Cara Operations Ltd., the largest Canadian-owned restaurant company, welcomed Quebec's rotisserie chicken chain St-Hubert Group to its table Thursday, securing both a beloved brand and access to an important market.
Vaughan, Ont.-based Cara will take on 117 restaurants in a $537-million deal that accelerates its expansion into a province where it has scarcely had a presence and taps into a loyal customer base that not only comes out to eat, but also buys its secret sauces and frozen entrées in the grocery store.
Cara's big brands, such as Swiss Chalet, Harvey's and Milestones, already span the country, and once Laval, Que.-based St-Hubert is folded in, it will oversee 1,127 restaurants. Only Tim Hortons' owner Restaurant Brands International Inc. and McDonald's Corp. have a larger market share. And Cara's management sees plenty of runway for more of its brands to find a home in Quebec.
"This is about growth for St-Hubert and is about growth for Cara," Bill Gregson, chief executive officer of Cara, said on a call with analysts. The company acknowledged that at 12 times adjusted earnings before interest, taxes, depreciation and amortization, the price is richer than what it has paid in the past for other assets. But this was the deal that Cara had in its sightlines for years – a perfect fit in its stable of family-friendly dining establishments.
Cara's Swiss Chalet and St-Hubert fit together naturally, thanks to franchise-focused concepts that largely serve separate markets. St-Hubert has expanded primarily through Quebec, with a few locations on the East Coast and in Ontario. Swiss Chalet has built up a presence as far west as Vancouver Island.
Aside from chicken, Cara was drawn to St-Hubert's connection to grocery stores, such as Sobeys, Loblaws and Costco, selling frozen versions of its classic dishes, side salads and soup, among other signature offerings. Mr. Gregson said St-Hubert had pioneered converting restaurant brands into products that can be sold in grocery stores and he hopes the addition of the Quebec company will enable Cara to be better at that.
St-Hubert also has a portfolio of real estate, including two food manufacturing plants and two distribution centres in Quebec that have the ability to increase their capacity. St-Hubert's management team is now set to develop and expand a line of Cara-branded products that can be sold to retail shoppers. These would be manufactured in Quebec and sold across Canada through existing St-Hubert suppliers.
Perhaps more importantly, Cara gets that which can rarely be bought: A deep pool of emotional capital that comes from 65 years of consumer loyalty.
Started by Hélène and René Léger in 1951 on St-Hubert Street in Montreal, the franchise chicken chain is so ubiquitous in its home province that its 1960s jingle is still recognizable to most Quebeckers. Its restaurants are community gathering places.
As Eric Blais of strategic marketing firm Headspace Marketing Inc. puts it, St-Hubert's secret sauce goes far beyond the actual sauce, famed chicken and creamy coleslaw.
"Drive through any small town across Quebec and you'll see a church, a caisse populaire [credit union] and a St-Hubert," Mr. Blais said. "You'll also see a busy Tim Hortons. They're local and, like Cheers, everyone knows your name."
The Légers' son Jean-Pierre took over the business 25 years ago and, now, at aged 70, he is intent on securing his company's place within Quebec culture. After he concluded that his two daughters didn't want to carry on the business, he agonized over what to do.
Mr. Léger said he canvassed potential buyers within Quebec, including institutional investors, such as pension fund manager Caisse de dépôt et placement du Québec and labour fund Fonds de solidarité FTQ. Although they had the means, he said none had the mandate to take over entire companies. Local industry players, meanwhile, were few and far between and he failed to develop a chemistry with them.
"My main concern was to ensure the long-term existence of the company," Mr. Léger told reporters who had gathered Thursday at the St-Hubert restaurant beside Montreal's Bell Centre, adding that the business employs 10,000 people.
Over the past several years, Fairfax Financial Holdings Ltd.'s founder and CEO Prem Watsa grew close to Mr. Léger and sought to reassure him that Cara would take good care of St-Hubert if he were to sell it. Fairfax has been a key investor in Cara and is now Cara's largest shareholder, primarily through multiple voting shares.
Mr. Watsa has a Warren Buffett-like mantra to never sell the business he buys, as well as experience with family-owned operations – Cara's Phelan familyhas been involved in the business since it's founding in 1883.
"Jean-Pierre always told us, if he decided to sell, when he decided to sell, he would sell it to us," he said.
It will take years, but Mr. Watsa believes Cara will one day bring the flavours of the provinces abroad. "Long term, we could expand in many countries in the world."
With a file from reporter Marina Strauss in Toronto.