It has been a while since I’ve written anything on Seeking Alpha. The acquisition of Kahala Brands by MTY Food Group (MTY) got me out of my writing break. This is an interesting acquisition since it doubles the size of MTY and it also establish a base in the U.S., a market that MTY wanted to penetrate for a long time.
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Reposted from Seeking Alpha
By Brian Langis
- MTY effectively double in size with the latest acquisition of Kalaha Brands.
- MTY finally has a solid platform to grow in the U.S.
- The acquisition is not without risk. Kalaha has been shrinking and contains a lot dull brands.
- The article also focus on the latest AGM and the USA strategy.
MTY Food Group Inc. is primarily traded on the Toronto Stock Exchange under the sticker MTY.
Note: Dollar amounts are in Canadian $ unless mentioned otherwise. USD-CAD 1.32 Price of 1 USD in CAD as of July 26, 2016.
This is a follow up on MTY Food Group Inc., a company that I have provided research on in the past. Feel free to read the in-depth research to have a better understanding of this update and MTY.
MTY Food Group Inc. – A Restaurant Stock For The Wallet, published in December 2013. MTY Food Group Inc. – Another Restaurant Stock For Your Portfolio, published in September 2015.
MTY Food Group is a Canadian company that operates a collection of brands. MTY is a franchisor and operator of 2,688 restaurants (pre-Kahala Brands acquisition), operating mainly in Canada and in 14 other countries around the world. Among MTY’s 40 banners are Thai Express, Jugo Juice, and Mucho Burrito. This is a big year for MTY. In 2015 MTY pass the $1 billion system wide sales threshold for the first time. But the even bigger news is the acquisition of Kahala Brands Ltd. ( OTCPK:KAHL). The deal is transformative and will effectively double the size of MTY.
On May 24 2016, MTY announced a deal valued at more than US$300million to acquire Arizona-based Kahala Brands and its approximately 2,800 locations in 25 countries. The purchase of Kahala Brands is by far its largest purchase to date. The Kahala’s portfolio of brands includes 18 names such as TacoTime, Cold Stone Creamery, Pinkberry and Blimpie among others. I will get into the details of this game changing acquisition for MTY below. Before I get into the acquisition, I also wanted to go over a few other things such as the AGM, the U.S. strategy and the case for investing in MTY.
What’s makes MTY an interesting investment?
MTY has a great business model. When you buy MTY, you’re not investing in the restaurants directly. Rather, you’re buying into a royalty stream based on a percentage of the restaurants’ sales and much more. For each plate that is sold MTY earns royalties. MTY simply collects royalties and has very low capital expenditures and financial risk. The math is simple; more franchises => more sales =>more royalties. Because of this successful recipe, MTY receives recurring revenues. Over time MTY builds a war chest and puts that money to work through acquisitions.
MTY is a serial acquirer and a compounder of shareholder value. When we talk about compounders, we are typically talking about companies that can earn a ROE that is consistently higher than its cost of equity. Companies that achieve returns on equity greater than their cost of equity are adding value for the investor, and this is reflected in steadily rising share prices. MTY’s franchise business had very high returns on invested capital with the ability to reinvest incremental capital at similar high rates. MTY had 15 years of 20%+ ROE! If you like this kind of company I would recommend that you read this interesting article, MTY Food Group – A Case Study of a 100-Bagger by Chip Maloney at MicroCapClub. According to the author, $1 invested in MTY stock in 2003 would go on to be worth $100 by 2013, so much more today at the current trading price of ~$44. The chart below shows MTY’s share price over the last ten years.