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YUM! Brands to Acquire Habit Burger Grill For $375 Million

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YUM! Brands, Inc. YUM entered into a definitive agreement to acquire fast-casual concept operator, The Habit Restaurants, Inc. (HABT). The addition will enable YUM! Brands to extend its reach in a unique fast-casual concept — The Habit Burger Grill.

The transaction, which is expected to be completed by the end of second-quarter 2020, is valued at approximately $375 million. The purchase price of $14 a share suggests a 33% premium over Habit Restaurant’s Jan 3, 2020 closing price. Notably, YUM! Brands stated that it will fund the transaction using cash on hand and available borrowing capacity under its credit facilities.

The addition of Habit Restaurant’s char-grilled burger-and-fries speciality chain — The Habit Burger Grill — will enable YUM! Brands to diversify the portfolio beyond Taco Bell, KFC and Pizza Hut brands.

Benefits From the Buyout

The Habit Burger Grill is known for its burgers, fries and shakes as well as for its ‘California’ style approach to fast food — precisely its grilled-it approach to burgers, chicken and tuna along with other healthier options like salads. The Habit Burger Grill operates nearly 300 company-owned and franchised restaurants across the United States and China.

The Habit Burger Grill has a modern asset strategy to drive traffic. Its investment in contemporary restaurant design has contributed to its balanced day part mix of approximately 50% lunch and 50% dinner. Moreover, it has been enhancing the customers’ experience through delivery partnerships and online ordering, a mobile app, restaurant kiosks, drive-thrus and technology-centric solutions to deliver excellent store operations.

These initiatives have helped The Habit Burger Grill to witness strong unit economics and growth. By fiscal 2018, The Habit Burger Grill grew its company-operated restaurant average unit volumes (AUVs) by 49.9% from approximately $1.2 million in fiscal 2009 to $1.9 million. In the same time period, The Habit Burger Grill grew its total units at a 28.4% compound annual growth rate.

In a nutshell, the deal provides a new opportunity for the company and franchisees across domestic and international markets. The Habit Restaurants currently operates more than 270 restaurants, including locations throughout California, Arizona, Utah, New Jersey, Florida, Idaho, Virginia, Nevada, Washington, Maryland, Pennsylvania, North Carolina and South Carolina as well as seven international locations. The company expects the acquisition to have a minimal impact on non-GAAP earnings this year. It expects the deal to be accretive in 2021 and thereafter.

Meanwhile, shares of YUM! Brands have gained 11.6% in the past year compared with the industry’s rally of 19.4%. Dismal performance at Pizza Hut U.S. division, consistent refranchising initiatives along with higher costs associated employee wages, benefits and insurance as well as other rent and energy costs have been affecting the company’s performances.

Nevertheless, by relying extensively on the four key drivers of growth — distinctive, relevant and easy brands; unmatched franchise operating capability; bold restaurant developments; unrivaled culture and talent; and a three-year strategic transformation plan — YUM! Brands is expected to stabilize earnings, increase profit margins and strengthen cash flow.

Zacks Rank & Key Picks

YUM! Brands currently carries a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the same space are Arcos Dorados Holdings Inc ARCO, Noodles & Company NDLS and Chipotle Mexican Grill, Inc (CMG - Free Report) . Arcos Dorados and Noodles & Company currently sport a Zacks Rank #1, while Chipotle Mexican Grill carries a Zacks Rank #2 (Buy).

Arcos Dorados 2020 earnings are expected to rise 35.5%.

Noodles & Company’s earnings surpassed estimates in three of the trailing four quarters, the average being 4.6%.

Chipotle Mexican Grill has expected earnings per share growth rate of 19.7% for three-five years.

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