Dunkin’ Buyout by Inspire Brands Would Be Excellent
The reported buyout price is a 42% premium to our $75 fair value estimate.
On Oct. 25, narrow-moat Dunkin' Brands (DNKN) confirmed that it has held discussions about a potential acquisition by Roark Capital-backed Inspire Brands, the parent company of Arby's, Sonic, Buffalo Wild Wings, Jimmy John's and others. The company did not release other details regarding a possible transaction, but The New York Times reported that a deal could come as soon as Oct. 26 with a buyout price of $106.50 per share, representing a valuation of $8.8 billion and a 20% premium to the Oct. 23 closing share price of $88.79.
We believe this would be an excellent transaction for existing Dunkin' shareholders, as it represents a 42% premium to our $75 fair value estimate (which assumes 4% average annual top-line growth over the next 10 years and adjusted operating margins approaching 42% by 2029, versus 34% last year). The rumored purchase also represents 18.5 times Dunkin's 2019 EBITDA of $475 million--well ahead of the five-year average restaurant industry M&A/buyout trailing-12-month enterprise value/EBITDA multiple of 11-12 times (based on data from PitchBook).
From an operations standpoint, we believe Dunkin' and Baskin-Robbins would complement Inspire's existing brand portfolio from a franchisee ownership (100%) and geographic perspective--Dunkin could find potential franchisee partners from existing Arby's and Sonic franchisees in the South and West, and would be Inspire's second brand with a meaningful international footprint behind Arby's. Assuming the transaction is completed, Inspire would become the fifth largest restaurant system in the world with over 20,000 units, trailing Yum Brands (YUM) (50,400), Subway (44,700), McDonald's (MCD) (39,000), and Restaurant Brands International (RSTRF) (27,100).
We believe there is a strong probability that a Dunkin buyout will take place, but we'll wait for a formal transaction announcement before making changes to our $75 fair value estimate, which is based on a discounted cash flow analysis on a standalone basis.
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R.J. Hottovy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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