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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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About the Author

RJ Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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