Wheeling and Dealing in the Restaurant Industry in 2017

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As we recap of the biggest consumer and retail stories of 2017, the Motley Fool Industry Focus team runs through notable mergers and acquisitions in the restaurant sector as an extended "restaurant recession" made several chains attractive buyout targets.

A full transcript follows the video.

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This video was recorded on Dec. 19, 2017.

Vincent Shen: It's also for M&A. This time it's in the restaurant industry. Asit, can you give us a quick overview of some of the buyouts that happened during those several months?

Asit Sharma: Sure. I'm actually going to focus on one of them, because this is surprising. It was the biggest M&A story this year in this space, and it was actually a buyout of a public company, Panera Bread, by private company JAB Holding Company. JAB Holding Company is a huge European conglomerate which owns a lot of coffee interests, and a lot of labels like Peet's Coffee, specialty coffee companies. It owns Dunkin' Donuts [Editor's note: though deal rumors have surfaced, Dunkin' Brands has not yet been acquired by JAB Holdings], and it's branching into other types of businesses like the Panera Bread business.

What's very interesting to me is, in restaurant M&A, we usually think in terms of a struggling competitor that's acquired by a stronger rival. But in this case, Panera Bread was doing just fine, had a great business. Its founder, Ron Shaich, had also started the Au Bon Pain company. A very successful businessman, he wanted to take this company private, because he felt that shareholders, especially institutional shareholders and the threat of activist shareholders, are forcing companies in this industry to make too many short-term decisions, and that's not creating value. In his mind, that's destroying value. Listeners, if you want to read up on this, he gives some very good pointers on this in the article that was in the Boston Globe this past Sunday, and it's called Five Things to Know About Ron Shaich. In this industry going forward, 2018, look for pressure on companies that are successful by these activist shareholders. We've covered a lot of them this year, but this is a double-sided coin. Sometimes, it can create a lot of long-term value, and sometimes it just ends up destroying it.

Shen: Alright, that's our time. I'm going to add a few notes. The other deals, the Panera Bread deal was by far the largest, but the others that happened in February and March included Restaurant Brands International, they already operate Burger King and Tim Hortons, they took over Popeyes for $1.8 billion. In March, Darden Restaurants scooped up Cheddar's Scratch Kitchen for about $780 million. So you know from previous episodes on the show, we've talked a lot about the ongoing weakness in the restaurant industry, and it's certainly made some of the smaller players attractive buyout candidates. But the JAB Holdings deal, if I can speak to it really quickly here, I think it's really interesting, because this Panera deal was just one more acquisition in a long string of them for JAB Holdings. They've already built up a portfolio of complementary businesses like Krispy Kreme, Peet's Coffee, Jacobs Douwe Egberts, Keurig Green Mountain. Something we didn't even cover in November was, JAB announced the acquisition of Au Bon Pain as well. With this huge coffee and dining portfolio, Starbucks founder Howard Schultz actually commented he believes JAB is trying to become the largest coffee company in the world.

Asit Sharma has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.