Bought and Sold
Top franchisees change hands at quick clip
To get an idea of how active the nation’s largest restaurant franchisees have been recently, look no further than the biggest, the Pittsburg, Kansas-based Pizza Hut operator NPC International.
In recent months, the company obtained new owners (private equity group Olympus Partners), it bought 36 more units from Pizza Hut, and it refinanced a $375 million loan. And that’s just since November.
That describes the past year and a half for the companies on Franchise Times’ Restaurant 200 in a nutshell: busy. A remarkable number of the companies toward the top of our annual ranking of the nation’s largest restaurant franchisees by annual revenue either made a big acquisition or were sold.
As this ranking illustrates, we’re in the midst of a franchisee acquisition boom. According to the New York-based investment banking firm J.H. Chapman’s annual restaurant merger and acquisition census, franchisee transactions rose significantly last year and represented nearly half of all recorded deals. “I can’t ever remember this large a percentage of transactions that involve franchisees,” David Epstein, principal with J.H. Chapman, told our sister publication, the Restaurant Finance Monitor.
The boom is being fueled by low-cost debt and the availability of units. Numerous franchise systems, including the chains that dominate the ranking such as Applebee’s, Burger King, and Yum Brands’ three concepts KFC, Pizza Hut and Taco Bell, have been selling off company stores to franchisees. In addition, a number of franchisees have put their operations up for sale, as owners retire or simply seek the exits after several years of challenging sales numbers.
The acquisitions boom would ultimately hit the top company on our ranking, too.
To be sure, NPC is no stranger to buying and selling. The company was founded in 1962, when an insurance salesman named Gene Bicknell bought a Pizza Hut restaurant in Pittsburg, Kansas and worked at night to grow the business. Bicknell expanded over the years and went through a few name changes—eventually becoming National Pizza Co., and then NPC International. By the time he sold his interest in the company to Merrill Lynch in 2006 it had more than 500 restaurants. That was the year after the company claimed the top spot on the Franchise Times Restaurant 200 as the nation’s largest restaurant franchisee.
NPC isn’t just acquiring units. CEO Jim Schwartz said the company is finding a healthy market for building new Pizza Huts, mostly delivery and pick-up units in smaller towns. “Yum’s done a great job providing lower-cost investment opportunities,” Schwartz said, noting the company has built 27 units in the past nine months.
In 2008, Bank of America took over Merrill Lynch, and by last year the Charlotte-based banking giant decided to narrow its focus, putting NPC on the block. It was good timing. The acquisitions market had returned in 2010 following a two-year hiatus and, in the franchisee world, had kicked into gear last year.
In November, Olympus Partners, the Stamford, Connecticut-based private equity firm, agreed to buy NPC for a reported $775 million, or more than seven times the company’s 2011 earnings before interest, taxes, depreciation and amortization. The earnings multiple is a way to measure the purchase price of a business—the higher the multiple, the higher its value. A multiple of 7x EBITDA is high for a franchisee, which typically sells for 4x to 6x earnings.
In this case, there was considerable interest in a company that operates more than 20 percent of the nation’s Pizza Hut units. “That’s a testament to the track record of the team and ownership,” Schwartz said, noting that senior executives and NPC have an average tenure of 17 years.
Olympus is no stranger to franchisee ownership. The company had owned Fort Smith, Arkansas-based Yum Brands franchisee K-Mac Enterprises, the No. 15 company on our ranking, before selling it to Los Angeles-based private equity firm Brentwood Associates.
“They’re really terrific people and are great supporters of our business and strategies,” Schwartz said of Olympus. “There’s been no change in how we operate, or in the senior management. Our job is taking care of customers every day and executing our mid-term and long-term strategies.”
Articles by Jonathan Maze
Research by Matt Haskin and Abbi Nawrocki
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