Dunkin' Brands has proven in recent months that its business model can outshine and outlast its independent coffeehouse rivals during the COVID-19 pandemic. Now, one of Massachusetts’ best-known chains looks likely to be acquired for a steep price by a national conglomerate.
The private equity-backed Inspire Brands has offered management at Canton-based Dunkin' a deal that seems too good to pass up: $106.50 a share, or $8.8 billion, a 20 percent premium above Friday’s closing price, as reported Sunday by The New York Times.
That premium doesn’t even factor in the steady run-up in the stock in recent weeks. The company on Sunday night confirmed it has held talks with Inspire, but did not disclose a potential deal price.
Dunkin' would lose some independence if sold, and some cuts to back-office operations could be inevitable. But people familiar with the company said they doubt the headquarters or the management team, led by chief executive Dave Hoffmann, would be in jeopardy. Atlanta-based Inspire is known for giving autonomy to its restaurant groups.
That should be reassuring to the 1,100 Dunkin' corporate employees worldwide, including roughly 670 in Massachusetts.
At first glance, Dunkin' might seem like an odd choice for a pricey buyout: Revenue fell 20 percent in the second quarter, year over year, because of the pandemic. The dearth of regular morning commuters has clobbered a key market for the company.
But the Dunkin' chain improved its sales, week over week, into the early part of the summer. Sales at corporate sibling Baskin-Robbins even improved over last year in May and June. Dunkin' will report third-quarter earnings on Thursday, a likely deadline for Inspire and Dunkin' to ink this deal.
The chain’s drive-through business has proven crucial, as has its remote-ordering app, which allows consumers to pick up their purchases and go, spending as little time as possible inside the stores. While Dunkin' is keeping many dining areas closed, the sit-down business was not a big part of the company’s revenue pre-pandemic.
In the early months of the pandemic, at least, sales at locations without drive-through windows were down by a factor of two to three, compared to those with drive-through capabilities, Scott Murphy, president of Dunkin' Americas, said in an interview in late May. Murphy noted some positive signs to help counter the lack of morning traffic: Business picked up between 10 a.m. and 2 p.m., and the order size, on average, grew as more people bought coffee and food for their households, as opposed to just for themselves.
“They’ve done a good job navigating, all things considered,” said R.J. Hottovy, an analyst with Morningstar. “They’ve really highlighted their drive-through capabilities.”
Still, this potential $8.8 billion deal represents a big markup, no matter how you slice it. Hottovy compared the value of the deal to the company’s operating earnings in 2019. By that measure, Dunkin' would be priced at a much higher level than other companies in its industry.
Another report, from William Blair & Co., looked at projected earnings at Dunkin' and saw a much higher multiple than what Inspire paid for the Sonic and Buffalo Wild Wings chains. With a valuation like that, analyst Sharon Zackfia said, it’s doubtful any other suitors will emerge to outbid Inspire.
So what does Inspire CEO Paul Brown see in Dunkin'?
Hottovy said Dunkin', with its grab-and-go business model, is well positioned to take market share from the many independent coffeehouses that are likely to be wiped out by the pandemic.
“There’s going to be a lot of market share that’s up for grabs,” Hottovy said. “Most of these places are not set up for drive-through. Most of these places are really designed to be sit-down. That’s not happening in this environment.”
Dunkin' Brands supported about 13,000 Dunkin' coffee shops and 8,000 Baskin-Robbins ice cream shops as of the end of June, although the company is in the process of trimming hundreds of underperforming locations. Hottovy said the Inspire acquisition could put Dunkin' back on a growth trajectory by lining up possible franchise partners among Inspire’s existing Arby’s and Sonic franchisees, particularly in the South and West.
The assistance might go both ways, if Brown and his team at Inspire want to expand brands like Arby’s and Sonic overseas.
Either way, a tie-in with Arby’s or Sonic could conceivably help Dunkin' in its battle with Starbucks for consumers' coffee dollars.
John Gordon, an industry consultant, said Dunkin' Brands’ international presence would give Inspire a toehold abroad. “None of the existing [Inspire] brands have an international component,” he said. “There is some international infrastructure [at Dunkin'], and it could be a starting point for the other brands.”
Brown created Inspire in 2018 as what was then Arby’s Restaurant Group completed the $2.9 billion purchase of Buffalo Wild Wings, with a stated goal of building a restaurant empire with distinct brands representing different kinds of restaurants. His cofounder is Neal Aronson, a top executive at Inspire’s majority owner, Roark Capital Group, an Atlanta private equity firm.
This wouldn’t be the first time Dunkin' would be owned by private equity. A trio of private equity firms — Thomas H. Lee, Bain Capital and Carlyle Group — acquired Dunkin' in 2006 for $2.4 billion. (Dunkin' had been owned by what was then Allied Domecq and then was unloaded by the beverage giant Pernod Ricard, after its takeover of Allied Domecq.) They took Dunkin' public in 2011.
Presumably, this private equity buyout would be different, because Roark would be acquiring control of Dunkin' for a strategic purpose, to strengthen its restaurant portfolio, and not just for financial reasons.
Ed Shanahan, executive director of the Dunkin' Donuts Independent Franchise Owners association, said the chain’s strong track record for speed and accuracy with its drive-throughs probably played into Roark’s desire to do a deal. Those strengths have been put to the test at many shops this summer as more consumers opt to stay in their cars when they pick up their Boston Kremes and Coffee Coolattas.
Shanahan said the sale probably wouldn’t have a significant impact on franchisees. But he wondered what effect the deal might have on New Englanders' loyalty to the brand, which can be traced back to a shop that opened in Quincy more than 70 years ago, particularly if management is moved out of state.
“New Englanders feel that they own the brand,” Shanahan said. “The iconic stature of the brand in New England, I don’t know that it translates to other brands or industries as much. Does Atlanta feel the same ownership of Home Depot?”