Soon after Inspire Brands formed in the wake of Arby’s $2.9 billion purchase of Buffalo Wild Wings, CEO Paul Brown told The Wall Street Journal the company envisioned buying no more than 10 chains, but with systemwide sales between $1 billion–$4.5 billion each.
It appears the growing group could be on the verge of nearly doubling that top-end projection.
According to a Sunday report in The New York Times, Dunkin’ Brands, which also directs Baskin-Robbins, is in talks to sell to Roark Capital-backed Inspire Brands. And the deal could be announced as soon as Monday. Dunkin’ is scheduled to report third-quarter earnings on October 29.
It would take Dunkin’ Brands private at a price of $106.50 a share, two people with knowledge of the negotiations told the NYT. The deal presents a 20 percent premium over Friday’s closing price of $88.79—Dunkin's highest since the company’s 2011 IPO—or a valuation of roughly $8.8 billion.
Dunkin’ Sunday released a statement confirming it’s held “preliminary discussions to be acquired by Inspire Brands.”
“There is no certainty that any agreement will be reached,” Dunkin’ said. “The company will not comment further unless and until a transaction is agreed or discussions are terminated.”
If the deal happens, Inspire Brands would control five of the country’s 18 largest quick-service brands. Dunkin’ entered 2019 with 9,630 units; Arby’s had 3,359; Sonic Drive-In 3,526, Jimmy John’s 2,787; and Baskin-Robbins 2,524. Buffalo Wild Wings closed last year with 1,215 restaurants—good for sixth overall on the full-service side.
After Inspire Brands’ equity-swap transaction of Jimmy John’s, a chain Roark first took a majority stake in four years ago, the company became the fourth-largest restaurant group in the U.S. with north of 11,200 restaurants and $14 billion in annual system sales. Dunkin’ would jolt Inspire Brands into 20,000-unit territory stateside. Subway was the largest domestic chain in 2019 at 23,802 U.S. restaurants, down 996 from the prior year.
In total, international mixed in, Dunkin' Brands has about 21,000 franchised outlets and reported revenue of $1.4 billion and profit of more than $240 million last year.
It would also place four of top 23 grossing counter-service brands under one umbrella (Baskin-Robbins was 48th). By total systemwide domestic sales in millions as of year-end 2019: Dunkin ($9,220); Sonic ($4,687); Arby’s ($3,885), Jimmy John’s ($2,105); and Baskin-Robbins ($626).
Buffalo Wild Wings ranked No. 3 among sit-down chains at $3.7 billion.
In July, Dunkin’ announced a plan to close as many as 800 U.S. and 350 international restaurants, including the shuttering of 450 Speedway units revealed earlier in the year.
For U.S. stores, this meant locations with low average weekly sales, ones that couldn’t support beverage innovation or a NextGen remodel, and were situated in areas where traffic has changed and couldn’t be relocated or add a drive-thru. CEO Dave Hoffmann called the closures “a good scrubbing of the portfolio.”
If all 800 domestic stores were to exit, it would slice 8 percent of the brand’s U.S. footprint, but only roughly 2 percent of systemwide sales. Dunkin’ said most of the restaurants were unprofitable for franchisees, with EBITDA margins well below average for a traditional U.S. restaurant. The average weekly sales for the group was about 25 percent of the average weekly sales of the system.
Dunkin’, like most beverage-run companies historically tied to habitual morning traffic, has faced its share of challenges during COVID-19, although trends are moving upward as business shifts to mid-morning and afternoon.
U.S. same-store sales declined 18.7 percent in Q2, but improved each month. Volumes went from 32 percent down in April, to negative 17 percent in May, and down 9 percent in June. Through the weekend of July 25, comps declined in the low single digits. The brand saw average weekly sales gains of more than 50 percent from the end of Q1 to the end of Q2. Revenue decreased 20 percent to $287.4 million.
