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Food court mogul Stanley Ma's MTY Food Group Inc. has struck a friendly $400-million deal to acquire Arizona-based Kahala Brands Ltd. and its 2,800 fast-food locations in 25 countries.

The cash and share purchase is the latest in a long string of acquisitions by Montreal-based MTY and by far its largest – effectively doubling the size of the Montreal-based company. It also represents a major expansion into the U.S. market.

MTY, which was essentially debt free, will have to borrow to complete the transaction, but investors still appeared thrilled by the expansion. MTY shares rose more than 18 per cent on the Toronto Stock Exchange Wednesday to close at $42.25.

The Kahala family of brands – which includes Cold Stone Creamery, TacoTime and Blimpie submarines – will be added to MTY's 2,700 restaurants in Canada and 14 other countries. Among MTY's 40 banners are Cultures, Thai Express, Country Style and Jugo Juice. MTY posted more than $1-billion in sales last year, while Kahala sales are in the $950-million range.

Kahala's controlling shareholder is the Serruya family of Markham, Ont., which bought into the company three years ago in an auction. Brothers Michael and Aaron Serruya started the Yogen Fruz frozen-yogurt chain in 1986 and later developed the CoolBrands ice-cream empire.

Mr. Ma, who immigrated to Canada from Hong Kong in the 1960s, started with a single restaurant serving Chinese and Polynesian food that he opened in 1979. He built MTY into a major food court player through a series of acquisitions that have paid off with an impressive stock-price performance – the shares have more than doubled in the past four years. Mr. Ma said MTY has been searching for the right foundation for U.S. expansion for three years, and "it has finally found the perfect match."

The transaction will see MTY pay $240-million (U.S.) in cash plus about 2.25 million MTY shares, valued at about $95-million (Canadian) at Wednesday's close. MTY will use cash on hand, but also raise money from a new credit facility being arranged by TD Securities.

Analyst Leon Aghazarian of National Bank Financial called the Kahala deal "transformative" for MTY because of the increased scale of the combined company, and the fact this is MTY's "first major foray" in the United States. Still, he said, it significantly changes the company's leverage profile because of the debt it is taking on. It also shifts MTY from being a domestic chain with only 8 per cent of its locations outside of Canada, to a global business with 55 per cent of outlets beyond the border.

Jeff Mo, a portfolio manager at Mawer Investment Management, noted that MTY paid a higher value for Kahala than it has for many of its early acquisitions – about 10 or 11 times EBITDA (earnings before interest, taxes, depreciation and amortization). He said that does not mean they overpaid; in this case that is "the going price for a platform that large."

Mawer holds about one million MTY shares in its clients' portfolios.

The Kahala collection of brands seems to be stable, rather than fast growing, Mr. Mo said. But MTY is also getting a management team that can operate a large U.S. and international platform. In addition, MTY should be able to use the U.S. foothold to expand its existing Canadian brands, some of which have a "more ethnically diverse palate" than Kahala's brands, he said.

Mr. Mo said MTY already had some U.S. locations that it picked up with earlier acquisitions, and that "was a low risk way for them to learn the [U.S.] market" before making this much larger move.

MTY is not done with expansion. The company said its new credit facility will give it flexibility to make more acquisitions, if they become available.

Healthy appetite

MTY Food group has been a serial acquirer over the past few years, adding several chains to its wide stable of fast food brands. The purchase of Kahala Brands is by far its largest purchase to date.

Target companyDate No. of outletsPrice paid
Kahala Brands May 20162,800$400-million
Manchu Wok Dec. 2014132$7.9-million
Van HoutteNov. 2014 51$1-million
Café Depot/ Sushi Man/ Muffin Plus/ FabrikaOct. 2014101$13.9-million
Madisons July 201414$12.6-million
Thai ZoneSept. 201325$17.6-million
Extreme BrandzSept. 2013305$44.6-million
SushiGoJune 20135$1.1-million
Mr. SouvlakiSept. 201214$0.9-million
Koryo Korean BBQNov. 201120$1.8-million
Mr. SubNov. 2011338$23-million
Jugo JuiceAug. 2011136$15.5-million

Source: National Bank Financial