic move not only signifies RBI's commitment to elevating the Burger King brand but also underscores its dedication to local entrepreneurship. By fast-tracking the renovation of Carrols' restaurants and subsequently re-franchising them to smaller franchisee groups, RBI aims to revitalise the guest experience while fostering economic growth within local communities. Through this acquisition, RBI is poised to reshape the fast-food landscape, leveraging its resources to drive innovation, profitability, and sustainable growth across its expanded portfolio of restaurants.
Deal Structure
Under the terms of the merger agreement, Restaurant Brands International Inc. (RBI) will undertake the acquisition of Carrols Restaurant Group, Inc. (Carrols) in a transformative all-cash transaction. RBI, along with its affiliates, currently holds approximately 15% of Carrols' outstanding equity. The acquisition will be executed for $9.55 per share, reflecting a substantial 23% premium over Carrols' 30 trading-day volume weighted average price as of January 12, 2024, and amounting to an aggregate enterprise value of approximately $1.0 billion.
To ensure a rigorous evaluation process, a Special Committee of Carrols' Board of Directors, comprising independent directors not affiliated with RBI, has been established. Advised by independent legal and financial experts, this committee conducted thorough negotiations and unanimously recommended the merger agreement. Following this, the Carrols Board of Directors, excluding those affiliated with RBI, also unanimously approved the agreement, urging Carrols shareholders to adopt it. Notably, a 30-day "go shop" period allows Carrols to solicit alternative proposals, ensuring the transaction's robustness.
Completion of the transaction, slated for the second quarter of 2024, is contingent upon customary closing conditions, including approval by the majority of Carrols' common stockholders, excluding those affiliated with RBI, and compliance with regulatory requirements, such as the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Financing for the acquisition will be sourced from cash reserves and term loan debt, for which RBI has secured a financing commitment. Affiliates of Cambridge Franchise Holdings, LLC, representing a significant portion of Carrols' outstanding shares, have entered into a voting agreement in favour of the transaction, further cementing its viability and potential for shareholder value creation.
Restaurant Brands International Overview
Restaurant Brands International Inc. (RBI) is a dominant force in the global quick-service restaurant industry, boasting a robust portfolio of iconic brands such as Tim Hortons, Burger King, Popeyes, and Firehouse Subs. With annual system-wide sales exceeding $40 billion and a network of over 30,000 restaurants spanning more than 100 countries, RBI is committed to fostering sustainable outcomes through its innovative "Restaurant Brands for Good" framework. Founded in 2014 through the merger of Burger King and Tim Hortons, RBI expanded its reach with the acquisition of Popeyes in 2017. Headquartered in Toronto, Canada, RBI operates alongside Tim Hortons, with Burger King and Popeyes maintaining individual operations in Miami. Notably, 3G Restaurant Brands Holdings LP holds a significant stake in RBI, further reinforcing its position as a global leader in the industry.
Under the leadership of CEO Joshua Kobza, who assumed the role in March 2023, RBI continues to drive innovation and growth, leveraging its global scale and shared best practices to nurture the development of its brands. Publicly traded on both the New York Stock Exchange and the Toronto Stock Exchange, RBI remains committed to upholding its core values, fostering strong employee and franchisee relationships, and making a positive impact on local communities worldwide.
Carrols Restaurant Group Overview
Carrols Restaurant Group, Inc. stands as a prominent American franchisee company and holds the distinguished title of being the largest Burger King franchisee globally. With a rich history dating back to 1976, Carrols has carved a niche for itself, owning and operating over 1,000 Burger King restaurants across 23 U.S. states, along with 55 Popeyes establishments. The company traces its origins to the Carrols hamburger restaurant chain, which flourished in the early 1960s before transitioning to Burger King franchises in 1975. Founded by Herb Slotnick, Carrols expanded its footprint throughout New York State, embodying a legacy of culinary excellence and community engagement.
Over the years, Carrols has navigated various transformations and expansions, including the acquisition of Burger King locations from Burger King Corporation in 2012, strategic divestments, such as the spin-off of Taco Cabana and Pollo Tropical in 2011 and finally its merger with Cambridge Franchise Holdings LLC in 2019.
Industry Overview
The retail industry, particularly the fast-food sector, has witnessed a significant surge in M&A activity in recent years. To understand the suitability of the RBI-Carrols acquisition within the broader retail M&A landscape, one needs to delve into the industry dynamics and examine its rationale. The fast-food industry has been characterized by intense competition, evolving consumer preferences, and changing market dynamics. Amidst these challenges, companies like Burger King have sought growth opportunities through strategic acquisitions. RBI's acquisition of Carrols Restaurant Group in January 2024 marks a significant move to bolster its market presence and streamline operations in the highly competitive fast-food market.
In assessing the suitability of this acquisition, it is crucial to consider metrics and projections. The deal valued at $1 billion positions RBI as a dominant player in the fast-food segment, with Burger King poised for expansion and enhanced operational efficiency. Moreover, Reuters reports that RBI anticipates significant cost synergies and operational efficiencies through the integration of Carrols' extensive network of Burger King franchises. One key metric to consider in evaluating the suitability of this acquisition is projected free cash flow. By acquiring Carrols, RBI gains access to a larger revenue base and economies of scale, which could potentially drive higher free cash flow generation. This increased cash flow can provide RBI with the financial flexibility to invest in innovation, expansion initiatives, or shareholder returns, thus creating value for stakeholders.