Domestic Baskin-Robbins comps slipped 6 percent in Q2, but posted positive same-store sales in the final two months of the quarter. Delivery sales were up more than 250 percent, peaking at more than 500 percent in late April. The channel was available in 93 percent of U.S. stores and mixed more than 5 percent. Online sales increased more than 150 percent.
Dunkin’ International comps dropped 34.9 percent, and Baskin-Robbins International declined 5.3 percent.
The company ended Q2 with 9,597 U.S. Dunkin’ stores and 2,511 U.S. Baskin-Robbins locations. Roughly 96 percent of domestic Dunkin’ units and 98 percent of domestic Baskin-Robbin stores were open. The majority of closed units were in nontraditional locations. The brand also had 3,528 international Dunkin’ restaurants and 5,470 Baskin-Robbin units.
The deal follows a familiar path for Inspire Brands. The company began with a promise of mirroring Brown’s former hotel career. The ex-Hilton Worldwide leader previously told QSR Inspire Brands would model the sector’s framework of driving concept value from within a multi-branded portfolio. Independent identities that pull from a center of excellence.
Unlike some other restaurant holding companies, Inspire Brands touts a focused, integrated model. Each brand relies on the resources of the other. Leveraging collective strengths like HR, finance, legal, IT, development, communications, customer personalization and insight, and media. It’s akin to how hotel organizations spread out like a web from a base of power.
Brown told the WSJ Inspire Brands wanted to create a restaurant company “with a broad portfolio of distinct brands across a full spectrum of restaurant occasions.” One that capitalizes on the benefits of scale not just to save cost, but also to enable outside investments in long-term growth initiatives.
Dunkin’, clearly, is an occasion it didn’t feature before. And it perfectly fits Inspire Brands’ other aim—to acquire brands that capture more visits from the same customers by establishing a portfolio that keeps guests engaged across all dayparts, price points, and interest levels.
Imagine a customer who goes to Arby’s for lunch, Buffalo Wild Wings for dinner, and Sonic Drive-In for a night-cap. What’s missing there? Breakfast and the beverage-led, snacking category.
It’s a different path than many competitors that stay and live within a certain segment, although they do cross occasions. Darden, Brinker International, and Bloomin’ Brands, for example, operate chains amid different full-service distinctions, like fine dining and casual. Yum! Brands, the owner of Taco Bell, KFC, Habit Grill, and Pizza Hut, sticks to quick-service, as does Restaurant Brands International with Burger King, Tim Hortons, Habit Grill, and Popeyes.
Brown told QSR acquisitions could be quick service or casual, franchised or corporate, national or regional. They just need to be unique to the market and have runway to grow.
Dunkin’, undoubtedly, fits the bill.
BTIG analyst Peter Saleh said Monday in a note, "In our view, the acquisition makes sense as it gives Inspire an established national brand with Dunkin', more significant exposure to the breakfast daypart and a concept with significant long-term unit potential. That said, these attributes come with a hefty valuation that is significantly above comparable acquisitions over the past decade and Inspire’s own previous acquisitions.”
“The deal comes at a steep price, valuing the company at more than 25x trailing EBITDA and representing the highest acquisition multiple of a franchise operator in recent history,” he added.
This valuation is well above historical industry averages of 11x and even the mid-to-upper teens multiples that best-in-class operators have been able to achieve, he said. For instance, Sonic’s $2.3 billion deal was for 15.8x trailing EBITDA. Popeyes’ $1.8 billion 2017 sale to Restaurant Brands International clocked in at 19.6x. JAB’s $7.5 billion acquisition of Panera Bread was 17.8x.
“The acquisition of Dunkin' Brands at this suggested price would be a 10x premium to that of Sonic, and would represent the highest multiple paid for a franchised business of scale in the past 10–15 years, if not longer,” Saleh said.
To justify this, he believes Dunkin’ must successfully expand west of the Mississippi. Dunkin’ management previously suggested long-term potential of more than 17,000 U.S. units. “We do believe Dunkin's drive-thru access, convenience and focus on digital gives the brand an upper hand in the current environment,” Saleh said.