Food & Beverage Industry Snapshot · 3 Food Industry Snapshot – Spring 2009 Grant Thornton Corporate Finance Food and Beverage Index The GTCF Food Index consists of food and beverage

Grant Thornton Corporate Finance Spring 2009

Food & Beverage Industry Snapshot

Deals still taste good. Grant Thornton Corporate Finance LLC (“GTCF”) is pleased to present its Spring 2009 Food & Beverage Industry Snapshot. This snapshot contains timely commentary on key factors affecting the food and beverage industry and an overview of trends in mergers & acquisitions (“M&A”), including a summary of industry stock market performance. Each issue also includes a Sector Focus section aimed at discussing trends, M&A activity and public market information for a selected industry subgroup. This issue features the restaurant sector. Through 110 worldwide offices, the partners of Grant Thornton International Ltd member and correspondent firms serve several hundred food and beverage industry clients ranging from global conglomerates to middle-market companies in all sectors of the industry. Grant Thornton Corporate Finance teams have advised more than 45 food and beverage industry M&A transactions over the past three years.

Contact information

Brian BasilDirectorT 248.233.6930E [email protected]

Erik EgererManagerT 248.213.4227E [email protected]

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Factors affecting the industryIn early 2009, the food and beverage industry experienced many of the same challenges as the broader economy. As consumers struggle with an uncertain outlook for the future, they cut back on luxury expenses and nonessential purchases in favor of less expensive alternatives. These changes in consumer buying habits have translated into shifts in demand for certain products; a trend that rewards companies displaying flexibility and the foresight to adopt new business paradigms.

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2 Food Industry Snapshot – Spring 2009

For instance, many consumers are choosing to eat at home more often, as opposed to dining out. When consumers do dine out, they are more likely to choose less expensive alternatives, such as fast food. Restaurateurs that have adjusted menus to feature less expensive selections and lower prices have been more successful in the current environment. On the retail side, food processor and grocery chain earnings are also being squeezed as people purchase less expensive brands and shop for bargains. Offsetting this trend to some degree is an increased emphasis on healthy alternatives. Pricier health foods have expanded from a niche market into mainstream diets.

Stores which have flexed their business model to include such products are better positioned for success.

Although the food and beverage industry is faced with a number of challenges, there are a few foods that appear to be performing well during the economic downturn. Sales of bread and sweet spreads, such as jelly, have outperformed expectations as people prepare more meals at home and bring bag lunches to work. Frozen meals, which are convenient and come in family-sized portions, have also fared well. As more consumers brew coffee at home instead of stopping by coffee shops, coffee processors are reaping the benefits.

Food and beverage industry M&A activity

2,500 10.00x9.50x9.00x8.50x8.00x7.50x7.00x6.50x6.00x

2,000

1,500

1,000

500

0

EBITDA Multiple Volume

EBITDA Multiple

Source: CapitalIQ, company filings, press releases

2005 2006 2007 2008

Volume

Food and Beverage Industry M&A Activity

Trends in the MetricsIn 2008, the number of food and beverage industry M&A transactions, as well as average deal multiples, dropped from 2007 levels. First quarter 2009 has experienced a further decline with a little less than 300 M&A transactions compared to 415 in Q4 2008.

Although food and beverage industry multiples have fallen since 2007, strong companies can still obtain attractive pricing. Despite the current restrictions in the credit markets, financial buyers are still completing deals and strategic buyers continue to look for ways to improve their own competitive position. An excellent strategy is to pursue highly attractive acquisitions as the current market is better than it has been in several years for companies looking to grow through acquisitions.

3 Food Industry Snapshot – Spring 2009

Grant Thornton Corporate Finance Food and Beverage IndexThe GTCF Food Index consists of food and beverage industry participants, broadly categorized as food processors, distributors, retailers, and beverage companies. Since March 2008, the S&P 500 has fallen 40 percent as a result of the overall U.S. market turmoil. The GTCF Food and Beverage Index has also declined in the current economy, but to a lesser degree than the S&P 500. Although food retailers mirrored the poor performance of the S&P 500 until December 2008, stock prices rebounded slightly, fueled by quick service restaurant sales. Although food processors include many strong brands and staple food products, they can still be affected during periods of recession. Food distributors have also been negatively affected by the current economy, but to a lesser degree than other participants and beverage companies have had similar results as the other participants in the industry.

