Restaurant Brands International Inc. (TSX: QSR)(NYSE: QSR) is a wonderful business that’s poised to take over the fast-food world one smart acquisition at a time. The strong management team has the ability to drive down costs, while putting its foot on the gas with its ambitious global expansion plans, resulting in next-level earnings growth and an accelerating cash flow stream that allows the company to reward its shareholders through massive dividend raises, while still allowing for enough financial wiggle room to pull the trigger on another deal.
The company has an impressive portfolio of brands in Tim Hortons, Burger King, and Popeyes Louisiana Kitchen. They complement each other nicely, allowing Restaurant Brands to expand at a rapid rate without cannibalizing itself, a major problem Starbucks Corporation has run into in the U.S.
Restaurant Brands could have all three chains on the same block, and there really wouldn’t be a problem with cannibalization. You’ve got coffee and doughnuts, burgers, and fried chicken, three very different sub-industries in the fast-food world. Each brand has an incredibly high growth ceiling, and with management’s proven track record, I’m very confident that each newly acquired brand will be global household names, as Burger King has become over the years.
It’s a delicious portfolio of brands, no doubt, and although the company has its hands full with its current three chains, there’s a gigantic opportunity for Restaurant Brands to add yet another complementary brand to its portfolio: Papa John’s Int’l, Inc. (NASDAQ: PZZA).
Given Papa John’s recent troubles and its modest valuation (19.9 times trailing earnings), I think the ~$2 billion pizza player looks like it could be the missing piece to the puzzle for Restaurant Brands, even though it may still be stuffed from its recent fried chicken expedition.
Former CEO John Schnatter (Papa John himself) and his controversial comments directed at certain NFL players have caused shares of the company to fall from grace. Today, Papa John is no longer at the helm, nor does the company have a big-league sponsor in the NFL. The third-largest pizza power is now in reset mode, providing Restaurant Brands with a rare opportunity to jump in and capture a slice of the red-hot pizza market.
Rumours suggest Restaurant Brands is hungry for a pizza acquisition
There has been speculation that Restaurant Brands may be hungry for a pizza chain with its next acquisition. Such a deal would allow Restaurant Brands to clash swords with Yum! Brands, Inc. for two of the hottest fast-food sub-industries out there: pizza and fried chicken.
Credit Suisse noted that Papa John’s is a promising potential buyout target and that the even a ~30% premium on today’s share price would be lower than the stock’s all-time high of ~$89. What a bargain!
It was also rumoured that Restaurant Brands had shown interest in Domino’s Pizza, Inc. (NYSE:DPZ), according to an unverified report issued by the Brazil Journal. Such a deal would imply a hefty premium, but as Jim Cramer once pointed out, Domino’s is essentially a “tech company that sells pizza,” so in this regard, the deal makes sense given Restaurant Brands’s recent commitment to embracing tech.
It’s all just speculation at this point, but the addition of a pizza brand makes a tonne of sense. Personally, I think Papa John’s is the better bet, allowing Restaurant Brands an opportunity to reboot comps following what I believe is short-term backlash from a handful of customers.
Given 3G Capital’s “cheap” and value-conscious attitude, I also suspect a buyout of Papa John’s would be the most probable pizza acquisition, but we’ll really need to wait and see how things pan out.
In the meantime, pick up shares of Restaurant Brands and collect the 3% dividend yield, while you wait for Restaurant Brands’s next big deal.
Stay hungry. Stay Foolish.
