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Sometimes even the most savvy of investors do not make it their business to study the exact origins of the companies they are interested in. That's OK, since what matters most is what is happening now and what may happen in the future. But understanding the full story behind a company and its beginnings can sometimes give valuable information as to its future direction.
Chanticleer Holdings (HOTR), an international Hooters franchisee, has recently made a slew of acquisitions since December that have come in such quick succession that some investors have been blindsided. Most of these have been equity financed, building off of HOTR's 180% rise since April, allowing Chanticleer to expand without much out-of-pocket expense. What is all this roll-up strategy all of the sudden? Isn't it dangerous for a company yet to achieve a profit? Going into the fortuitous history of this company may help shed light on some possible answers. It may help, as well, to compare it to the historical beginnings of one of its peers, Outback Steakhouse, now Bloomin' Brands (BLMN) to see where developments may turn.
Outback, Florida, 1987
Outback was started by three partners in Florida in 1987, bucking the trend of light and fast food, realizing good money was being made in steak and beef chains. The partners started a steakhouse that served the middle of the market. Heavier food at a medium range, but they needed a theme. Even though none were Australian, or had even visited there, all had appreciated the hit movie Crocodile Dundee, and decided to utilize an Australian theme, while ensuring all food remained authentically American.
While the partners' sights were set small at hopefully opening 5-6 sites, they were cornered into franchising with professional companies who eventually took them to 49 sites in 1990. Outback went public in 1991 with a $23.5M IPO on the NASDAQ. With that funding, Outback continued to expand, even into a parallel franchise, Carrabba's Italian Grill. Its international expansion began in 1996, and now it has franchises in 19 countries.
The Outback success story doesn't end with its successful IPO. In 1999, revenue was $1.65 billion worldwide. With those kind of numbers, financing for major business moves becomes possible. In 2006, Outback and her two sister chains Carrabba's and Bonefish Grill, were bought and made private by a capital consortium for a whopping $3.2 billion. The Outback Steakhouse franchise and brand has been bought and sold privately in the ensuing years until her current resting place as a laurel in the franchise portfolio of the publicly traded Bloomin' Brands. Outback is no longer something to be directly invested in, but rather as a part of a diversified franchise portfolio that started as a restaurant roll-up. Outback's time was in the 90s and 2000s when its U.S. and international growth was in its heyday, and its specialty theme, coupled with its famous steak and bloomin' onion, rewarded its investors quite handsomely.
Hooters, Florida, 1983
Also during the same 80s era, also in Florida but 4 years before Outback in 1983, six men started a Hooters restaurant. It took regular food, but gave it a different theme than Outback's - one of sex appeal and flirtatious tight-shirted wait staff. Two years later, the franchise rights to the then single Hooters restaurant eventually were bought by a man named Robert Brooks who saw its potential and began expanding as Hooters of America (HOA).
He expanded across the US and worldwide, into 425 different locations until his death in 2006. Brooks' HOA was always privately held, even during its international expansion, and even today is still controlled mostly privately (a little more on that convoluted tale later). You can't invest directly in the future of HOA but you can invest in a publicly traded franchisee of Hooters, which is Chanticleer, currently a minority holder in HOA, and a growing, internationally expanding franchisee of Hooters chains.
How a $5M Awkwardly-Timed Loan Started it All for Chanticleer
Chanticleer was a small financial services and advising company with various technology and financial interests worldwide. It was traded over the counter under the symbol CCLR, and was quite unremarkable in the first decade of this millennium. In 2005, with what was to be a pioneering business move in the airline industry, Chanticleer loaned Robert Brooks $5 million to start Hooters Air. Hooters Air, while a fun and laudable business concept, went bankrupt one year later in 2006, a major reason probably being that Brooks unfortunately died. Our protagonist, Chanticleer, got its $5 million repaid via Brooks' assets, and more interestingly, the original loan documents gave Chanticleer rights of first refusal for all of Hooters of America should it ever be sold.
After Brooks' death in 2006, his estate was fought over by his heirs. Some soap opera details can be found here for those interested. After a protracted family feud, and further trademark wars with Hooters Casino in which the true victors were the lawyers, the court ordered HOA sold in 2010. The knight in shining armor riding up to save the day for the heirs was Wellspring Capital, a private equity firm that offered a rumored $200M to pick up the chain. In came the peewee firm Chanticleer to this drama of giants, and with quite a bit of gumption, blocked the sale with its quite valid right of first refusal, which stemmed from a comparatively puny $5M loan a few years before.
