MTY Food Group, which owns a number of restaurants including Thai Express, has hired a financial adviser to begin a formal review process.Christinne Muschi/The Canadian Press
MTY Food Group Inc.’s MTY-T decision to explore a sale should attract private equity players hungry for its steady franchise royalty revenues, but its wide smorgasbord of banners might scare away some buyers, analysts say.
The Montreal-based company behind Thai Express, Wetzel’s Pretzels and other restaurants confirmed late Monday that it has hired a financial adviser to begin a formal review process with the aim of boosting shareholder returns. A range of options are being considered, including the sale of all or part of the company as well as pushing on with management’s current business plan, it said in a statement.
MTY’s stock price initially gained 13 per cent on the news but retreated on Tuesday, falling 7.6 per cent to close at $35.38 on the Toronto Stock Exchange as investors weighed the likelihood of a takeout transaction. Its market capitalization now stands at about $808-million.
Launched by Hong-Kong émigré Stanley Ma with one Tiki Ming restaurant in Montreal in 1983, MTY has ballooned to more than 80 banners at 7,000 different locations in Canada, the United States and abroad. It makes most of its profit from franchising fees and royalties and also operates a smaller number of its own corporate locations.
Scotia Capital analyst John Zamparo said the biggest barrier to MTY’s sale might be complexity, owing to the sheer number of brands it controls. Rival restaurant operators probably “wish to target a simpler portfolio,” he said in a research note, leaving a private equity player as the most likely acquirer.
RBC Capital Markets analyst Ryland Conrad agreed, saying in his own note: “We believe the pool of potential acquirers for an outright sale is relatively limited.”
Several investment firms hold restaurants among their asset base and might be keen to add to it. Bain Capital this past summer bought Sizzling Platter, a restaurant management company with brands that include Little Caesars, Wingstop and Jersey Mike’s. Roark Capital has amassed a number of restaurant chains over the years and grouped them under its Inspire Brands umbrella, including Arby’s and Baskin Robbins.
“This business reliably generates more than $100-million of free cash flow (nine years running), and we forecast about $115-million this year,” Mr. Zamparo said in a separate note on MTY published in June. “A roughly 12 per cent free cash flow yield for what is primarily a royalty business yearns for private ownership.”
MTY Food Group struggles to satisfy its hunger for acquisitions
Earlier this month, Denny’s said it’s being acquired by a trio of investors led by New York-based private equity company TriArtisan Capital Advisors in a deal that aims to take the breakfast chain private. Closer to home, Fairfax Financial Holdings in 2022 took over Recipe Unlimited, owner of restaurants including the Keg, Harvey’s and Swiss Chalet.
The Recipe Unlimited deal was done at a takeout multiple of about 10 times earnings before interest, taxes, depreciation and amortization (EBITDA) for the previous 12 months, TD Securities analyst Derek Lessard said in a research note. A similar takeout multiple in this case would imply a $68 share price for MTY, 78 per cent higher than Monday’s closing price, according to the analyst.
MTY chief executive officer Eric Lefebvre and his team have been under pressure for more than a year from a series of challenges, including a pullback in discretionary spending by cash-pinched American consumers and rising food and labour costs. They’re trying to respond with menu innovations and promotions as well as improving online and in-store customer experiences.
When MTY last reported earnings in October, the company also cited the recent U.S. government shutdown as a potential negative. It said the stoppage, which was the longest in American history at 43 days, had the potential to affect the timing of small-business loan funding needed for new restaurant openings and disrupt benefits on which some people rely to feed themselves.
Known historically as a shopping mall food court consolidator, MTY has morphed. About three-quarters of its restaurant system sales now come from freestanding restaurants such as Baton Rouge, Barrio Queen and Pizza Delight. The company generates most of its EBITDA from sales in the United States.
Mr. Ma is the company’s biggest shareholder with a 13.9-per-cent stake, according to S&P Capital IQ data. The next biggest shareholder is Fidelity Investments with an 11.27-per-cent position.