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Habit Sold to Taco Bell

Habit Restaurants Inc.’s (Nasdaq: HABT) $375 million sale to Yum Brands Inc. (NYSE: YUM) is expected to turbocharge growth at a burger business that’s already seen a more than doubling in restaurant count over the past five years.

News of the Irvine-based restaurant chain’s impending sale to Yum Brands of Louisville, Ky.—the parent to KFC, Pizza Hut and the locally headquartered Taco Bell Corp.—broke last week; it will bring into Yum’s fold its first burger concept and its first in the fast-casual space.

Habit, in turn, assumes a prominent spot in the portfolio of one of the world’s largest restaurant operators, one with a market capitalization of nearly $31 billion.

“This is exciting for the Habit,” CEO and President Russ Bendel said by phone last week. “I believe, long term, this will allow the Habit to certainly take the next step in its evolution and its journey and to become part of the world’s largest restaurant company.

“The resources that they have to bear to assist us and accelerate our growth in areas around branding and supply chain, tapping into their over 2,000 franchisees globally, is pretty exciting for us.”

Stock Boost

The deal, which is expected to close in the second quarter, was a nearly 33% premium to the company’s share price prior to the sales announcement.

The cash deal equates to $14 a share. Habit’s stock was trading at $13.93 for a market cap of $369 million late last week.

The Yum-Habit tie up is a big start to 2020 for the restaurant industry, following a bevy of M&A deals in more recent years that include not just restaurant concepts being folded into operators’ portfolios, but also service providers.

In 2018, Sonic Corp. was sold off to Inspire Brands Inc. for $2.3 billion. Cheesecake Factory Inc. paid $308 million for Fox Restaurant Concepts in a deal announced in July, while that same month Jollibee Foods Corp. dished out $350 million for Coffee Bean & Tea Leaf. A month later, delivery service DoorDash bought delivery platform Caviar for $410 million. McDonald’s in September snatched up artificial intelligence firm Apprente.

20 to 282

The Yum deal marks another major milestone for the Habit team and specifically Bendel, a restaurant vet who joined the company in 2008 following a private equity-led acquisition. The business at the time counted less than 20 restaurants. Today, the footprint totals 282 with a 2018 average unit volume of $1.9 million.

Bendel took the company public in 2014 with an initial public offering that priced the company at $18 a share; its shares briefly topped $40 during a frenzied period for restaurant stocks before dropping to below $10 in 2017.

An uptick in stock in 2018, combined with growth in sales and other corporate moves, earned Bendel the Business Journal’s nod for Orange County’s Businessperson of the Year in the restaurant category a year ago.

Expansion Plans

“It’s a smart decision for Yum Brands to purchase Habit Burger,” OC Restaurant Association Inc. President Pamela Waitt told the Business Journal. “The acquisition expands their portfolio into the burger space as Yum already has some of America’s favorite foods like tacos, pizza and chicken on their plate.”

For Habit, the opportunity is in the potential for scale, the specifics of which have yet to be discussed.

Habit is to remain in its Irvine headquarters, roughly 10 minutes away from its future sister company Taco Bell, Bendel noted, pointing to the decentralized way Yum’s portfolio companies are run.

Taco Bell was the No. 1 OC-based restaurant chain by systemwide sales a year ago with $10.8 billion, while Habit was No. 8 with $402 million.

Bendel will report directly to Yum CEO David Gibbs, who became head of the company at the start of the year, and succeeded Greg Creed, a former Taco Bell chief. Habit Chief Financial Officer Ira Fils is also remaining in his current position, the companies said at the time the deal was struck.

“We haven’t had a lot of those conversations [on strategy] yet because of the regulatory process,” Bendel said, reiterating the current focus is to simply get the deal done.

Thus, questions on how large the Habit footprint could grow up to be, and whether franchised growth would lead over company-owned, and what the plans are internationally, remain undefined.

Bendel said, “I certainly believe that franchising will play probably a major role in our growth going forward for sure.”

Gibbs said the acquisition “allows us to offer an exciting new investment to our franchisees and to expand an award-winning, trend-forward brand through the power of Yum’s unmatched scale and strengths in franchising, purchasing and brand building.”

Foreign Growth

“If you look at Yum, again, when I say it’s the world’s largest restaurant company and they have a significant presence in I believe approximately 150 different countries around the world, I think it will present opportunities to us,” Bendel said.

Habit currently has seven locations in Shanghai via a franchisee and last year inked a deal with a franchisee in Cambodia with some of those locations expected to come online in the early part of this year, according to Bendel.

Whether or not the brand and the business could support scale to the size of some of Yum’s other portfolio companies, remains to be seen. Taco Bell totals 7,000 locations, for example.

“We always felt that this brand had a lot of runway in front of it and that is something that David [Gibbs] and Yum sees as well,” Bendel said. “They see it in the early stages of a growth cycle with a lot of potential in front of it.”

Convenience Factor

One thing that is certain is that the company will continue to focus on innovation, whether that’s at the menu level or store experience level. It’s a strategy that began roughly two years ago; Bendel called it a “pivoting and leaning into being more convenient.”

The objective? Becoming what the company has called multiple times now an “all-access brand.”

Digital, as is the case with others, will help lead the business. Although Bendel did not get into specifics of how large the digital business could grow to be, he said tapping into the Yum network would no doubt benefit Habit.

“Convenience certainly is an element of quality today in the consumer’s mind and we have put a number of resources against being more convenient,” he said. “That started on our new-store development. We now have 50 drive-thru locations. We’ve made significant investment in technology focused around convenience, whether it be a proprietary app, a more robust online ordering platform, third-party delivery, self-order kiosks.”

Otherwise, other consumer movement impacting the business and rest of the industry are far less high tech: demand for better ingredients, fresh food and big flavors.

“To sum it up, we’re excited about this opportunity,” Bendel said. “For the Habit’s evolution and for this brand to be able to reach its full potential, this is a great partner for us.

“They will bring resources to the table that, quite honestly, we had not been able to tap into previously. So these are exciting times.”

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