With Carrols' extensive franchise network, RBI stands to benefit from increased sales volume and revenue growth, particularly in the US market where Carrols operates. This growth trajectory aligns with RBI's strategic objectives of expanding its market share and driving top-line growth. Additionally, the synergies arising from the acquisition could lead to operational efficiencies and cost savings. By consolidating operations, streamlining supply chains, and leveraging shared resources, RBI can optimize its cost structure and enhance profitability. These synergies are critical in a competitive industry landscape where margins are often under pressure.
The current financial landscape, particularly in the fast-food sector, presents lucrative opportunities for strategic acquisitions aimed at driving growth and enhancing market position. With a focus on leveraging synergies, optimizing operations, and driving top-line growth, RBI's acquisition of Carrols is poised to create significant value for stakeholders and solidify its position as a leading player in the fast-food industry.
Financial Analysis
Discounted Cash Flows Analysis - Carrols Restaurant Group
Deal Rationale and Synergies
The acquisition of Carrols Restaurant Group by Restaurant Brands International (RBI) is a significant strategic step, indicative of RBI's commitment to reinvigorate the Burger King brand within the highly competitive U.S. fast-food market. This move aligns perfectly with RBI's "Reclaim the Flame" plan, which is a comprehensive strategy designed to remodel and modernize Burger King outlets, with an emphasis on attracting a younger demographic and enhancing the overall customer experience. This plan is not just about physical refurbishment; it's about redefining the brand's appeal in a market that is increasingly driven by digital innovation and consumer trends favouring more contemporary dining experiences.
The synergies from this acquisition are multifaceted. Firstly, there's a clear operational synergy. By acquiring Carrols, RBI gains direct control over a significant number of its outlets, allowing for a more consistent and controlled rollout of its new branding and operational strategies. This control is crucial in ensuring a cohesive brand experience across a large network of restaurants. Secondly, the financial investment of approximately $500 million in remodelling about 600 restaurants suggests a focus on long-term asset value creation. These modernized outlets are expected to attract more customers and potentially generate higher revenues per outlet. Thirdly, the expansion of the franchisee base is a strategic move towards a more localized, community-focused business model. This approach could foster stronger ties with local markets and create a more personalized customer experience. Lastly, there are marketing synergies. The revamp is likely to reposition the Burger King brand in the public's perception, making it more relevant and appealing to younger consumers who are increasingly influenced by brand image and digital presence.
Risks
The acquisition carries several risks. The integration of Carrols’ operations into RBI's existing framework presents a significant challenge. It involves aligning different corporate cultures, systems, and operational standards. RBI will need to manage this integration carefully to prevent disruption in operations and maintain employee morale and productivity.
The financial risk associated with the substantial investment in modernization is also noteworthy. If the remodelled restaurants do not yield the expected increase in customer traffic and revenue, the ROI on this investment could be lower than anticipated. RBI might need to explore additional revenue streams or more efficient operational models to mitigate this risk. Market response and competition in the fast-food industry are unpredictable. While the rebranding and modernization efforts are designed to attract a younger demographic, there's no guarantee that these efforts will resonate with the intended audience. Continuous market research and flexibility in marketing strategies could be key to adapting to consumer preferences.
Regulatory approvals and shareholder support are critical for the completion of the acquisition. To navigate this, RBI must ensure transparent communication and demonstrate the long-term value of the acquisition to all stakeholders. Litigation risks, common in such large-scale corporate transactions, must be anticipated and managed. RBI should have a robust legal strategy in place to address any potential legal challenges that might arise during or after the acquisition process. Lastly, operational risks stemming from the management of a larger portfolio of company-owned restaurants are significant. RBI will need to strengthen its operational frameworks and perhaps leverage technology and data analytics to manage these complexities efficiently.
In conclusion, while the acquisition of Carrols Restaurant Group presents a promising opportunity for RBI to revitalize and grow the Burger King brand, careful navigation of the associated risks and strategic execution of the plan will be crucial for its success.
Conclusion
The intensively competitive, ever-changing and dynamic fast-food industry is an ideal environment in which companies seeking strategic acquisitions can thrive, synergising on cross-selling and up-selling opportunities are continuously born. Restaurant Brands International is an already predominant force in the global quick service restaurant industry. RBI is the archetype of a firm that managed to successfully leverage the fast-food industry’s opportunities and is now boasting a robust portfolio comprising brands such as Burger King, Tim Hortons, Popeyes, and Firehouse Subs.
RBI expects further enhancements in its competitive edge in the market through the acquisition of Carrols Restaurant Group. Carrol’s extensive network is a great asset for RBI, and will likely allow for the expansion of the buyer’s operational scope. The combination of RBI's global presence and Carrols' established market dominance in the U.S. creates a formidable entity poised for sustainable growth and continued success in the dynamic landscape of the quick-service restaurant industry. With this strategic acquisition, RBI cements its status as a leader in the fast-food world, ready to meet future challenges and seize new opportunities in this industry’s ever-evolving landscape.
References
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