Late last week the private equity investment firm of Thomas H. Lee announced it acquired Papa Murphy’s, a chain of franchise-operated pizza stores.
The deal value is approximately $180 million, according to Deal Journal. It represents a 10x Ebitda multiple, if you go with the $18 million Ebitda figure peHUB reported in January. To demonstrate the frothiness of that multiple, compare it to any number of restaurant buyouts over recent months. THL Partners paid 5.8x Ebitda for CKE restaurants, and Friedman Fleischer & Lowe purchased Church’s Chicken for between 6x and 7.8x.
The deal multiple, and the heated auction leading up to it, company resembled a frothier era gone by. But the deal’s capital structure will likely face the realities of a financing market just beginning to recover. Lee Equity has not yet lined up a financing package; it plans to use a moderate amount of leverage on the company.
The paradox between high multiple and low leverage is a testament to Papa Murphy’s growth proposition. Since 95% of the company’s stores are franchise-operated, it requires zero capital to expand by opening new stores, which has helped the company rapidly expand to 1200 stores. The free cash flow is higher because of the franchisee model as well. And even though the company has a presence in 35 states and is the fifth largest pizza chain in the country, Lee Equity emphasized there many un-penetrated regions. It is the only leading pizza chain to offer cold “take and bake” pizzas.
Charlesbank bought Papa Murphy’s in 2004, using capital from Charlesbank Equity Fund V LP, a $590 million pool. The deal value was not available but it involved $100 million in senior bank debt. The company had roughly $350 million in sales in 2004.
Previously: Papa Murphy’s Auction Heating Up M&A Market
(Update: This post was corrected to include the correct Ebitda multiple as I am horrible at math.)