Yum’s Bid for Habit Burger Signals New Stance on M&A, Analyst Says
Yum Brands bid $14 per share to buy Habit Burger, up from $10.51 a share on previous close.
Habit Burger shareholders gave a thumbs up to the proposed purchase of the California-based chain by Yum Brands, pushing the stock up 32 percent in its first day of trading after the $375-million acquisition ($14 per share) was announced.
Wells Fargo analyst Jon Tower called the deal “more mouse-like in stature” than the “elephant-sized” deal investors were looking for from Yum. He wrote Habit “would almost immediately benefit from Yum’s scale and institutional know-how around supply chain, marketing and also Yum’s franchise network.”
While Habit is mostly company-owned, with more than 270 stores in 13 states, he noted the concept has grown from five franchise stores in 2015 to 28 by the third quarter of 2019, with seven international locations.
“What we view as important for shareholders is that this deal does little to alter Yum’s balance sheet,” he wrote. (Yum had $691 million in cash as of the third quarter of 2019.) He added there is “relatively low menu overlap today vs. the existing portfolio.” Yum also owns Pizza Hut, Taco Bell and KFC.
He wrote he believes Yum’s attitude toward M&A has shifted: “Yum sounds more willing to consider adding to the portfolio over time.” In the past, “management often dismissed portfolio additions for any business that competed head-to-head” with McDonald’s or did not have an international presence.
“Based on our recent conversations, we believe those criteria have been relaxed assuming the brand fits within Yum’s network, is economically attractive, would benefit from Yum’s competitive advantages and the brand has an ability to grow globally in a relatively asset-light manner.”
Nick Setyan and Ivan Yu of Wedbush wrote the “acquisition multiple seems low to us,” and believe the Habit board “could have driven a tougher bargain” but could not refuse the deal “and perform its fiduciary duty.” They view competing bidders as unlikely and downgraded their outlook on the stock to “neutral.” Closing is expected in the second quarter of 2020.