Potential mergers and acquisition opportunity of Domino’s and Restaurant Brands International

Potential mergers and acquisition opportunity of Domino’s and Restaurant Brands International

Introduction

Domino’s Pizza Inc. and Restaurant Brands International (RBI) are segments of fast-food restaurants known as Quick service restaurants (QSR). The QSR are establishments that serve food quickly and do not necessarily offer table services. The QSR market started in the 1920s and has rapidly grown and evolved, with the industry considered as highly lucrative. In the United States, the fast-food market is dominated by the hamburger fast food segment, which accounts for over 30 % of total sales.

Nonetheless, Fast food market share is sliding, with other segments such as Chicken restaurants, Pizza parlours, Mexican restaurants and Sandwich shops recording gain in market share. According to Forbes, there were over 230,000 fast food establishments as of 2019. United States is considered the founder of QSR with the financial experts estimating that the industry was worth $256 billion in 2018. Over the past decade, the U.S. Quick Service restaurant landscape has been engulfed by new concepts that demand restaurants brands to evolve and grow amidst increased competition. The U.S. fast-food market has become saturated with both domestic and international brands competing for the already stretched market. Despite the saturation, household brands such as Restaurant Brand International, McDonald’s, Subway, Starbucks, Taco Bell and KFC, show no sign of slowing down. These brands have recorded increased sales, and revenue, not to mention expanding their reach to other locations.

Restaurants Brands International is one of the world’s largest QSR recording revenue of $5.3 billion for FY 2018. RBI Limited Partnership is organized under Ontario laws which indicates that the partnership interests are either directly or indirectly held by RBI Inc. The brand was founded in 2014 in Ontario, Canada and had a market capital of $17.1 billion as of 2019. From a full-year outlook, gross revenue increased by almost 7% to reach $5.7 billion in the year 2019. The value of shares is accepted to rise due to expected growth from the three segments of the company. The revenue was consolidated from three revenue streams including Burger King, Tim Hortons and Popeyes Louisiana Kitchen. RBI brands total revenue has continuously increased due to the addition of new restaurants. Between 2017 and 2018, the three revenue streams have added more than 1000 new restaurants. In particular, Burger King added over 1000 new restaurants with Tim Hortons adding more than 100 restaurants while Popeyes Louisiana Kitchen added more than 210 restaurants, over the same period. In 2019, the brand reported system-wide sales growth of 6.4% and added 65 new restaurants. From the current trends, the total expenses have decreased due to a tax benefit and relieves provided by the government. Company’s restaurant cost of sales has remained steady and in the range of 76-78% of the company restaurant revenues. In property and franchise, the brand has recorded a steady decrease alongside increasing revenue being generated from the segment. In the wake of these trends, the franchise expenses margin had been pushed down from nearly 21 % in 2017 to about 14% in 2018. On the contrary, the selling, administrative and general expenses have increased almost three times over the same period.

Domino’s pizza was founded in 1960 and is currently a recognized leader in pizza delivery and the second pizza restaurant chain globally. The company operates a network of franchise-owned and company-owned stores across the United States as well as international markets. Trends recorded over the past 6 months indicates that the office culture has been moving upwards, recording a 1 % increase. However, environment and diversity scores have been trending downwards over the same period. Domino’s pizza is a global brand that generates earnings and revenue by selling equipment, food and other suppliers to a more extensive network of company-owned and franchise-owned stores. Domino’s business model considered straightforward with the company serving quality food at a highly competitive price. Additionally, the company has a natural ordering access not to mention technology innovations that aid in service efficiency.

Consumers in the fast-food industry tend to focus on taste, price and quality, QSR emphasis on consistency of experience, speed and affordability. Food products are often highly processed and prepared in an assembly line. Customers are usually required to order and pay at the counter, after which they either sit and eat on the premises or take food out. With the industry facing challenges, which includes perceptions of unhealthy menus from customers, low wages and poor working conditions from employees, cultural degradation and emergence of fast-casual restaurants, there is need for companies in the fast-food industry to strategize adequately and evolve to continue growing. Some of the strategies that companies could adopt are mergers and acquisition (M&A), tender offers, consolidations, and purchase of assets.

Mergers and acquisitions are essential financial transactions that allow businesses growth while protecting shareholders. On the one hand, the term acquisition describes a deal when one company purchases another entity and assumes ownership. Target Company ceases to exist, and buyer absorbs the business, resulting in the target company’s stock ceasing to trade. On the other hand, the term merger describes a financial transaction where two companies of approximately the same size join forces as a single entity, as opposed to being separately operated and owned. A purchasing deal is classified either as a merger or an acquisition, depending on the nature of the transaction.

Based on recent trends in financial performance, size, local and international reach and brand recognition, there is a potential merger and acquisition opportunity for Domino’s pizza and restaurant brand international. Domino’s pizza and restaurant brand international could either merge or Domino’s pizza undergoes acquisition to consolidate operations, increase global market share and expand territorial reach. Domino’s Pizza Inc. has, for the past five years, recorded ever-increasing annual revenue from $2,216.528 million in 2015 to $3,618.774 million in 2019. Net profit margins have also increased from 8.69 to 11.07 between 2015 and 2019. However, the company’s financials report indicates that Return on assets (ROA) and Return on investment (ROI) has been decreasing over the years due to increased competition and operating expenses. Potential merger and acquisition opportunity is an essential internal and external growth strategy for companies. By Restaurant Brand International targeting Dominos’ Pizza Inc., it will grow in terms of customer base, employees, profits and international coverage. As evidenced by financial reports and experts’ analysis, Domino’s Pizza Inc. has recorded poor environment and diversity scores over the recent years.

Merger and acquisition would contribute to diversification since external growth would allow the business to expands operations through the increased capacity and resources. M& A between Restaurant brand international and Domino’s pizza brings together two global competitors resulting in increased market power and reduced competition. Additionally, the strategy would increase efficiency through sharing of resources and reducing surplus capacity for the two companies. Based on the Financial position of Domino’s pizza, the M&A strategy would allow RBI, which has a strong balance sheet to provide financial aids, thereby enabling it to save on interest payments. Equally important, Domino’s pizza could access otherwise unavailable investment funds. Lastly, the strategy allows tax losses and profits to be transferable, which accounts for tax efficiency and company benefiting from different tax regimes.