As a whole, food processors in the GTCF Food and Beverage Index trade at approximately 8.9x EBITDA, food retailers trade at about 7.3x EBITDA, food distributors trade around 6.9x EBITDA and beverage companies trade at 9.9x EBITDA. While the ratio of current stock price to 52 week high for each category is down by approximately 35 percent, the average EBITDA multiples for food retailers and beverage companies have actually increased since winter 2008.

Sector Focus: RestaurantsSimilar to the overall food and beverage industry, the restaurant industry is facing a number of challenges. Increasing food prices, changing consumer behavior and the struggling U.S. economy are adversely impacting the restaurant industry. Consumers have begun to spend less at restaurants, opting instead to eat meals prepared at home. Beneficial circumstances such as declining gas prices and government stimulus packages have been overshadowed by rising unemployment and weakened housing and stock markets. With already modest gross margins, these factors are of serious concern throughout the industry.

Despite these challenges, the overall restaurant industry has performed surprisingly well by finding new ways to generate revenue while accommodating shifting trends. Trends in 2009 include increased consumer interest in bars and inexpensive meals. Although spending in restaurants has declined, orders for less expensive drinks such as beer have not declined, supporting the notion that alcohol sales tend to outperform other sectors in challenging times. To address this trend, many high-end restaurants have expanded their bars and modified menus.

With the trend towards inexpensive meals, quick service restaurants have enjoyed stronger demand than more traditional dine-in formats. The relatively inexpensive food items appeal to price conscious consumers.

Also, American consumers have become more selective and adventurous; they want new exotic experiences, exciting flavors, healthy options, variety on menus and convenience. Restaurants focusing on these consumer interests have performed well.

These trends have and will continue to have implications with regard to M&A activity. Successful operators have the opportunity to buy restaurants hurt by the economic recession, while less successful formats might find a much more attractive solution by selling the business rather than experiencing outright failure. Feeding the interest in M&A activity are several key factors, including eliminating competitors, increasing purchasing power and obtaining prime real estate locations.

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Public Company Comparable Data

Category% of 52 week high

Enter-prise value

LTMEBITDA%

EV/ EBIT

LTM EV / EBITDA

Nov. 2008 EV / EBITDA

Food processors 65.3% 29,618 14.6% 11.4x 8.9x 8.9x

Food retailers 65.8% 16,265 12.6% 11.8x 7.3x 6.2x

Food distributors 65.0% 5,986 4.3% 9.4x 6.9x 7.6x

Beverage companies 64.5% 25,064 18.9% 12.5x 9.9x 9.5x

As of 3/30/09Source: Capital IQ company filings

Average Metrics

Grant Thornton Corporate Finance food and beverage index

120%

110%

100%

90%

80%

70%

60%

50%

May-08 Jul-08 Oct-08 Dec-08 Feb-09Mar-08

Food processorsFood retailersFood distributorsBeverage companiesS&P 500

Source: CapitalIQ, company filings

Index Trends

Source: Capital IQ company filings

4 Food Industry Snapshot – Spring 2009

Public Company AnalysisThe public company analysis is composed of publicly traded companies within two sub-sectors of the restaurant industry: quick service and casual dining. The recent data shows public quick service companies trade at higher EBITDA multiples than companies in the casual dining segment. A deeper analysis reveals that the casual dining segment has experienced more of the negative effects of the current economic downturn as indicated by the ratio of current stock price to the 52 week high. The quick service segment is trading at a median of 69 percent of its 52 week high predominantly due to a few

