Fast Food's Cash Flow May Whet Private Equity Appetites
David Palmer, senior restaurant analyst at UBS, told CNBC’s “Squawk on the Street” that fast-food companies, especially those that rely on franchisees, may become private equity take-over targets.
“Franchise businesses are very attractive to private equity,” Palmer said Thursday.
“So, to some degree, if you have a challenged business which may be a two- to three-year turnaround, and you can borrow against that franchise income -- which is steady income -- and you have some restructuring opportunities by selling more company stores to franchisees, private equity will tend to pay a significant higher amount for those businesses than the public markets will.”
The fast-food sector has performed well. Year-to-date stock performance includes: Burger King, up 26%; McDonald’s, up 17%; Wendy’s, up 16%; and Yum! Brands, up 15%.
“We think [Wendy’s] is going to be sold,” Palmer said. “…These franchise business have significant value. You can borrow money at very good rates and you can leverage them to a high degree, borrowing against that franchise business. Wendy’s is a company that’s under-earning today, so a private equity firm…might take a bet on being able to turn that around.”