Cara Operations Ltd. is set to swallow Keg Restaurants Ltd. in the latest example of consolidation in Canada's fragmented restaurant industry.
Cara, the country's largest full-service restaurant company, said Tuesday it will acquire its upscale competitor in a deal valued at about $200-million in cash and shares. The company, based in Vaughan, Ont., plans to change its name after the deal closes to help it move away from any connections with its past business of providing airline food, Bill Gregson, Cara's chief executive officer, told reporters.
The takeover is designed to help Cara get a boost from the outperforming Keg chain while helping the Keg expand further south of the border, where it has 10 eateries. "There's massive potential there," Mr. Gregson said.
Cara investors seemed to like the deal: Its stock jumped almost 10 per cent to $27.38 on the Toronto Stock Exchange Tuesday. But Keg Royalties Income Fund units fell nearly 4 per cent to $19.
Cara's chains include Swiss Chalet, Harvey's, Milestones and 14 other well-known Canadian restaurant brands with more than 1,250 locations across the country. Adding the Keg's more than 100 steakhouses in Canada and the United States will both bolster and diversify Cara's portfolio at a time when growth has been relatively flat and challenges, such as the rising minimum wage in some provinces, have added to pressures.
The Keg has performed more strongly than Cara's upscale chains and will serve as a model from which Cara can learn, Mr. Gregson said, noting all of the Keg's restaurants are profitable with their sales rising 5 per cent annually.
Cara's strategy is to use its size and purchasing power to buy food at lower costs and negotiate its real estate deals more aggressively to better navigate the restaurant industry, which it has called "intensely competitive." Amid that competition, Cara's same-restaurant-sales growth figures, which are watched by the industry as an important measure of earnings from established locations, were relatively flat at 0.9 per cent in the company's last quarter.
The Keg has been majority owned by Fairfax Financial Holdings Ltd. since a 2013 deal with the restaurant chain's chief executive, David Aisenstat, who owns the other 49 per cent of the company. Fairfax also had a stake in Cara, which it helped to take public on the Toronto Stock Exchange in 2015.
After completion of the deal, Fairfax will hold 43.5 per cent of the combined company's equity, and nearly 57 per cent of the total votes.
Mr. Aisenstat will continue to lead the Keg, which will operate as a wholly owned subsidiary of Cara. He will also oversee Cara's higher-end brands, such as the Bier Markt, the Landing Group and Milestones.
Mr. Aisenstat said he will be focused on improving the customer experience at Cara's chains and would "get those places up to their full potential."
The deal to buy the Keg is not expected to alter the company's relationship to the publicly traded Keg Royalties Income Fund, which collects 4 per cent of gross sales of corporate and franchised Keg restaurants and owns intellectual property related to the business. The Keg has managed to boost its same-store sales enough that it recently announced a special payment to its unitholders.
Mr. Gregson said the deal could help the Keg expand significantly south of the border where it has a foothold in the Phoenix and Dallas areas. "It gives us a beachhead, if you will, for expansion without anywhere near risking the farm."
Geoff Wilson, principal at food services consultancy fsSTRATEGY Inc., said cracking the U.S. market is tough but the Keg will have an easier time than others because its premium steak category is a well-defined one and understandable to consumers who may not be familiar with the brand.
"It's a big market and there is lots of opportunity," Mr. Wilson said.
He said the Keg has done a good job of positioning itself as "the go-to celebratory steak and bar venue." The chain hasn't strayed from its premium-steak roots while other rivals have shifted their focus and tried to be "something to everybody," he said. The Keg, meanwhile, is "stealing market share from other chains."
Over all, sit-down restaurants are feeling a pinch but "premium casual" dining restaurants (such as the Keg, Cactus and Earls) outpace the segment in sales and traffic, said Robert Carter, executive director of food services at market research firm NPD Group.
In 2017, sales at sit-down restaurants over all slipped 2 per cent to $21-billion while traffic fell 4 per cent to 1.3 billion visits, according to NPD data. Meanwhile, sales at (lower-priced) fast-food outlets rose 3 per cent to $27-billion and traffic picked up 2 per cent to 4.6 billion visits, the research shows.
At the same time, grocery takeout counters are snaring business from conventional restaurants: Those retail sales jumped 8 per cent to $3.8-billion last year, NPD says.
Full-service restaurants have responded in part by pushing out beyond their traditional offerings and locales to win back customers. In Cara's case, that includes connecting its stores to e-delivery platforms, such as UberEATS, and striking partnerships with media such as The Weather Network and digital apps, such as GPS navigator Waze.
Although premium restaurants represent only 4 per cent of all sit-down restaurant traffic, they cater to "upscale and innovative" menu offerings that a growing segment of consumers is looking for when dining out, Mr. Carter said.
The takeover bid comes as restaurants are grappling with minimum-wage hikes in Ontario and Alberta, prompting some to raise prices to make up higher pay.
"Everybody has taken some prices [up] on some items," Mr. Gregson told reporters, adding it was too early to say the ultimate effects of recent wage increases on Cara. He has said it will respond by becoming more efficient and re-evaluating prices while staying competitive with the rest of the industry. Altogether, Cara restaurants' total system sales, capturing all Cara-owned brands, were $2-billion year-to-date in its third quarter of 2017.
At the same time, the Keg has recently projected that improving North American economic conditions and consumer sentiment will continue to buoy sales at its locations, which benefit from rising disposable incomes.
Mr. Gregson said Cara is looking for a name-change to disassociate itself from its former airline-food business. "We haven't done the airline food for a long, long time," he said. "We just thought it might be time for a new name to recognize where the company is now from where it used to be."