Hole in the middle
For Dunkin’ Brands, things are going wicked pissah. The Boston-area owner of the Dunkin’ Donuts and Baskin Robbins coffee and ice cream chains held up relatively well during the pandemic. Now it’s in talks to sell itself to private equity-backed Arby’s-and-Sonic owner Inspire Brands for some $9 billion. But the new owners will struggle to make returns as gut-busting as the price they’re paying.
Like other drive-thru purveyors of fast food and drink on the go, virus-related lockdowns curbed revenue: Dunkin’s fell by a fifth in the quarter ended June 27. But it could have been worse. Sales at Tim Hortons, the Canadian breakfast chain owned by Restaurant Brands International, fell more than a third during the same period. Starbucks’ top line was off by almost 40%.
The outperformance has been reflected in the share price. Even before the sale revelations, first reported by the New York Times, the stock was trading at levels not seen since its previous buyout owners took it public in 2011. They have returned some 140% over five years, twice as much as RBI and almost 2.5 times Starbucks. Consequently, Dunkin’s enterprise value is more than 20 times its EBITDA, among the top range of its peers, and a third higher than its valuation five years ago.
The point is Inspire isn’t exactly getting a bargain. And it’s not obvious it can wring a lot of extra grease from Dunkin’, whose operating margins at above 30% are close to industry leader RBI’s. Restaurant roll-ups don’t always create synergies – at least they haven’t been the stated driving factor in RBI’s previous deals. Finally, Dunkin’ is mostly a franchise business, so the most Inspire might hope for is cutting some corporate overhead.
But there’s not a lot of that to go around. Dunkin’ is forecast to make some $462 million in operating income next year. Even if Inspire is inspired to cut $100 million of costs, it’s looking at a return on investment of at best 4%, well below Dunkin’s near 8% cost of capital. Like one of its deep-fried French crullers washed down with a sugary Dunkaccino, Dunkin’s new owners will struggle to digest this deal.