As we entered the Chili’s Grill & Bar, our eyes darted around the restaurant excitedly in search of clues and ways on how we could present our group’s case to invest in Brinker International (“Company” NYSE: EAT), the parent company of Chili’s and Maggiano’s Little Italy. This was our third and final visit to the restaurant chains owned by Brinker International as part of our due diligence exercise to better understand the restaurant operations, and identify the value creation and growth opportunities for the Company. See Exhibit 1 for a Company Overview.
The group comprised of Jade Dai (Flex MBA), Bihan Hai (Flex MBA), Andrew Hinton (MBA/MA), Owais Iqbal (Flex MBA), and myself (Kelvin Fu, Global MBA). We were selected to represent the Johns Hopkins Carey Business School to participate in the prestigious annual Wharton MBA Buyout Case Competition held on Feb 24, 2017 in New York City. This was the first time the Carey Business School had a presence in the competition which brought together teams from leading business schools around the world to evaluate and make recommendations for a proposed private equity (PE) buyout transaction.
The key deliverable for the competition was to prepare a presentation that includes the investment thesis, company and industry analysis, proposed transaction and capital structure, and a leveraged buyout (LBO) financial model. The key emphasis was to present the potential growth opportunities and operational improvements for the business. A leveraged buyout is the acquisition of another company using a significant amount of debt and equity to fund the transaction. The assets of the company are used as the collateral to secure the loan. Hence, a company’s ability to generate strong cash flow is one of the key criteria used by PE firms to evaluate a potential LBO candidate.
Private equity firms provide capital, management and operational experience, and networks to help grow and improve the companies that they invest in. These investments are typically held over 5 to 7 years and PE firms are under tremendous pressure to achieve their envisioned growth targets, margin expansion, and value creation initiatives for companies in order to exit with high cash-on-cash returns.
Brinker International is operating in a competitive U.S. marketspace in an industry with decreasing margins. However, Brinker’s core business has been fairly resilient and has executed well versus its peers. It holds 3.6% of the restaurant chain business with a market capitalization of $2.19 billion, trading at $43.87 (as of Feb 2017). Our groups’ investment thesis was:
By capitalizing on market dynamics and strong cash flow generated through Brinker International’s stores and franchises, we seek to (1) enhance operational efficiencies, (2) exploit hidden value of the platform and through product expansion, (3) drive value-creating growth opportunities. Once we were the owners of Brinker International, our key value drivers include expanding locations, improving inefficiencies, and boosting revenues through product sales.
We identified the key value drivers of the business as seen below:
Our domestic expansion strategy consisted of acquiring domestic U.S. franchises to take back control of the brand, training, food quality and customer service in order to speed up the re-branding and repositioning of Chili’s and Maggiano’s to attract new customers while retaining existing customers. Our views were formulated after we spoke to store managers who shared that company-owned stores were performing much better than the franchised stores. In addition, we felt strongly that there would be a strong market internationally for Chili’s in Asia, Middle East, and South America based on a rising middle class and increased consumer spending. The international expansion would be executed through partnerships with proven restaurant owners in the region. For example, in Thailand, we would partner with Minor International—one of the largest quick service restaurant operations in Asia. In the Middle East, we would partner with MKM Group which has 40 restaurants across Dubai, Kuwait, and Qatar.
To improve operational efficiency, enhance customer service, and reduce labor costs, we would invest in Information Technology (IT) systems to improve the inventory management and rollout supply chain optimization programs across the company. We saw a strong potential growth area in the home delivery market. Chili’s had an existing partnership with Bellisio to sell Chili’s frozen tacos and burritos but contributions from this business segment had been minimal. We learned through our interviews with the store managers and customer surveys that many people had yearned to purchase Chili’s signature BBQ baby back ribs and sauces but they were only sold in the restaurant. Hence, one of our growth strategies was to expand the product line to include frozen BBQ back back ribs and sauces and to expand retail channels into grocery chains.
On top of the Board of Directors that is comprised of experienced retail executives, we identified two seasoned food and beverage (F&B) top executives in Asia that would be able to provide further insights on the expansion into international markets. We also plan to better leverage the existing Board’s relationships to expand domestically. For example, the newly developed in-home Chili’s and Maggiano’s products could be sold at 7-11 chain stores across the U.S. and through QVC shopping channels.
We developed a 100-day action plan that focused on the execution of the business plan post-investment. To ensure accountability, we tagged key executives to major initiatives. For example, the Chief Executive Officer would be responsible to design and implement a management incentive plan and execute the business expansion strategy domestically and internationally. The Chief Financial Officer would be responsible to conduct an in-depth financial review and the establish key performance indicators for the business.
The Wharton MBA Buyout Case Competition was a great learning experience to apply the skillsets picked up through the MBA coursework at Carey. Private equity is not simply about providing capital to companies. A successful investment requires the deliberate planning and execution of the value creation strategies over the investment period.
For more details on our investment deck on Brinker International, please email Kelvin at email@example.com.