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The Monitor 200 Turns 15

Private equity turns its eye toward successful zees


 Sales at companies
on the Monitor 200 grew 4.5 percent in 2006, but that didn’t quite keep up with overall restaurant industry growth.

This year marks the 15th edition of the Monitor 200, our annual ranking of the country’s largest restaurant franchisees. Collecting sales and unit-count data from sometimes-reluctant franchisees takes considerable time and effort (and pleading), but the end result is well worth it. Not only does the data provide us with a sense of the size and makeup of the restaurant franchise universe, it affords the 200 companies on it well-deserved recognition.

2006 was generally a better year for the quick-service sector than it was for casual dining. Whether it was tradedown, convenience or simply improved product offerings, customers frequented fast-food restaurants seemingly at casual dining’s expense. On balance, this was bullish for the Monitor 200, where nine of the 10 most represented brands compete in the quick service sector.

The Top 200 companies managed sales just shy of $20 billion in 2006, a 4.5 percent increase over 2005. All told, these companies operated 16,030 units representing 75 different concepts at the end of 2006, a 3.4 percent unit increase over 2005. According to data presented in GE Capital Solutions, Franchise Finance’s 2007 Chain Restaurant Industry Review, the restaurant industry as a whole grew sales slightly faster than the Top 200. Chains and independents together generated $345 billion in sales last year, a 5.1 percent bump from the year prior. Unit growth for the Top 200 outpaced the industry overall, where net units actually declined.

The GE Industry Review provides 2006 domestic sales and unit counts for the country’s largest 100 chains, and this provides context for the impact of the Monitor 200 companies. These chains produced $170.5 billion in U.S. sales, of which the Top 200 companies contributed 12 percent. Of the 103,394 franchised units under these brands, the Monitor 200 companies operate better than one-in-seven.

The 10 largest Monitor 200 companies operated 20 percent of the ranking’s total units and brought in $0.18 of every dollar of Monitor 200 revenue last year. Three companies are new to the top 10 this year, including The Briad Group with its Main Street Restaurant Group acquisition and ADF Companies, which added significantly to its Pizza Hut unit count last year.

In terms of total units among the Monitor 200 concepts, Pizza Hut claims the top spot with over 2,800 restaurants spread among 29 different operators. Taco Bell again claimed the most operators, with 34. The 31 Applebee’s franchisees on the ranking collectively operate 90 percent of all domestic franchised units for the brand with nearly 1,200 restaurants between them.

Coverage of the restaurant industry tends to focus on the parent companies themselves, and more recently on the private equity firms and activist investors who generate drama in the form of proxy battles and billion dollar takeovers. Large franchisees, in contrast, like to fly under the radar and focus on operating restaurants. Without their execution, all this financial engineering would be a moot point.

That’s not to say that franchisees have been left out of the buyout mania. The biggest company on the ranking—Pizza Hut franchisee NPC International—is now owned by Merrill Lynch Global Private Equity. The private equity firm Olympus Partners owns Yum! Brands franchisee K-MAC Enterprises, and Olympus affiliate Pepper Dining purchased 89 Chili’s units from Brinker earlier this year. Duke & King, affiliate of Kinderhook Industries, purchased 88 Burger Kings from former Monitor 200 operator Nath Companies last year. And BK franchisee Heartland Food Corp. is now owned by the hedge fund GSO Capital Partners.

Hedge funds have taken a liking to one of the few public restaurant franchisees as well. Morgan’s Foods (NASDAQ-MRFD.OB), a Yum! Brands franchisee for over three decades, has enjoyed considerable share price appreciation over the past few years, partly driven by the growing holdings of Black Horse Capital and Moab Partners, hedge funds that combined own more than a fifth of the company’s shares.

Download the entire Monitor 200 here.

Last year’s Main Street acquisition reduced the already few public companies on the list, but that loss was offset with the IPO of Carrols Restaurant Group. Carrols, both a franchisee and franchisor, has been operating Burger Kings since 1976, and the $369 million in sales generated at its 328 Burger Kings last year represents just half the company’s total rev.

The Monitor 200 is sponsored by . . .

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