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Restaurant Brands agrees to pay US$105M for Hawaiian fast-food chain

Wednesday 26th October 2016

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Restaurant Brands NZ plans to buy Pacific Island Restaurants, the largest fast food operator in Hawaii with 82 Taco Bell and Pizza Hut stores, to diversify its earnings away from New Zealand where it runs the KFC, Pizza Hut, Starbucks Coffee and Carl's Jr food chains.

The Auckland-based company has offered US$105 million for PIR, funded by a $94 million sale of shares to existing holders and US$42 million of debt, it said in a statement. It expects to complete the sale by late December, conditional on approval from Yum! Brands, which is the franchisor for PIR's Taco Bell and Pizza Hut stores and Restaurant Brands' existing KFC and Pizza Hut operations.

Restaurant Brands, New Zealand's largest fast-food operator with 173 stores, is expanding into new markets to spread its risk and drive future earnings growth, opening new burger chain Carl’s Jr in New Zealand and expanding into KFC in Australia where it has 42 stores. To improve profitability in its legacy businesses, the company has been refurbishing and adding to its local KFC outlets, exiting low performing Pizza Hut stores and closing its worst performing Starbucks Coffee outlets.

"A while ago we looked at the growth potential for Restaurant Brands in New Zealand and it was in our view limited to a steady 'business as usual' growth of one or two KFCs per year, maybe one or two Pizza Huts per year, that sort of pace. The ability to grow rapidly with new brands as we have seen with Carl's Jr is a very slow path, and there's not many other brands that we could purchase or would be interested in purchasing to add step change," chief executive Russel Creedy told BusinessDesk. 

"We really came to the conclusion that the transformational growth steps would involve going offshore and primarily stick with a brand that we were familiar with, the franchisor we were familiar with and also where they were a very strong brand so we don't have to try and invest lots of time and effort in establishing a new brand in a new territory."

PIR is the sole Taco Bell and Pizza Hut franchisee in Hawaii, Guam, and Saipan and is profitable with a stable management team. It was previously owned by private equity firms and Creedy said Restaurant Brands sees an opportunity to reinvest in existing stores, and build infill and new stores to lift sales and profits.

He said there were also "potential bolt-on opportunities" where Restaurant Brands could add other chains in the US market.

The company is offering its shareholders one new share at $4.70 apiece for every 5.15 shares they already own. That's a 12.5 percent discount to $5.37, the dividend-adjusted volume-weighted average price of the shares for the five trading days prior to Oct. 26. The shares are in a trading halt pending the result of an institutional bookbuild. The new shares won't be entitled to a 9.5 cent first-half dividend announced by the company today.

Restaurant Brands today posted a 0.7 percent gain in first-half profit to $13.5 million for the 28 weeks to Sept. 12. Sales jumped 22 percent to $256.2 million, with the bulk of the increase coming from its acquisition on April 27 of QSR in Australia, the biggest KFC franchisee in NSW, which added $43.6 million of sales.

The company said it completed one transformation of a KFC store in New Zealand over the latest period, bringing to an end its 10-year programme of major KFC transformation, having revamped 87 of the 91 stores in its network. 

Meanwhile, its Australian KFC business is performing well against expectations and the company said it has identified the opportunity for further acquisition of KFC stores in the Australian market. 

It's Pizza Hut network in New Zealand increased to 90 stores after independent franchisees added a new store. The total number sold to independent franchisees increased to 45 after it sold six more stores, as the company moves over the next two years towards its target holding of about 25 company-owned stores. 

Restaurant Brands said it's in talks with Yum! Restaurants International about the establishment of a master franchise arrangement for the New Zealand market, which would provide certainty around its current arrangements for a share of royalties in return for providing marketing, supply chain, IT, and support to the independent franchises.

Its 20-year Starbucks Coffee franchise expires in mid-2018 and the company said it's in talks with the franchisor about the future of the brand. The store numbers reduced by one to 25 after closing a Wellington store at the end of its lease, and the unit contributed $13.8 million of sales in the first-half, just 5.4 percent of total revenue.

Creedy declined to say if the company remained committed to the brand, saying it would look at its options as the franchise expiry date drew closer.

The company said most of its 20 Carl's Jr stores were contributing satisfactorily, although the future of some under-performing stores is being evaluated. Steady progress is being made towards building sales growth and profitability after the initial setup issues, it said.

Restaurant Brands expects its existing business, combined with two overseas acquisitions, will deliver an annual profit of between $30 million to $32 million, excluding non-trading items. First-half profit excluding non-trading items was $15.9 million.

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