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Baja Fresh owner to acquire Papa Murphy’s for $190M

MTY Group is bullish on take n’ bake pizza segment

MTY Group of Montreal will acquire Papa Murphy’s stock and debt for a combined $190M transaction value. MTY is the parent of Kahala Brands and a multi-brand franchisor of food brands across North America. It’s also a hefty player in the quick-service restaurant (QSR) space with 5,941 stores. Papa Murphy’s, operating in the take n’ bake segment, franchises 1,331 restaurants and runs another 105 company-owned stores. MTY put up approximately $113M in cash for the deal and assumed $77M in debt.

The transaction gives MTY muscle in the pizza space, with Papa Murphy’s considered the fifth largest pizza chain in the United States. Papa Murphy’s posted $808.7M during the 2018 calendar year.

By all indications, MTY plans to continue operating the Papa Murphy’s support center in Vancouver, Wash. MTY is banking on some “synergies,” due to scale, and possible leverage in purchasing programs. In a MTY earnings call, Eric Lefebvre, chief executive of MTY, suggested the companies had some general priorities moving forward. Management would continue to focus on updating stores (refresh/remodels) and ensuring the right technology is in place within each unit post-acquisition.

MTY’s portfolio will increase to 7,378 stores globally after completion of the deal. Through the acquisition of Papa Murphy’s, MTY plans to moderate its sales seasonality. Also, the Montreal-based QSR franchisor gains a brand that’s well-suited for growth after a corporate strategy shift and brand refresh.

MTY to acquire Papa Murphy's for $190M.
MTY to acquire Papa Murphy’s for $190M. Logo by Groupe MTY.

MTY gains foothold in pizza segment, offsets sales seasonality

MTY’s Kahala Brands franchises top-label QSRs, including Pinkberry, Coldstone, Planet Smoothie, Taco Time, Blimpie and Baja Fresh, among others. Additionally, MTY Group operates and franchises several QSR brands in Canada, including Industria, Koya Japan, La Crémière, Madisons, Manchu Wok,Timothy’s, Van Houtte Coffee and Wasabi.

Several of the frozen yogurt and ice cream concepts are strong in the warmer months, creating pronounced sales fluctuations for MTY. In fact, Lefebvre told analysts these dessert brands are stronger traditionally in the second and third quarters, and have much softer sales in the other quarters..

Lefebvre indicated to analysts that he was contacted regarding the possible acquisition of Papa Murphy’s once the pizza chain began a strategic review. There was back and forth, he said, and then, a deal was achieved. He also suggested there would also be additional Papa Murphy’s store closings as the brand continues to reposition itself. In 2018, Papa Murphy’s closed 86 stores.

MTY bullish on take n’ bake segment

Nonetheless, Lefebvre is bullish on the future of Papa Murphy’s. “When you take n’ bake, you have the optimal experience where your pizza hasn’t traveled 30 minutes to your door,” he said. He suggested there was a sweet spot between frozen pizza that may not be flavorful, and delivered restaurant pizza that is no longer providing a good experience for customers.

“We believe the pizza segment is highly attractive due to its size, fragmented nature and growth potential,” said Lefebvre, in a MTY announcement. “The Papa Murphy’s brand is well-loved by its loyal customers and is supported by a strong network of franchise partners. We expect the combination of these two companies and the expertise it brings to produce tremendous opportunities for MTY’s U.S. expansion objectives.”

Papa Murphy’s posted a one-year comparable sales decrease of 2.5 percent in 2018, showing improvement over the 4.0 percent decline in 2017. Management had forecast relatively flat comparable sales from its stores during 2019, suggesting further improvements. Lefebvre would not comment on specific strategic plans for Papa Murphy’s as the merger had not yet been submitted to regulators nor finalized. Nevertheless, he did indicate there were possibly more North American acquisitions in the future for MTY.

What’s next in acquisition plan

Papa Murphy’s had $808.7M in sales in 2018. Logo by Papa Murphy’s.

Furthermore, both companies’ Board of Directors have approved the deal. And the transaction is contingent on the majority of outstanding shares being tendered. Moreover, regulators still need to review and approve the plan.

The companies see the deal to be closing in the second quarter of 2019. The companies will submit the merger plan to regulators by April 21, said Lefebvre.

MTY retained National Bank Financial Inc. as exclusive financial advisor to MTY, while North Point Advisors LLC is acting as exclusive financial advisor to Papa Murphy’s. Papa Murphy’s retained Perkins Coie LLP as its legal advisor, while Fasken Martineau DuMoulin LLP and Morrison & Foerster LLP represented MTY.

Photo credit: Papa Murphy’s (featured, gallery, logo), Groupe MTY (logo)

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