It's pretty certain that Wellspring Capital knew of the ROFR, but probably wrote off the upstart capital firm, who at the time, only had a market capitalization of $7 million. Chanticleer had to match the offer on the table of $200 million in order to exercise its right.
In what is still murky on the details as to how Chanticleer actually pulled it off, in 2011, a financing operation was organized by Northpoint Advisors, and was actually invested in by two private equity firms, H.I.G. Capital and KarpReilly. HOA was bought out from underneath the assuredly astounded Wellspring Capital for at least the rumored $200 million purchase price offered previously. HIG and KarpReilly were now the proud and private owners of Hooters of America, profiting from a currently owned 160 stores, and reaping the franchise fees on future stores to be opened.
For the use of its right of first refusal, Chanticleer walked away with under 1% of HOA, a seat on the board of directors of HOA (occupied now by Michael D. Pruitt, Chanticleer's CEO), and international expansion rights in a handful of countries. With these strong cards up its sleeve, Chanticleer partnered with local restaurateurs and franchisees worldwide (South Africa, Brazil, and Hungary, to name a few countries) to provide local market knowledge, as well as restaurant operational knowledge to actually run something with already razor-thin margins.
To get things rolling, in July of 2012, Chanticleer offered an $11 million IPO on the NASDAQ, and is now operating under the ticker HOTR. To this date, Chanticleer owns and operates 16 Hooters worldwide including 2 in the US (acquisition equity financed) as of January 1, 2014, and is expanding with other chains (details below). It had revenues over the past year of almost $7 million, but in the 6 quarters since it was listed on the NASDAQ, has yet to earn a profit. However, various metrics are starting to look promising for Chanticleer, such as lowering its debt levels over the previous 18 months, increasing sales per employee (61%), and improving its price to sales ratio.
Chanticleer's market cap is still small at $26 million, but growth wise is about 4x what it was back when it was a puny loan shark of $7M trading under CCLR. Chanticleer is now using its stock very efficiently by mostly equity financing an aggressive expansion into parallel franchise operations, which can benefit greatly by expanding internationally.
Chanticleer, to its credit, sees its expansion internationally with Hooters and understands what its core competency is: Making deals with local franchise operators worldwide, and expanding a brand. Rather than focus on just Hooters, Chanticleer recently acquired American Roadside Burgers (equity financed), which has an Americana brand that could benefit greatly by a competent international expansion drive. Rather than wait and see how the ARB expansion goes, Chanticleer has been on something of a mad spree recently, acquiring many more brands and stores such as Spoon Bar and Kitchen (equity financed) Just Fresh Restaurants ($560K), Tacoma Wings, Oregon Owl's Nest, and Jantzen Beach Wings, (the US Hooters locations referenced above, equity financed) not to mention a large Hooters acquisition in England ($3M), another restaurant in Pretoria, South Africa, involvement in beer brewing, and rights to purchase worldwide in other endeavors.
With American Roadside Burgers, it was clear what the strategy for Chanticleer would be - use its core competency to enable international expansion of a well-known American brand. With the latest acquisition spree resulting in a larger more diversified restaurant portfolio, it is unclear if Chanticleer's strategy will remain international expansion, and even if so, is it reaching too far and too fast? Possibly, and we will all find out in the coming year or two, but I believe that Chanticleer can succeed mightily by using equity and cash from current operations of the chains already acquired to finance local and worldwide expansion. But as with all things culinary, there will have to be a few brands culled from the herd before Chanticleer can point to success metrics.
Another possibility is that Chanticleer is making these bold moves in an attempt to lure a suitor with more capital, just like Outback succeeded in doing, though admittedly long after it became profitable. With so many brands now under its wing in such a short period of time, Chanticleer is definitely attracting attention.
In terms of international franchise expansion, both Bloomin' Brands and Chanticleer Holdings have bought the respective rights to Outback and Hooters in Brazil, and are expanding chains there. And as others have noted previously, Brazil could be quite a boom for both franchisees come World Cup fever, so watch for some potentially positive numbers from Chanticleer in 2014 from its Hooters line of restaurants as well as the large Nottingham restaurant in the UK.
All told, we have two American iconic restaurants with unique themes - one Australian and fun, the other unabashedly raunchy and fun. The first to success, Outback, went public on the NASDAQ, expanded internationally, increased sales, then was bought for a few billion. The other one could be engaged in some kind of roll-up strategy looking for a suitor, or may even succeed on its own, and could be next in line. So far it has gone public on the NASDAQ, is currently expanding internationally at breakneck speed, and is increasing sales at the same time. HOTR will continue to be a speculative play until such time as it pulls its first profit. Considering all the operations it has taken under its wing recently, the next few earnings statements will be terribly interesting to see.