Are the restaurant royalty trusts undervalued?
Scotia Capital made an interesting point Thursday on the gap between what private equity paid for Timothy's Coffee - nice java, but an also-ran in its sector - and the price commanded by more established franchises, such as A&W, the Keg, Second Cup and Boston Pizza.
The restaurant trusts change hands at an average of 7.5 times last year's earnings before interest, taxes, depreciation and amortization, or all-important EBITDA, according to the Scotia Capital team that follows the sector.
Timothy's went to U.S. private equity fund Sun Capital Partners for $100-million, or 11 times EBITDA.
Now, this is not to say that private equity is about to come sweeping in on 'cheap' restaurant trusts. Private equity buyers are largely on the sidelines.
If takeovers do come, the structure of these companies is best suited to going-private transactions. These deals would see the private entity that actually runs the restaurants taking out the publicly traded trust, which faces a tougher tax regime come 2011. There is also a case to be made for tax-deferred entities - hello, pension funds - to snap up the restaurant trusts, and preserve the cash-spinning structure.
The simple and valid point made by Scotia Capital is that these restaurant trust chains, many of which crank out steady growth in recession-proof niches, are trading at relatively low valuations.