Add Papa Murphy’s to the flurry of restaurant M&A activity. MTY Food Group Inc., a leading franchisor that runs Pinkberry, Cold Stone Creamery, Grabbagreen, Blimpie, and many others (it had 5,941 total locations in operation as of February 28), announced Thursday that it’s entered into a definitive merger agreement to acquire all of the issued and outstanding shares of common stock of the pizza chain. The deal is valued at about $190 million and includes Papa Murphy’s net debt outstanding, which is about $77.4 million. It’s expected to close in the second quarter of fiscal 2019.
The purchase price per share of $6.45 implies a premium of 31.9 percent to Papa Murphy’s closing price on April 10 and 46.3 percent to the unaffected closing mark on November 7, 2018, prior to Papa Murphy’s announcement it was evaluating strategic alternatives.
It’s a big scoop for MTY. Papa Murphy’s is the fifth largest pizza chain in the U.S. and had 1,331 franchised and 106 company-run stores across 37 states, Canada, and the UAE as of December 31.
“This is an important transaction for MTY as we add a brand with a differentiated position in pizza to our existing U.S. portfolio. We are thrilled about the prospect of welcoming the Papa Murphy’s brand, its franchise partners and employees, to the MTY family. Papa Murphy’s is a unique concept with over a 35-year history of providing a superior quality product made with fresh ingredients,” MTY CEO Eric Lefebvre said in a statement. “We believe the pizza segment is highly attractive due to its size, fragmented nature and growth potential. The Papa Murphy’s brand is well loved by its loyal customers and is supported by a strong network of franchise partners. We expect the combination of these two companies and the expertise it brings to produce tremendous opportunities for MTY’s U.S. expansion objectives.”
With the deal, MTY’s combined network will represent roughly 7,378 stores globally. In March, Papa Murphy’s said its Q4 same-store sales declined 1.3 percent, year-over-year. For the year, comps dropped 2.5 percent compared to fiscal 2017. The brand reported revenue of $32 million in Q4 compared to $38.5 million a year ago, a decrease driven primarily by the refranchising efforts and net closure of company units.
Reported net income was $4.3 million for the full year, or 25 cents pre diluted share, compared to a net loss of $1.8 million. Revenue came in at $126.4 million versus $148.5 million.
Papa Murphy’s system has been retracting. The brand ended Q4 with 106 company-run stores, which represented a net decrease of seven stores compared to Q3 and 39 less than Q4 2017. This reflects 10 closures over the last year and a net reduction of 29 stores that were franchised—a push Papa Murphy’s is making as it tracks back to at least a 95 percent franchised system with no more than 50 corporate units by 2020.
On the franchised side, the brand’s Q4 count of 1,331 compared to 1,378 in the prior-year quarter. The decrease comprised of a total of 87 franchise store closures offset by 11 openings and a net refranchising of 29 company-owned units over the last 12 months. In total, Papa Murphy’s closed 97 restaurants in 2018.
MTY said the deal was strategically timed “as Papa Murphy’s system is building momentum after implementation of refreshed corporate strategy and refocus on the brand.”
This includes refranchising, an improved marketing message that streams a low, broad, and consistent value story, and becoming more convenience driven. In March, Papa Murphy’s rolled a new ecommerce platform that serves as the foundation for many of its convenience initiatives. The brand said it’s led to a steady increase in the mix of online orders with Q4 ecommerce sales jumping 34 percent over Q3. Online check average were roughly 28 percent higher than in-store orders.
Also, delivery orders still represent a very minimal part of Papa Murphy’s overall business. The mix in its top 10 stores offering delivering hit 4 percent in Q4. At year’s end, delivery was live in 480 restaurants. The company plans to double that count by the end of 2019.
In addition, this past fall, the company introduced a new mobile app. It focuses on seamless digital ordering, including favorites and the ability to quickly reorder with saved payment information. But it also integrated into Papa Murphy’s POS system, which has helped the chain minimize operational impact. The app has more than 243,000 downloads to data and generated almost as many orders, the brand said earlier.
MTY said it anticipates working with Papa Murphy’s to make capital investments focused on growing top-line sales and increasing franchise partner profitability. It added that it’s looking forward to welcoming “a seasoned management team,” and “building on Papa Murphy’s employees’ expertise and maintaining the current support center in Vancouver, Washington.”
The deal is not subject to any financing condition and consideration will be 100 percent funded in cash, MTY said.
Papa Murphy’s agreed to not solicit or initiate discussions regarding any other business combination or sale of material assets under the agreement. MTY has the right to match any superior proposals, and there will be a termination fee of close to $6 million if the transaction is not completed.
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