Fairfax Financial Holdings Ltd. FFH-T has proposed taking Recipe Unlimited Corp. RECP-T private in a deal that values the restaurant-chain owner at $1.2-billion.
Toronto-based Fairfax is already the controlling shareholder of Recipe, which owns restaurants including the Keg, Harvey’s and Swiss Chalet. The investment group currently holds 45.8 per cent of the company’s shares and has offered $20.73 cash per share for most of the remainder.
The Phelan family, which founded Recipe predecessor Cara, would continue to hold a stake in the private business through Cara Holdings Ltd. Cara currently holds nearly 22 per cent of the company’s shares.
The offer represents a 53.4-per-cent premium to Monday’s $13.51 closing price for Recipe’s shares, the company said in a statement Tuesday. But it is lower than the value of the company at the time of its initial public offering in 2015: Recipe went public in April of that year at $23 per share and pushed to $37 in its first summer as a public company. It has been on a downward trend since, falling below $7.50 per share in the early weeks of the COVID-19 pandemic in 2020.
Through Monday, Recipe shares had lost 55 per cent of their value from their first-day close. That’s one of the 12 worst performances over that time period of any current TSX-listed company with a market capitalization of $500-million or more, according to S&P Global Market Intelligence.
Fairfax, the insurance and investment conglomerate founded by chief executive officer Prem Watsa, acquired Cara Operations Ltd. in 2013 and paired it with other chains owned by Prime Restaurants, which Fairfax also controlled. Further consolidation followed with the $537-million acquisition of Quebec rotisserie chicken franchise St-Hubert, and subsequent deals to bring Original Joe’s Franchise Group and Pickle Barrel into the Recipe Unlimited fold.
Mr. Watsa merged Keg Restaurants Ltd., which he also controlled, with Recipe in 2018. But even before the pandemic, Recipe was struggling to generate growth in its existing restaurant chains aside from the Keg.
“This premium paid indicates that Fairfax is confident that the asset is priced well below fair value, and that they see plenty of upside for the portfolio of brands. With the economy reopening, the Fairfax team clearly sees a bright future for casual dining,” said Robert Gill, senior vice-president and portfolio manager with Toronto-based Goodreid Investment Counsel, who covers Canadian retailers.
Goodreid does not currently hold shares in Fairfax or Recipe Unlimited, though Mr. Gill has invested in both in the past.
A special committee of the Recipe Unlimited board of directors unanimously recommended moving forward with the deal, and the board plans to recommend that Recipe shareholders vote to approve it once a definitive agreement is negotiated, the statement said.
Recipe’s share price rose by more than 45 per cent on Tuesday in the wake of the news. The company expects the deal to close in late 2022.
Recipe Unlimited owns roughly 20 fast-casual and fast-food chains and a total of more than 1,200 restaurants. Roughly 82 per cent of its locations are franchised. Other restaurant chains it owns include Kelsey’s, East Side Mario’s and New York Fries.
Recipe has recently benefited from customers’ growing comfort with returning to restaurants. In May, restaurant and bar sales grew 3 per cent to $7.4-billion in Canada, their highest level since before the pandemic’s devastating effects on the industry, according to Statistics Canada. Sales at full-service restaurants rose by 3.1 per cent and at limited-service restaurants by 1.9 per cent.
Visits to both casual-dining and midscale restaurants – categories where Recipe competes – are up by roughly 40 per cent this year in Canada as they recover from pandemic lockdowns, according to research firm the NPD Group.
“Now that restrictions are largely lifted, a good swath of the population is saying ‘I’m going out’ – despite what we’re hearing about food inflation and about the economy,” said Vince Sgabellone, a food-service industry analyst with NPD in Canada.
Last week, Recipe Unlimited reported a 55.4-per-cent increase in system sales in the second quarter. Some of Recipe’s brands have seen a decline in guest traffic, while at others, traffic is now above 2019 levels, CEO Frank Hennessey said on an earnings call with analysts on Aug. 3. “So, it really is a bit of a mix,” he said.
Like other restaurant owners, however, the company has been raising some menu prices, and continues to feel the effects of significant inflation in food prices and by a tight labour market. Across the sector, restaurants hiked food prices by 6.8 per cent in May compared with the same time last year, or 12 per cent compared with May, 2019, according to Statistics Canada.
This is the second announced take-private deal in less than a week for Fairfax.
Last week, Fairfax joined a consortium of owners and managers of New York Stock Exchange-listed global shipper Atlas Corp. in announcing an offer to purchase the public shares of the company. Fairfax owns 48 per cent, a stake worth about US$1.9-billion.
The offer, a 32.1-per-cent premium over the 30-day average closing prices for Atlas, will cost the consortium more than US$1.1-billion. Fairfax did not disclose its exact contribution to the take-private offer.
Another deal in the Canadian restaurant sector was also announced on Tuesday, as Montreal-based MTY Food Group Inc. said it had agreed to acquire BBQ Holdings Inc. in a deal worth roughly US$200-million. BBQ Holdings is the owner of Famous Dave’s and other casual and fast-casual restaurants in the U.S., Canada and the United Arab Emirates.
MTY owns roughly 80 fast-food and casual-dining chains in Canada, the U.S. and overseas, including Mr. Sub, Pinkberry, Bâton Rouge and food-court staples such as Manchu Wok and Thai Express. Almost all of MTY’s 6,660 restaurants are franchised.
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Susan Krashinsky Robertson
David Milstead