FAT Brands to Acquire Johnny Rockets, Escape ‘Microcap Hell’
FAT Brands is set to acquire Johnny Rockets in a transformational deal for the concept and the company.
The company will be a part of the overall platform of FAT Brands that includes Fatburger, Elevation Burger, Buffalo’s Cafe, Buffalo’s Express, Hurricane Grill & Wings, Yalla Mediterranean and Ponderosa and Bonanza Steakhouses. As of year-end 2018, Johnny Rockets reported $335 million in revenue and 372 global locations for an overall average unit volume of about $900,000. According to FAT Brands (NASDAQ: FAT) President and CEO Andy Wiederhorn, adding Johnny Rockets would push his company’s overall revenue to north of $700 million.
He said the company serves as a middle step between FAT Brands’ two burger concepts, the urban-skewed cult-favorite Fatburger and the upscale Elevation Burger. The company acquired Elevation last year for about $10 million. As the in-between brand with good brand recognition, the classic-diner feel and made-to-order fast-casual model of Johnny Rockets means options.
“I think Rockets sits right in the middle. If we talk to a casino operator or a shopping center or a cool new outdoor mall. You can say to the franchisee or the landlord, ‘What is the right brand for you?’” said Wiederhorn.
He said it would be a transformational transaction for FAT Brands and Johnny Rockets. A core focus for the platform company, he said, is buying brands and merging the back-office functions. As an example, he said when the company acquired Hurricane Grill and Wings, that brand was pulling in $4 million in revenue and had $2 million in overhead. After the acquisition, overhead dropped to $1 million.
It’s also a transformational acquisition for FAT Brands. With Johnny Rockets, system sales jump to $700 million and earnings will reach $16 to $18 million (on a pre-COVID and ideally post-COVID basis). That’s an important range for the public company that would push company valuation dramatically.
“Getting to almost $20 million is important for the company. If publicly traded companies trade at 10- to 20-times earnings. And we can get to $18 to $20 million, which Rockets should do. Even with a 10x multiple, we're now not a microcap stock. That attracts all kinds of institutional investors and broadens the investor appeal,” said Wiederhorn. “It’s been the goal to get out of microcap hell. This moves us almost all the way there. If we make another acquisition, we’ll definitely get there or if we grow organically.”
Investors took note. Shares of FAT Brands rocketed up by more than 100 percent on announcement of the acquisition and remained elevated by about 93 percent days later. And a broader pool of investors would mean more access to capital to push the flywheel of the multi-brand platform strategy further.
An acquisition like this for $25 million sounds like a great deal for FAT Brands, but Wiederhorn said it was no fire sale on behalf of owner Sun Capital. He said the deal had been discussed for some time prior to COVID.
“I wouldn’t say it was a fire sale. I would say the price reflects just that restaurants are banged up right now and there’s some work we have to deal with,” said Wiederhorn. “I'm not saying it is a steal, but you're paying for something in a different state and there will be more refresh and cleanup to do."
As for the big macro backdrop that has banged up restaurants broadly, Wiederhorn said he’s looking forward to those post-COVID metrics to reach small-cap status, but FAT Brands concepts are doing pretty well.
“I’m surprised in a positive way by the performance in our casual dining brands. In the beginning we were all scared about casual, we knew burger brands would do fine,” said Wiederhorn, noting that delivery surged in the burger concepts from 35 percent to 70 percent.
Casual dining ticked up from 5 to 10 percent delivery to 30 percent, but sales went wild when things started reopening for patio business.
“When restaurants were allowed to reopen, we were able to utilize our outdoor porches or patios or fake beaches—outdoor spaces. Sales went back to more than 100 percent of normal because they were still doing 30 percent delivery and dining rooms are open,” said Wiederhorn.
The acquisition of Johnny Rockets is expected to close in September. Wiederhorn said the company would be expanding its financial securitization to pay for it and prepare for the next acquisition. The company completed a securitization in March to finance existing debt.