DALLAS (Reuters Breakingviews) - The power behind the Burger King throne wants an extra side of nuggets. Fresh from withdrawing Kraft Heinz’s $143 billion bid for Unilever over the weekend, investment firm 3G Capital’s restaurant roll-up pounced on fried-chicken chain Popeyes Louisiana Kitchen. Restaurant Brands International is offering $1.8 billion for the maker of the Bonafide Chicken meal, a 27 percent premium to the undisturbed price. The deal gives the Brazilian founders of 3G a savory snack while they settle on another big deal for Kraft Heinz.
The fast-food business has become more challenging over the last several years as newer entrants like Shake Shack and Five Guys and online ordering outlets threaten the market share of traditional drive-thrus. Chains also compete ruthlessly on price. In 2015, for example, Wendy’s launched a campaign to offer a bacon cheeseburger, nuggets, fries and a drink for just $4.
These secular dynamics make Restaurant Brands’ performance all the more impressive. Not only has the $13 billion group created by the merger of Burger King and Tim Hortons been able to grow revenue, albeit slightly, it has substantially trimmed the corporate fat. EBITDA in 2016 added up to roughly 45 cents for every $1 item on the menu, versus about half that for the rest of the industry, and a better margin versus the previous year. It’s an impressive cost squeeze considering fast-food chains have a limited amount of pricing power.
Popeyes is a logical target for Restaurant Brands, which is why its shareholders added some $1 billion to its market value on the takeover announcement. Though Popeyes’ EBITDA margin is better than the industry‘s, at around 37 percent, it offers Restaurant Brands room for improvement. Sales are also increasing - up 4 percent in the first three quarters of last year - and analysts surveyed by Thomson Reuters expect growth to continue. As Restaurant Brands does its margin work on Popeyes, the extra juice flows straight to the bottom line.
Restaurant Brands could find plenty of other nibbles that have similar deal prospects. Wendy‘s, Bojangles’ and Jack in the Box are all of similarly digestible sizes and have room for expense management. Even the mighty McDonald’s still holds just around 16 percent of the overall U.S. fast-food market share, according to most recent estimates from Euromonitor. That’s a number 3G has ample room to shoot for.
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