Current State of the Taco Bell M&A and Financing Market – Summer 2018

By Rick Ormsby
Managing Director
[email protected]

After several years of incredible prices and lending terms on M&A transactions, Taco Bell appears to be nearing the end of its historically-high valuations. Things are still great all-around – but expect a slow and possibly steady decrease in valuations going forward.

Unbridled has had an unprecedented start to 2018 within the Taco Bell brand, and our perspectives below come from 11 Taco Bell assignments so far this year:

  1. M&A activity within the Taco Bell community is brisk but appears to be slowing slightly as continued Corporate divestiture activity is supplanting the incredible pace of Taco Bell franchise-to-franchise M&A seen in recent years.
  2. We are hearing anecdotally that overall QSR M&A in the franchise community is down a bit, however it has certainly flared-up in several brands like Pizza Hut. In the burger space, for example, uneven sales and traffic is impacting M&A activity across several brands. Unbridled’s M&A activity is booming, however. We hear several comments each week that we have a bigger book of business than most advisors. Our views on M&A activity therefore might be skewed because of our high volume of deal flow.
  3. Fast casual deals are starting to show up on the market, but they are troubled in many cases. The jury is definitely out on the future health of fast casual.
  4. Lenders are complaining that refi activity is drying up as interest rates are increasing. Thus, expect continued and increasing competition for M&A loans, especially at Taco Bell.
  5. The Taco Bell lending market is still incredibly strong, especially as several Tier 1 and Tier 2 restaurant concepts are struggling with sales and traffic declines. This is causing a flight to quality loans, and Taco Bell franchisees continue to benefit due to a strong brand position and great financial performance relative to QSR peers.
  6. Interest rates are increasing, resulting in higher borrowing costs. Watch the trend here – this is one of the primary reasons why Taco Bell valuations are starting to see a slow decline.
  7. Due to the Corporate divestiture bonanza, there is now a slight supply/demand problem as so many stores are for sale. However, this is mainly impacting larger deals since Corporate is selling larger chunks of stores. Smaller deals don’t have this same competition (see point #11 below).
  8. The pool of Taco Bell buyers is shrinking slightly because many existing franchisees have acquired Corporate stores recently and are digesting these deals.
  9. As such, new buyers/PE firms/family offices are considering the brand and are being approached in greater frequency. However, many financial buyers are having trouble stomaching 8x+ EBITDA multiple valuations.
  10. Taco Bell Corporate has become quite strict on approving M&A transactions. Do not blindly expect to get a transaction approved, even if the buyer is growth-approved or well-capitalized.
  11. Smaller Taco Bell M&A deals that have strong performance are getting higher EBITDA multiples than the larger ones, and this gap is growing for two primary reasons – (1) a high amount of Corporate deals on the market and (2) higher borrowing costs impact valuations on large deals more than small ones.
  12. Last fall, Unbridled began a massive campaign to attract new franchisees and buyers into the Taco Bell, Pizza Hut and KFC brands, anticipating a continuation of higher-than-average M&A activity in the next 2 years. We now have a robust Rolodex of well-capitalized, prospective franchisees and investors for all three of the Yum concepts, including Taco Bell. Our competitors generally do not know many of these groups.
  13. Several of them have now begun to make offers on our recent sell-side M&A assignments. They generally offer high prices and strong terms, better than many franchisees who are buyers.
  14. Today’s outside buyers generally have fiduciary responsibilities to their investors, and deals are therefore becoming more complex. Sellers need significant business and legal representation to navigate a successful closing or risk making huge mistakes.
  15. EBITDA multiples are ranging from 7.5 – 8.5X depending on the size, scale and sales volume of Taco Bell packages. This range is slightly wider than in the past few years, reflecting up to a 0.5X downward turn in EBITDA multiples.
  16. Cap rates on real estate are still favorable but are expected to worsen if the 10-year treasury continues to climb. In our view, the rising 10-year will dampen any further increase in valuations on Taco Bell real estate. Realistically, there is substantial near-term risk to real estate values. Don’t be surprised to see a 5-10% valuation drop soon if cap rates worsen.

Our recommendation would be to revisit the current valuation of your Taco Bell business and your lending situation NOW. If you are planning to sell or refinance soon, don’t wait much longer as it is difficult to see much more upside from here unless current Taco Bell financial performance strengthens. Don’t forget that Taco Bell restaurants were selling at 5.5-6.0X of EBITDA just seven years ago.

If you have any questions or would like to discuss further, please feel free to reach out anytime to Rick Ormsby, Managing Director, at 502-252-6422 and [email protected].

Rick Ormsby
Managing Director
[email protected]