For years, investment bankers made a pilgrimage to Stanley Ma's office in Montreal, pitching the founder of MTY Food Group on the wisdom of converting his collection of fast-food outlets into an income trust.
Mr. Ma turned down the financiers, preferring to plow cash into expansion and acquisitions. That proved a wise strategy, as the federal Conservatives moved to shut down trusts, hammering the valuation on restaurant chains that adopted the structure.
Now, the world has come full circle. As trusts enter their final months of existence, investment bankers are urging Mr. Ma to make a move on a rival restaurant trust. This time, he may heed the advice.
MTY Group is a small-capitalization success story, a company that fills food courts with a collection of 25 outlets that include Country Style doughnuts, Cultures and Thai Express. Mr. Ma and his team chowed down on three acquisitions last year, including Country Style. MTY Group spokesman Jean-François Dubé said yesterday that the long-term strategy is to continue expanding by purchasing rival chains, though he declined to name specific targets.
"We expect future growth to come from the acquisition of additional banners in Canada," analyst Sarah Chiasson at Beacon Securities said in a report this week, adding that a deal in 2010 is likely. Income trusts lose their favourable tax status at the end of this year.
What could MTY Group buy in the trust space? With the right deal, all but the largest restaurant chains are potential targets.
Despite recent acquisitions, MTY Group's cash holdings grew more than 20 per cent over the past year to $20.3-million. The TSX Venture-listed company was founded back in 1979, when Mr. Ma opened an outlet that served Chinese and Polynesian cuisine. It now has a $195-million market capitalization, and stock trades at a premium multiple of 15 times last year's earnings.
The two largest restaurant trusts are the pizza plays, with both Boston Pizza and Pizza Pizza in the $160-million range. They may be out of MTV Group's league. But there are a number of trusts worth less than $100-million with food-court-style outlets similar to MTY Group's approach, including Priszm, owner of the KFC, Pizza Hut and Taco Bell franchises in Canada, and coffee chain Second Cup.
Many of these restaurant trusts have seen their unit price drift steadily downward, while other trusts were acquired. That shows there's not much interest in these companies from financial players - the private equity and pension fund crowd. If Mr. Ma is hungry, there are deals to be done at MTY Group.