Fat Brands Inc., the parent of Fatburger Inc., is hoping a "mini" IPO to turn customers into investors, will raise enough capital for it to expand its franchise business worldwide, as it adds two new brands to its belt.
On Wednesday, Sept. 6, the Los Angeles global franchising company that also runs casual-dining chains Fatburger, Buffalo's Cafe and Buffalo's Express, said it has applied, under Securities and Exchange Commission Regulation A, to list 2 million shares priced at $12 each under the ticker symbol "FAT," on the Nasdaq. Fat Brands, seeking to raise $24 million, will use the funds to further expand, through franchisees, its portfolio of brands worldwide. Reg A allows the sale of IPO shares to individual investors, not just institutions.
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Along with its mini IPO, Fat Brands announced that it acquired Homestyle Dining LLC, the parent of Ponderosa Steakhouse and Bonanza Steakhouse, for $10.5 million. Across the Ponderosa and Bonanza brands, Fat Brands will gain 120 locations open and under development.
Fat Brands bought Southwestern-style casual dining chain Buffalo's Cafe, known for its chicken wings, in 2011, and created a fast-casual version in 2012, called Buffalo's Express. Along with calorie-laden burger joint chain Fatburger, touted as the "Last Great Hamburger Stand," Fat Brands already operates 200 locations open and under development in 18 countries, with plans to expand to 32.
The XXXL Fatburger with cheese has about 1,920 calories, and 118 grams of fat, according to website myfitnesspal.com.
We are entering into our first major deal since the acquisition of Buffalo's Cafe and subsequent creation of Buffalo's Express," Andy Wiederhorn, Fat Brands CEO and president, said in a statement.
Here's what he said.
Question: So why expand in casual dining now when the sector is particularly pressured?
Answer: The creation of Fat Brands has entered into the next step of our business plan of becoming a global franchise company with multiple brands. We bought the Fatburger brand almost 15 years ago with 40 restaurants just in California and Nevada and we grew it to now have almost 200 restaurants and another 300 in our development pipeline. We felt it was time to create a multi-brand holding company. The capital markets are a really effective way to raise capital to acquire more brands because we're operating as a global franchise. We're not building company-owned stores. The use of the capital is to acquire brands that already have attractive long-term cash flow and grow them to our franchisee network in 32 countries. We grew organically and internally when we bought the Buffalo's brand and for this next acquisition we want to use active public markets. It enables us to involve all of our fans of the brands, be it Fatburger, Buffalo's, Ponderosa or Bonanza. We want that participation and involvement and this is the one shot we can do it.
Q: What is your view of the casual dining sector in the U.S.?
A: The casual dining sector is going to be full of opportunity for guys like us and it's going to be full of trouble. I think there will be a lot of opportunity to consolidate, to reposition with capex and menu refreshes, but really brands need to go back to their [roots] right now. When you get so far out there with trying to keep up with the latest trends, you end up looking back and say how did we get to where we are and how did we get so far away from what we were made of? Also, the opportunity for casual dining will be home delivery. That will be a big savior. They have to come up with a mechanism to do it efficiently. For example you pick one of 10 different meals. Like any casual dining restaurant, it's not just a burger, it's a steak with potatoes and salad and bread, whatever. If you can choose one out of 10 things on an app or menu and they deliver it complete, that will add marginally a significant amount of sales to the sector.
Q: Are you testing that delivery method?
A: Yes, our Buffalo's Cafe brands, which are full casual restaurants with bars, are delivering full meals and have been very successful. People want to eat casual-dining food, they just want to eat it at home. The opportunity for Ponderosa and Bonanza is to get in line with what we're doing at Buffalo's and Fatburger, with drive-thru, to-go and delivery. People want a good home-cooked meal, just at home.
Q: What do you think of Chili's Bar & Grill's [owned by Brinker Int.'l Inc. (EAT - Get Report) ] announcement today that it will cut 40% of its menu to get back to its 'roots?' Fat Brands' restaurants all seem to have very focused themes. Why is that important?
A: Honestly, I think that's what differentiates brands. I think that's a logical, strategic move for Chili's. Sometimes you have to look in the mirror and say, 'how did we get to where we are right now?' You convince yourself that this is a good idea and that's a good idea and this other thing is a good idea, and then you look back and go, 'jeez, we made a couple right turns here and we're not going straight.' I think you will see a lot of brands [refresh menus] in the coming year.
Q: How do you identify a good brand?
A: The Ponderosa and Bonanza brands were very storied and have such depth in terms of customer awareness. They represent the true American steakhouse. You want to see a brand translate in multiple markets in multiple locations. If you see five or 10 markets where your product has been accepted, that's a good sign that everyone likes it. For me, 99% of the decision is the quality of the food. If the food isn't great there's no way it's going to work. When you think about how competitive the burger space is, we're seeing double digit comp sales in California, almost 12%. We have a great product. The burger space is extremely competitive, so it has to be based on the food. When we went into Dubai in 2008, there were four 'better-burger' brands - Johnny Rockets and two others. Today, there are 41 'better-burger' brands. You have to differentiate yourself on the quality of the food first, and then you can add all the bells and whistles of packaging or delivery.
Q: Shake Shack has been off to a relatively rough start. What is your view of the rival burger joint?
A: I think Shake Shack is a great company with a great brand. I don't think anyone ever thought that their brand equity would translate from New York to other markets around the world with the same flair and enthusiasm because it's just not as well known. They're going through the growing pains that we went through years ago when we expanded across the country and internationally. Fortunately, they're well capitalized. They're running a tough business, though, because they're operating all these company-owned stores. They have some franchises but not many and that's a balance they'll have to strike. It's expensive to get into the franchise business and even more expensive to get into the international franchise business. I really like our business model and where we are positioned today with less than 1% of stores company-owned. We don't need to have more company-owned stores. We need to spend our time supporting our franchisees.
Q: What is the long-term goal for Fat Brands? After you build all these brands out, do you have plans to sell them?
A: You haven't seen us sell anything. We have no intention of selling anything. I will never say never but we're building a portfolio of global brands that we can franchise to our partners around the world and take advantage of the synergies in doing that. We're definitely going to be acquisitive. We're looking for several brands a year to acquire.
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Editors' pick: Originally published Sept. 8.