By Zahra Malik, Devi Vanalia, Baliny Ganeshakumaran, Deimante Chailenko and Matilda Oculy (The University of Manchester)
Overview of the deal
Acquirer: Inspire Brands
Target: Dunkin’ Brands
Implied Equity Value: $8.8bn
Total Transaction Size: $8.8bn
Closed date: TBC
Target advisor: n/a
Inspire Brands is in talks to acquire Dunkin’ Brands for nearly $9bn. The takeover would be the restaurant industry’s biggest since the 2014 sale of Tim Hortons to Burger King. Inspire’s offer of $106.50 a share represents a 20% premium over Dunkin’s closing price on Friday, which was near all-time highs. The deal would value Dunkin’s equity at $8.8bn. Accounting for the $3bn in net long term debt, Inspire would be paying an enterprise value of over 26 times forward EBITDA. Inspire could help the doughnut and coffee chain expand in the underpenetrated Midwest and West Coast markets. The acquirer operates about 10,900 restaurants across five brands, generating more than $14bn in annual sales. Dunkin’ would add about 21,000 global locations with $12bn in sales. The deal with Inspire would return Dunkin to private equity control after nine years on the public markets. Inspire’s typical strategy is to improve companies’ digital operations while keeping their brands separate. Owning a dominant chain like Dunkin’ could be the final touch Inspire needs before going public.
“There is no certainty that any agreement will be reached” - Karen Raskopf, Chief Communications Officer of Dunkin’ Brands
Company Details: Acquirer – Inspire Brands
Inspire Brands, formerly named Arby’s Restaurant Group, is the fourth largest multi-brand restaurant chain group with a portfolio of more than 11,000 restaurants in 14 countries. It is owned by the private equity firm Roark Capital Group and has 1,400 franchisees. Its most famous brands are Buffalo Wild Wings, Arby’s, Sonic and Rusty Taco. Inspire Brand’s latest acquisition was Jimmy John’s Franchisor SPV, LLC in September 2019.
Founded: February 5, 2018
Headquartered: Atlanta, GA, United States
CEO: Paul J. Brown
Number of employees: 325,000+ (including franchise employees)
LTM Revenue: $14.6 Billion
Company Details: Target - Dunkin’ Brands Group
Dunkin’ Brands Group operates in over 30 countries in a 100% franchised business model. Dunkin’ Brands is the parent company of Dunkin’ and Baskin-Robbins, two quick service restaurant chains which operate more than 12,900 and 8,000 locations respectively. They serve coffee, baked goods, doughnuts, and ice cream.
Founded: 1950
Headquartered: Canton, MA, United States
CEO: David L. Hoffmann
Number of employees: 1,114
Market Cap: $8.20 Billion (as of 30/10/2020)
EV: $10.25 Billion
LTM Revenue: $1.37 Billion
LTM EBITDA: $462 Million
LTM EV/Revenue: 7.87
LTM EV/EBITDA: 22.20
Projections and Assumptions
Short-term consequences
There is no doubt that the COVID-19 pandemic has put pressure on many US restaurants that did not have large cash reserves. Especially after the US government imposed lockdowns in cities to stop the spread of coronavirus. Many businesses have temporarily closed or are opened only on weekends. Despite the pandemic, the demand for fast-food chains has outperformed, particularly those with drive-through facilities. Dunkin’s coffee and doughnuts chain recorded unprecedented sales numbers, with around 70% coming from drive-through outlets. Shares in the company were valued at $88.79 on October 23rd, up 16% YTD.
“Dunkin’ has demonstrated strong recovery trends amid a challenging environment” - said an analyst at Credit Suisse.
It is expected that Q3 sales will be lower by 1% year-over-year, but Q4 is expected to demonstrate growth.
Long-term Upsides
The growth prospects from this acquisition will be very favourable for Dunkin' as currently, their stores are concentrated in the Northeast, which accounts for 4,099 of the total 8,629 stores across the entire country. The acquisition could help the doughnut and coffee chain expand, including in the West Coast market, so that Dunkin’s consumer base grows. This will aid the brand’s recovery from the COVID-19 pandemic, which has negatively affected Dunkin’s sales due to the disruption caused to people’s typical routines and commutes. The ability of Inspire to drive growth for the franchise will likely bring meaningful value to shareholders.
Inspire will greatly benefit from this transaction, as it will gain a spot in the breakfast category, which was the fastest-growing segment of the restaurant industry before the pandemic hit. Entering the market with Dunkin’ and Baskin-Robbins, who are category leaders with more than 70 years of rich heritage, will likely guarantee success for Inspire. Inspire will be expanding their portfolio by more than 12,500 Dunkin’ and almost 8,000 Baskin-Robbins outlets around the world, as well as adding complimentary guest experiences and occasions to their current portfolio. It furthers Inspire’s goal of bringing together a family of complementary, highly differentiated brands. Additionally, Dunkin’ will strengthen Inspire through their scaled international platform and robust consumer packaged goods licensing infrastructure, as well as by adding more than 15 million loyalty members.
Risks and Uncertainties
The number of coffee shops in the U.S. is shrinking for the first time in nine years as sales plunge and COVID-19 has forced the industry to rethink its business. Despite Dunkin’s global position, it is still not enough to keep all its stores operating if the pandemic continues to grow. Dunkin’s franchises have been running unprofitable businesses, with worse margins than the industry average. U.S. same-store sales dropped nearly 20% last quarter, as they struggled to maintain operations throughout the pandemic. Inspire wishes to bring Dunkin’ back to the same level as its competitors, including prominent chain Starbucks.
Forbes’s profile on Inspire highlighted the company’s unstable performance as it has improved but declined to provide specifics. Due to the inconsistent performance, Inspire’s level of leverage and debt, including covenants, may restrict the operation of its business and obtain additional financing. Furthermore, Inspire's reputation as a company using turnaround efforts, usually pushing for changes such as new menu items to increase sales, may conflict with Dunkin's already well-established staple dishes such as their coffee and doughnuts. This highlights Inspire's ability to integrate the business of Dunkin' Brands successfully.
On the other hand, Dunkin’ may be a natural fit for Inspire, as it adds coffee to fast-food options that include wings, slushies, and a chain in need of improvement. Inspire aims to use its scale and expertise to spread better technology across its brands (potentially including Dunkin’).