Pizza is always a safe bet-be it for breakfast, lunch, dinner or investing. Evidence to back up the latter can be found in the quantity of private equity-backed, pizza-related deals consummated recently. In 2004, Charlesbank Capital Partners recapped Papa Murphy’s Take N’ Bake Pizza, Blue Sage Capital acquired pizza franchisor Mr. Gatti’s and Bain Capital exited part of its Domino’s investment last year through an IPO. Meanwhile, in 2005, Centre Partners acquired Uno Restaurant Holding Corp. while Bunker Hill Capital acquired Papa Gino’s from BancBoston Capital. And thanks to Milestone Capital Management LLC, which is intent on becoming the third-largest franchisor of Papa John’s restaurants, the list goes on.
Last month, Washington, D.C.-based Milestone, agreed to acquire 84 company-owned restaurants in Colorado and Minnesota from Papa John’s International Inc. For the seller, total proceeds from the transaction will be $12 million, including $1 million for prepaid royalties, assuming that Milestone exercises its purchaser’s option to acquire real estate related to eight of the locations being sold, according to Papa John’s.
“We’re catching this deal at a strong time in that we will be able to continue with the population-driven momentum that the [Colorado and Minnesota] markets have been experiencing,” said Milestone principal Aldus Chapin. Citing other variables, such as overall commodity prices and increases in overall pizza consumption and delivery, he added that times have generally been good for the pizza industry as a whole.
Indeed, this not the first pizza asset Milestone has considered buying. Chapin said the firm had aggressively perused another publicly-traded, non-franchised pizza company, noting that the deal fell through when Milestone could not negotiate what it deemed a “reasonable” price. “There are a lot of restaurant opportunities out there right now, but some of the valuations are ridiculous, partly because there are so many financing options open to them,” noted Chapin.
In all, this investment will be Milestone’s fifth since it was founded 18 months ago. The firm is currently investing from Milestone Capital Partners LP, its inaugural $88.2 million private equity fund. Chapin declined to discuss the equity-to-debt ratio pertaining to the deal, noting that the capital structure of the transaction is still being finalized. According to its 8-K filing with the SEC, Papa John’s has agreed to provide up to $5 million in bridge financing to facilitate the closing of the transaction, expected to take place on Sept. 26.
Papa John’s is currently the smallest of the Big Three pizza companies-topped only by Pizza Hut and Dominos. That said, Milestone’s vision for the 84 Papa John’s franchises they are buying is to turn them into market leaders in their respective locales. The firm eventually hopes to reach this goal with the help of advertising campaigns, but Milestone’s first step is to tackle the execution challenges unique to each individual location, no matter how small, Chapin said.
“Once you’re certain that you’re meeting or exceeding your expectations in regards to those challenges-even things like knowing who has the key to the front door and whether or not the walkway is clean-then you can focus on the marketing. We’re a very interested firm in the nitty-gritty, blocking and tackling aspects of our investments,” he said.
Indeed, the durability-and borderline omnipresence-of the pizza industry also played a role in Milestone’s decision to invest. “Restaurants seem to fall in and out of favor, and we’re probably coming to an end of the days when restaurants will have balance sheets as juicy as they are today,” Chapin said. “But the bigger franchises with proven ability will always prove valuable for investors. In particular, steak houses and pizza delivery will always be fine.”
Target: 84 Papa John’s Resturants
Buyer: Milestone Capital Management
Legal Counsel: Milestone: Patton Boggs LLP
Accountant: Milestone: In house