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Fast Food's Cash Flow May Whet Private Equity Appetites

Thursday, 5 Jul 2007 | 10:52 AM ET
A McDonalds sign welcomes patrons into the restaurant in Wilmington, Del., Wednesday, Jan. 24, 2007. McDonald's Corp., the world's largest fast-food chain, says its fourth-quarter profit more than doubled, thanks in large part to the spinoff of a burrito chain and strong sales in Europe. (AP Photo/Chris Gardner)
Chris Gardner
A McDonalds sign welcomes patrons into the restaurant in Wilmington, Del., Wednesday, Jan. 24, 2007. McDonald's Corp., the world's largest fast-food chain, says its fourth-quarter profit more than doubled, thanks in large part to the spinoff of a burrito chain and strong sales in Europe. (AP Photo/Chris Gardner)

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.”

Fast Food's Fast Profits
Fast food restaurants are serving up quick profits, and David Palmer, UBS sr. restaurant analyst, shares his insight with CNBC's Melissa Lee.

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.”

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