Why breakups are in vogue for restaurant chains and Big Food

Economic uncertainty and evolving consumer preferences are leading to major shakeups in Big Food — from the likes of restaurant chain Denny’s (DENN) and mac-and-cheese maker Kraft (KHC).

Companies like these face a “combination” of economic factors. Those range from the low-income consumer under pressure to movements like Make America Healthy Again. Also, about 75% of the US adult population is expected to be on a GLP-1 drug in the next 10 years, PwC Consumer Markets Industry Leader Ali Furman told Yahoo Finance, which doesn’t help. That has caused a pileup of M&A action.

This week, Denny’s announced a $620 million deal to go private with the private equity firm TriArtisan Capital Partners, Treville Capital, and one of its largest franchise operators, Yadav Enterprises. The brand saw same-store sales fall for the third consecutive time in the latest quarter, down 2.9%.

“PE [private equity] see opportunities there to seize … potentially undervalued companies that they can … turn around and then make a big amount of money on top of that,” Ye Cai, a professor at Santa Clara University, told Yahoo Finance.

Consistent cash flow is another reason PE has always had interest in the restaurant space, Furman said. Yum! Brands (YUM) is now exploring a similar option, among others, for its Pizza Hut brand.

“We’ve made the decision to initiate a thorough review of strategic options,” CEO Chris Turner, who officially joined the helm on Oct. 1, said in the release. Pizza Hut posted its eighth straight quarter of sales declines, down 1%. That’s compared to Taco Bell, which saw 7% growth in the latest quarter, and KFC, up 3%, rebounding from declining sales a year ago.

Papa John’s (PZZA) investors got their hopes up that Apollo Global Management would buy the chain at a premium for $64 per share, but the private equity firm, which owns Yahoo Finance, withdrew its offer earlier this week, just ahead of its bleak third quarter results.

On Thursday, the quick-service pizza restaurant chain posted a sales decline of 2.7% in North America, well below the 1.7% growth the Street expected, per Bloomberg data.

Meanwhile, Starbucks (SBUX), which is struggling in the US, said Monday that it sold a majority stake in its China business to Boyu Capital in a deal that values the segment at $4 billion. “We hope this is the beginning of re-franchising other international markets, such as U.K. & Canada, to help management streamline focus on the key priority of turning around the US,” TD Cowen analyst Andrew Charles wrote in a note to clients.

It’s not just restaurants that are making moves. Consumer packaged foods are also changing up.

Earlier this year, Kraft Heinz and Keurig Dr Pepper (KDP) shared plans to accelerate profitability by each splitting into two separately listed companies. “When fundamentals are not in your favor or are going against you, and valuation is at lows … sometimes your only way out is strategic action,” Bank of America analyst Peter Galbo told Yahoo Finance in September after the announcement.

The Kraft Heinz spinoff plan: one company called Global Taste Elevation, which includes Heinz, Philadelphia, and Kraft Mac & Cheese, and a second company called North American (NA) Grocery, with Kraft Singles and Lunchables in its stable. This unwinds the 2013 merger between Kraft and H.J. Heinz.

“We believe that there was unlocked value in the company that wasn’t truly being assessed appropriately outside,” Kraft Heinz CEO Carlos Abrams-Rivera told Yahoo Finance. “At the same time, we recognize that the complexity of the business was actually leading to not driving the type of performance that we wanted to get to.”

Keurig Dr Pepper also announced plans to split into two publicly listed companies and pick up another asset, Dutch coffee chain JDE Pete’s, for $18 billion. Similarly, this unwinds the merger of Keurig Green Mountain and Dr Pepper Snapple Group from July 2018, breaking up into pure-play coffee company Global Coffee Co., which will include JDE Pete’s, Keurig, and Green Mountain, and Beverage Co., with energy drinks like C4 and Ghost, as well as Snapple and Dr Pepper.

Galbo calls it the “way out” for the company. It likely saw a “really strong business in the cold side of beverages” that wasn’t getting “fully recognized from a valuation standpoint,” leading to the “need [for] a path to making that a standalone.”

Both companies are following a playbook set by Kellogg’s two years ago that split up its snack business, Kellanova, and cereal brand WK Kellogg. Both got scooped up for large premiums by Ferrero and Mars.

Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on X at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.

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