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Fast Food's Cash Flow May Whet Private Equity Appetites

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

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

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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