U.S. restaurant industry outlook: Slow and steady improvement

While restaurants are naturally positioned as discretionary for consumer spending, there are some reasons to be optimistic in a still-sluggish economy.

Bob Bielinski, CIT's managing director of corporate finance, spoke about the U.S. restaurant industry outlook in the recent CIT Executive Insights Video Series.

Highlights include:

  • Middle market and large restaurant companies are experiencing access to financing for acquisitions, system growth and remodeling efforts.

"Lenders that stepped away from the market during the downturn have returned and there have been some new entrants as well. Strong companies are able to get debt financing on very attractive terms," Bielinski said.

For example, California-based Domino's franchisee Hishmeh Enterprises recently received a $5.6 million term loan to refinance existing debt and a $1.5 million development line of credit for growth capital from GE Capital, Franchise Finance.

About two weeks later, GE Capital, Franchise Finance also provided a $6.7 million credit facility to Pizzerias LLC, a Papa John's franchisee that operates in the Miami market, to refinance debt.

In March, KK Group of Companies, a Subway franchisee, received $4.5 million to help with remodeling and reimaging updates.

  • Mergers and Acquisitions activity has been steady in 2012, but not overwhelming.

This is especially compared to a busy 2011, when Dunkin' Donuts went public; California Pizza Kitchen went private; Arby's was sold by Wendy's; A&W and Long John's Silver's were sold by Yum! Brands; Corner Bakery changed ownership; and the largest franchisees for Pizza Hut, Applebee's and Taco Bell were involved in M&A activity.

In February, Bielinski predicted a slower M&A pace, saying "there simply aren't as many mature deals left in private equity portfolios."

However, so far in 2012, there have been some franchisee transactions driven by the sales recovery and the potential increase in taxes next year, he said.

  • The IPO market has been "extremely strong" for restaurant companies in 2012.

"There are a number of formerly public companies that have gone private that are now public companies again," Bielinski said. "The real exciting news in the public markets is the access that smaller companies (such as Ignite Restaurant Group, Chuy's and Del Frisco) now have."

Burger King is probably the biggest example of a company returning to the New York Stock Exchange this year, and began trading under BKW in June.

However, CKE Restaurants, parent to Carl's Jr. and Hardee's, balked at going public in August, citing unfavorable market conditions.

  • Franchisee consolidation is expected to continue in 2012 and beyond.

"It's a great time to sell a business currently because valuation multiples are very high and the debt markets are strong, so buyers can get financing," Bielinki said. "However, the restaurant companies that were sold in 2010 and 2011 have new owners and these new owners are not yet ready to sell."

  • Slow economic recovery and unemployment are not as bad as they seem.

"The consumer is out there and spending," Bielinski said. "When you're thinking about the outlook for the restaurant sector, you have to keep one eye on the economy and the other eye on gasoline prices. If jobs continue to be created, restaurant sales will be OK. For a meaningful increase in restaurant sales, we're going to need to see the unemployment figure come down."

Bielinski's statement came before the most recent jobs report was released Oct. 5, showing the unemployment rate down to 7.8 percent – its first time under 8 percent since early 2009. At the same time, however, gas prices have experienced a rare fall spike, setting an October record high.

Bielinski leads the restaurant industry practice within corporate finance at CIT. He has more than 20 years of restaurant and retail financial management, investment banking, corporate lending and transaction experience.

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