Huge Cash Windfall for Dunkin Brands Group Inc Shareholders
November 18, 2020
Dunkin Brands Group Inc Is Up 137%
Dunkin Brands Group Inc (NYSE:DNKN) recently announced that it will soon go private in one of the largest restaurant deals in more than a decade. And that could mean a huge cash windfall for shareholders of the popular donut chain.
After weeks of speculation, private equity-backed Inspire Brands, the parent company of “Sonic,” “Arby’s,” “Buffalo Wild Wings,” and “Jimmy John’s,” announced it will acquire Dunkin Brands in an $11.3-billion deal. DNKN shareholders will receive $106.50 per share, representing a 20% premium from where the stock traded ahead of the announcement. (Source: “Dunkin’ Brands Acquired in $11.3 billion deal,” Chain Store Age, November 2, 2020.)
The transaction will rank as the largest restaurant buyout since Restaurant Brands International Inc (NYSE:RBI) acquired Canadian coffee chain Tim Hortons for $11.4 billion back in 2014. (Source: “Roark Capital Looks to Add Dunkin’ to Fast-Food Empire in $8.8B Deal,” PitchBook, October 27, 2020.)
I have mixed feelings about the news.
On one hand, the acquisition represents a great deal for Dunkin Brands shareholders. At the announced deal price, Inspire will pay 18.5 times Dunkin Brands’ 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA)—well above the typical buyout price we’ve seen in previous restaurant takeover deals. No doubt, any investors who’ve held on to DNKN stock will be happy to collect their overnight cash windfall.
Dunkin Brands Group Inc should fit in nicely with Inspire’s growing portfolio. Assuming the transaction gets the green light by regulators, Inspire will rank as the fourth-largest restaurant operator in the world, with $26.0 billion in systemwide sales.
That will give the company more negotiating power with suppliers, allowing management to strike better deals and earn above-average margins. And by spreading its fixed costs over an even wider base of sales, Inspire can better take advantage of the lucrative economies of scale.
“Dunkin’ and Baskin-Robbins are category leaders with more than 70 years of rich heritage, and together they are two of the most iconic restaurant brands in the world,” said Inspire Brands co-founder and CEO Paul Brown. “By joining Inspire, these brands will add complimentary guest experiences and occasions to our current portfolio. (Source: Chain Store Age, op. cit.)
On the other hand, I’m disappointed to see Dunkin Brands Group Inc go private. The company is a truly wonderful business with a recognizable brand name, thick profit margins, and a tradition of rewarding shareholders.
That combination of characteristics explains why DNKN stock has shot the lights out in recent years, producing a total return of 137% since I first highlighted it in the Automated Income newsletter back in April 2016.
Chart Courtesy of StockCharts.com
Dunkin Brands’ departure from the public stock market will leave a big hole to fill. And it will be difficult to find businesses with even remotely comparable fundamentals.
The deal, however, isn’t a sure thing. As mentioned earlier, inspire still needs to get the go-ahead from regulators. And of course, the lawyers still need to cross some t’s and dot some i’s. But for the most part, analysts don’t see any huge hurdles in the way of this deal. That explains why shares of Dunkin Brands Group Inc trade pretty close to Inspire’s proposed purchase price.
With little in the way of upside left, I suggest that DNKN shareholders enjoy their windfall and then take their investment dollars elsewhere.
