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Tim Hortons owner buys Popeyes, with an eye on cost cutting

Steve Kovacs, right, and his son Jordan dig into some fried chicken at Popeyes at the Toronto Eaton Centre on Tuesday.

Fred Lum/The Globe and Mail

The parent company of Tim Hortons and Burger King is buying Popeyes Louisiana Kitchen Inc. for $1.8-billion (U.S.) with an eye to stepping up the expansion of the fried-chicken chain amid analysts' predictions of fresh cost-cutting.

Restaurant Brands International Inc. would be following the well-honed recipe it used at both Tim Hortons and Burger King of slashing expenses, chopping staff – especially at the top ranks – and teaming up with local master franchisees in new markets to add stores internationally. Now the RBI executives will turn their attention to Popeyes.

"We look forward to many, many more years of growth in the United States and around the world with this brand and other brands Burger King and Tim Hortons," Daniel Schwartz, chief executive officer of RBI, said on a brief conference call, during which he took no analyst questions.

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RBI, controlled by investment firm 3G Capital, which in turn is controlled by Brazilian billionaires, is adopting a cut-to-the-bone business model at its fast-food businesses, although it may find fewer opportunities for new cost savings at Popeyes.

Popeyes has already been cutting its costs over the past several years while its largely franchised operation shifts many expenses from the company to the restaurant owners, analysts say.

Synergies "would be relatively limited versus the value created at Burger King as Popeyes' network is already largely franchised," Peter Sklar, retail analyst at BMO Nesbitt Burns, said. "Unlike Tim Hortons, which was a larger company with significant overhead reduction opportunities, Popeyes' general and administrative expenses appear to offer fewer areas for cost-cutting."

Still, cost savings could be as much as much as 20 to 30 per cent, estimated Robert Carter, executive director of food services at market researcher NPD Group.

Mr. Carter said RBI will probably downsize Popeyes' staff while consolidating back-office responsibilities such as real estate, legal services, marketing and product purchasing.

Stephen Anderson, a senior restaurant analyst at investment bank Maxim Group LLC in New York, said RBI could shave some costs at Popeyes by accelerating its efforts to connect its franchisees to the same information technology system and by selling some of its 55 company-owned Popeyes locations, which are mostly in Louisiana and Tennessee. Popeyes over all has more than 2,600 restaurants.

"I would expect those to be sold to franchisees as well," he said. "That's where you see the savings. The franchisees will take on more of that investment."

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Oakville, Ont.-based RBI was created after 3G-controlled Burger King bought Tim Hortons in 2014 with a goal, as its generic-sounding Restaurant Brands corporate name signalled, of bolstering its portfolio of fast-food chains. RBI's profit last year more than tripled, to $345.6-million from $103.9-million in 2015 while its stock price has jumped more than 90 per cent since it went public in December, 2014, on the Toronto Stock Exchange.

Over the past six years, Burger King has increased its pace of annual new-restaurant growth to 735 in 2016 from 170 in 2010 when 3G acquired the burger chain.

"Popeyes is growing at a similar pace today as Burger King was in 2010," said Josh Kobza, RBI's chief financial officer. "And our strategy will be much the same: to grow the size of the brand by working closely with existing and new franchise partners all around the world."

Still, Andrew Charles, an analyst at Cowen & Co., said Tim Hortons has not yet opened any restaurants in Britain, the Philippines or Mexico, where it has signed master franchise development agreements in each market (although the latter was just finalized last month).

Franchise lawyer Ned Levitt, partner at cross-border business law firm Dickinson Wright LLP in Toronto, said that, while investors may be pleased with the Popeyes acquisition, other stakeholders – including some consumers and franchisees – may be not so happy.

"Changes resulting from an acquisition of this size might include loss of a more 'neighbourhood' experience and a potential increase in prices," Mr. Levitt said.

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He said that, in some cases of franchise acquisition, franchisees may find their profits diminishing as the parent company concentrates on its return on investment. For example, sometimes purchasers of a franchised system increase the price of inventories and supplies and cut overhead that supports the franchisees.

He said franchisees' morale can sag, along with their focus on the business, which in the longer term can hurt the company's bottom line.

"When culture changes, things can go wrong," Mr. Levitt said.

The Popeyes' deal gives its shareholders $79 a share, a 19-per-cent premium from its closing price on Friday.

Popeyes has gained a following among millennials with its focus on Louisiana flavours and fresh spices, Mr. Carter said. NPD's research has found that consumers find the quality of Popeyes' food offerings better than that of KFC, which is owned by YUM Brands Inc. and is Popeyes' main rival.Cowen's Mr. Charles said he thinks while RBI had considered acquiring YUM, now that it is buying a chicken chain, it could next look at snapping up Dairy Queen.

Video: How Tim Hortons became part of a fast-food empire which is now adding Popeyes to its menu
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About the Authors
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More

Capital Markets Reporter

Christina Pellegrini is a reporter at The Globe and Mail and a regular contributor to Streetwise, covering capital markets, the exchange business and market structure.She writes about the capital markets divisions of BMO, CIBC and National Bank; independent brokerages such as Canaccord Genuity; and the Canadian operations of foreign dealers including JP Morgan, Goldman Sachs, Credit Suisse and Citigroup. More


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