February was a big month for Restaurant Brands International Inc. (TSX: QSR)(NYSE: QSR). It announced that it was acquiring Popeyes Louisiana Kitchen Inc. (NASDAQ:PLKI) for US$1.8 billion, giving it another brand to work with in its quest for global domination in the fast-food market.
The acquisition makes complete sense because chicken products are on the rise. So far, chicken accounts for 10% of the total fast-food market. Popeyes has quickly gained on its larger competitors, Kentucky Fried Chicken and Chick-fil-A. Popeyes is a relatively small company with 1,600 locations in the United States and an additional 400 around the world.
But that’s a big reason Restaurant Brands wanted Popeyes. It saw an opportunity to take a growing brand and aggressively expand it around the world like it has begun to do with Tim Hortons. Restaurant Brands’s mechanism for achieving this is through a master franchise joint venture (MFJV). Essentially, Restaurant Brands launches a joint venture in a country; the joint venture then focuses on building a network of restaurants. By launching this joint venture, Restaurant Brands is able to rapidly scale out the supply chain and has a dedicated partner to build the business.
This model works. An example is the recent MFJV in the Philippines, where some analysts predict hundreds of Tim Hortons could launch over the next couple of years. And it’s worked in other countries, too. Brazil saw restaurant numbers balloon from fewer than 150 in 2011 to over 500 today. In 2012, there were fewer than 90 restaurants in China; now there are over 650. Russia also had fewer than 90 in 2012, but it now has over 350.
This model can be replicated with many other brands. Analysts expect that more acquisitions are coming, considering the largest investors in Restaurant Brands are habitual acquirers. “They’re going to look to build the company through accretive acquisitions,” said Jayson Moss, an analyst at Fraklin Bissett Investment Management, in an interview with the Financial Post.
Who are the likely targets?
There are two primary targets. The first, which would help it to compound its investment in the growing chicken market, is Yum Brands, Inc. (NYSE: YUM). This would obviously cost Restaurant Brands a lot, considering Yum Brands has a far higher market cap than Restaurant Brands. However, it would give Restaurant Brands Taco Bell, Kentucky Fried Chicken, and Pizza Hut. Pizza, by the way, is another rapidly expanding area.
Another target, suggested by Will Ashworth, a fellow Fool contributor, is Dairy Queen. Warren Buffett is the fourth-largest shareholder of Restaurant Brands; he also owns Dairy Queen. Therefore, it’s not entirely unrealistic that Restaurant Brands could acquire Dairy Queen to expand the brand internationally. I quite like this opportunity because the deal could be entirely in stock, which is good because Restaurant Brands stock is its best asset right now considering how valuable it is.
However, Buffett tends to be a buyer, not a seller, of companies, so this might not happen.
Nevertheless, Restaurant Brands is going to keep buying. That MFJV model has worked for the company thus far, so I expect to see it replicate its success with other brands. I find this company appealing, though it’s important to recognize that shares are very expensive. It might be worth waiting for things to cool down some.
