Nation’s Restaurant News reports that the days of large corporate buyouts and billion-dollar transactions are gone.

Most merger-and-acquisition activity in 2008 was driven by deal making between franchisors and franchisees, as tight credit markets and weaker industry fundamentals reduced traditional buyout activity, according to new data from investment bank J.H. Chapman Group LLC.

In its 2008 Chain Restaurant Merger & Acquisition report, released this week, the Chicago-based firm reported that the total number of announced transactions last year grew 3.6 percent from 2007, to 116 deals. The largest group of last year’s transactions, or 40 deals, occurred between franchisors and franchisees. In addition, many transactions had tones of distress, the research showed, as 21 announcements came from restaurant companies in financial difficulty, up 31 percent from 2007.

J.H. Chapman tracks only announced deals, so some may not have closed by year-end or may not have closed at all. The company also noted that many of 2008’s transactions occurred in the early part of the year, or prior to October’s market meltdown.

“The franchise market is driving transactions for two reasons,” said David Epstein, a J.H. Chapman principal. “First, franchisors are selling restaurants so there is more supply today, and second, there are still lenders willing to provide financing to tier one franchisees looking to expand within their own concept.”

Last year numerous franchisors initiated, or more aggressively pursued, refranchising strategies to reduce corporate capital expenditures and conserve cash in the tighter economy. Well-capitalized franchisees were able to take advantage of these programs to expand with new unit purchases. Some of the larger deals included NPC International and Pizza Hut, Apple American Group and Applebee’s, and numerous franchisees within the Hardee’s chain.

Unlike in years past, traditional change-of-ownership deals covering the purchase of an entire concept fell in 2008. Just 20 deals involving an operator purchasing another concept were announced last year, down 44 percent from 36 such deals in 2007.

When credit markets were flush and operators had excess cash from robust sales, portfolio diversification was en vogue, exemplified by the growth of McDonald’s, Wendy’s International and Brinker International, which each purchased numerous chains. Today, however, more restaurant companies are divesting brands rather than acquiring them. A total of 81 deals were marked as divestures in 2008, up from 72 such deals in 2007, J.H. Chapman’s data shows.

There were some new chain acquisitions last year, however, including G&R’s purchase of Damon’s; the catering company Taher Inc.’s purchase of the 10-unit Timber Lodge; and Triarc’s purchase of Wendy’s, by the far the largest transaction of 2008. That deal was valued at more than $2 billion.

Equity funds continued their interest in the restaurant sector, recording 38 announced transactions, a 12-percent increase from 2007. Deals included Kohlberg & Co.’s purchase of Centerplate Inc.; Golden Gate Capital’s purchase of an 80-percent stake in Macaroni Grill from Brinker International; Sentinel Capital’s purchase of 123 Pizza Hut units in California; and LNK Partners’ purchase of the 226-unit Au Bon Pain.

“Equity players still have money,” Epstein said. “While valuations have declined, deals are still closing. Equity groups like the restaurant industry, and many think there are more good buys today than in the past.”

Looking ahead, industry merger-and-acquisition activity will be based more on distressed situations, as chains continue to get hammered by declining sales and increasing costs, Epstein noted.

“We anticipate that there will be more transactions involving financially troubled companies and several notable public companies will attempt to go private,” he said. “We also expect that the tight capital situation which exists today will improve somewhat by the end of the year or early 2010 which should allow more traditional merger-and-acquisition activity.”

Nation’s Restaurant News