SYRACUSE, N.Y.–(BUSINESS WIRE)–Carrols Restaurant Group, Inc. (“Carrols” or the “Company”) (Nasdaq:TAST), the largest Burger King franchisee in the U.S., today announced that it has entered into a definitive Agreement and Plan of Merger to acquire 166 Burger King® and 55 Popeyes® restaurants from Cambridge Franchise Holdings, LLC (“Cambridge”) in 10 Southeastern and Southern states. In addition to its strong restaurant portfolio in these attractive geographies, Cambridge has an established track record of developing both new Burger King and new Popeyes restaurants that the Company believes will benefit Carrols’ stockholders and broaden its capital allocation and growth opportunities.
The transaction will be structured as a tax-free merger. Cambridge, which is controlled by Garnett Station Partners’ Managing Partners Matt Perelman and Alex Sloane and owned by some large and highly respected family office investors, will receive approximately 7.36 million shares of Carrols common stock, and at closing will own approximately 16.6% of Carrols’ outstanding common shares. Cambridge will also receive shares of 9% PIK Series C Convertible Preferred Stock that will be convertible into approximately 7.45 million shares of Carrols common stock at $13.50 per share (a 44% premium to the $9.35 closing share price on February 19, 2019). The conversion of the preferred stock received by Cambridge will be subject to a vote of Carrols’ stockholders which will occur at the Company’s 2019 Annual Meeting of Stockholders, and will automatically convert into common stock upon stockholder approval of such conversion. All shares issued to Cambridge are subject to a two year restriction on sale or transfer subject to certain limited exceptions. As part of the transaction, Cambridge will have the right to designate up to two director nominees and Perelman and Sloane will join the Carrols Board of Directors upon completion of the merger.
Including approximately $100 million of net debt assumed from Cambridge, the transaction value of $238 million based on the Company’s February 19, 2019 closing share price, values Cambridge at approximately 5.0 to 5.5 times pro forma restaurant-level EBITDA (based on September 30, 2018 results, with pro forma adjustments for acquisitions completed in 2018 and the assumed sale-leaseback of approximately $25 million of fee owned property). On a fully-diluted, as-if converted basis after giving effect to both the conversion of the Cambridge and Burger King Corporation (“BKC”) convertible preferred stocks to common stock, Cambridge would hold an approximate 24% equity interest in the Company. There is no cash consideration as part of the transaction.
Carrols expects to refinance the existing Cambridge debt assumed as part of the transaction, along with the Company’s existing debt, through a new senior secured credit facility providing for term loan and revolving credit borrowings under a fully committed financing provided by Wells Fargo Bank, National Association and arranged by Wells Fargo Securities, LLC. The closing of the merger with Cambridge is not, however, conditioned on financing. After giving effect to the transaction and the refinancing, the Company expects that total debt will be under 3.0 times Adjusted EBITDA, and believes that along with an expanded revolving credit facility, it will have sufficient liquidity to fund its investment and growth plans.
Under Carrols’ existing agreement with BKC, it is currently pre-approved for expansion and holds assignment rights to BKC’s Right of First Refusal (“ROFR”) in 20 states until it reaches 1,000 restaurants. In conjunction with the merger, Carrols has entered into a new Area Development and Remodeling Agreement with BKC (which will be effective upon the closing of the transaction with Cambridge) that expands the assignment of BKC’s ROFR for the acquisition of up to 500 additional Burger King restaurants (excluding the Cambridge restaurants) and also expands the Company’s ROFR territory to include most of Arkansas, Louisiana, Mississippi, and Tennessee. The Company has agreed to relinquish its right to BKC’s ROFR in certain states where it is not currently expanding (Connecticut, Delaware, Massachusetts, New Hampshire, New Jersey, New York, and West Virginia). As part of the agreement with BKC, Carrols has also agreed to develop 200 new Burger King restaurants over the next six years and to remodel or upgrade certain of its restaurants (or restaurants to be acquired) to the Burger King of Tomorrow image over the same period.
The acquisition and the new Area Development and Remodeling Agreement with BKC will expand Carrols’ capital allocation alternatives and growth opportunities to include: (i) Burger King acquisitions (expanded ROFR cap permits acquisition of another 500 Burger King restaurants), (ii) Burger King new restaurant development, (iii) Popeyes acquisitions including a ROFR for Popeyes in Tennessee and Kentucky and (iv) Popeyes new restaurant development.
“This is a transformational transaction for our Company,” said Dan Accordino, Chairman and CEO of Carrols. “It further strengthens our position in the Burger King system and provides us the opportunity to continue executing our Burger King acquisition and expansion strategy. Cambridge also brings a strong, growing second brand in Popeyes to Carrols’ portfolio, and they have demonstrated strong returns on new restaurant development in their geographies. We look forward to partnering with them as we work to improve returns for our stockholders through additional, diversified alternatives for future growth and effective capital allocation.”
The Company believes that Cambridge will provide Carrols with a platform and relationships to grow within the Popeyes brand. Cambridge has already built a Popeyes business with 55 Popeyes restaurants in Kentucky, Louisiana, Mississippi and Tennessee and has additional growth opportunities through both acquisitions and new restaurant development. As part of the transaction, the Company will assume Cambridge’s existing Development Agreement with Popeyes, which provides for an acquisition ROFR in Tennessee and Kentucky and the development of approximately 70 new Popeyes restaurants over the next six years.
Accordino added, “We are excited about the opportunity to grow with Popeyes which is a strong brand. As a second, complementary brand to our considerable Burger King holdings, it provides Carrols with another avenue for growth including new restaurant development given Cambridge’s development pipeline, and expansion through the opportunity to acquire additional Popeye’s restaurants in the future. Adding Popeyes to our restaurant portfolio also offers diversification to our commodities exposure and geographic footprint.”
Matt Perelman, a Garnett Station Managing Partner, commented, “Carrols has an incredible track record of operating Burger King restaurants over more than four decades. We are excited to partner with the Carrols management team and look forward to adding value to the combined company as engaged board members focused on effective capital allocation and continued growth.”