Quick Service Casual Dining

Company % of 52 week high

Enterprise value EBITDA EV/

RevenueEV / EBITDA

McDonald’s Corp. 80% $68,201 $7,510 2.90x 9.08x

Yum! Brands Inc. 66% 16,095 1,992 1.43x 8.08x

Starbucks Corp. 61% 8,735 1,142 0.85x 7.65x

Burger King Holdings Inc. 74% 3,948 450 1.55x 8.77x

Wendy’s/Arby’s Group Inc. 85% 3,358 161 1.84x 20.92x

Dominios Pizza Inc. 47% 2,039 220 1.43x 9.29x

Chipotle Mexican Grill, Inc. 54% 1,899 186 1.43x 10.20x

Jack in the Box Inc. 75% 1,767 256 0.70x 6.90x

Panera Bread Co. 84% 1,621 183 1.25x 8.85x

Sonic Corp. 42% 1,321 197 1.67x 6.71x

CKE Restaurants Inc. 57% 789 152 0.53x 5.20x

Papa John’s International Inc. 75% 769 117 0.68x 6.55x

Carrols Restaurant Group, Inc. 41% 387 81 0.47x 4.76x

Steak n Shake Co. 81% 362 26 0.60x 14.20x

O’Charley’s Inc. 23% 220 63 0.24x 3.50x

Median 66% $1,767 $186 1.25x 8.08x

Mean 63% $7,434 $849 1.17x 8.71x

Company % of 52 week high

Enterprise value EBITDA EV/

RevenueEV / EBITDA

Darden Restaurants Inc. 91% $6,700 $878 0.95x 7.63x

DineEquity, Inc. 21% 2,666 377 1.65x 7.06x

Brinker International Inc. 62% 2,287 412 0.56x 5.55x

Cracker Barrel Old Country Store, Inc. 72% 1,397 200 0.59x 6.99x

Bob Evans Farms Inc. 63% 946 182 0.54x 5.20x

Landry’s Restaurants Inc. 25% 897 191 0.78x 4.69x

Texas Roadhouse Inc. 77% 777 103 0.88x 7.53x

Ruby Tuesday, Inc. 31% 709 136 0.56x 5.21x

PF Chang’s China Bistro Inc. 70% 607 123 0.51x 4.95x

Buffalo Wild Wings Inc. 80% 598 61 1.42x 9.78x

Red Robin Gourmet Burgers Inc.

40% 483 99 0.56x 4.89x

Denny’s Corp. 41% 470 93 0.62x 5.04x

California Pizza Kitchen 77% 372 67 0.55x 5.55x

BJ’s Restaurants Inc. 86% 370 33 0.99x 11.05x

Ruth’s Hospitality Group Inc.

14% 184 37 0.46x 5.00x

Median 63% $658 $113 0.57x 5.38x

Mean 54% $912 $151 0.76x 6.32x

As of 3/30/09Source: Capital IQ company filings

companies that have struggled in the previous months. The casual dining segment is trading at a median of 64 percent of its 52 week high with almost half of the companies in this segment trading below half of their 52 week highs. Although this ratio for both the quick service and casual dining segments appears to reflect negatively on the industry, it has actually shown significant improvement from winter 2008 when they were only trading at a median of 55 percent and 45 percent, respectively.

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The factual statements contained herein are taken from sources believed to be reliable, but such statements are made without any representation as to accuracy or completeness or otherwise. Grant Thornton Corporate Finance LLC does not engage in the business of recommending or effecting transactions in securities. The above information is presented solely in connection with describing Grant Thornton Corporate Finance LLC’s mergers and acquisitions services, and should not be considered as constituting a research report or as providing information reasonably sufficient upon which to base an investment decision.

5 Food Industry Snapshot – Spring 2009

Date Target Buyer

03/17/09 Vinny T’s Restaurant Group C&T Restaurant Management LLC01/14/09 Petrus Brands, Inc. Edmonds Capital, LLC01/14/09 Wholly Guacamole! Mexican Grille Poblano’s Mexican Bar and Grill, Inc.01/08/09 The Mayan and Spaghetti Mama’s Restaurant Atlantic Restaurant Consultants, LLC 12/28/08 DLR Restaurants, LLC Triton Pacific Capital Partners 12/12/08 VI Acquisition Corp. Newport Global Advisors, L.P. 12/03/08 Galaxie Diner Ltd. Cavendish Investing, Ltd. 11/11/08 Dine Out-In Restaurants On the Run, Inc. 10/22/08 Bennigan’s Franchising Company, L.P. Atalaya Capital Management LP 10/20/08 Qdoba Restaurant Corporation Tom Lewison, Joe Drury, Bill Branstrom 10/08/08 The Van Dyck Restaurant & Brewery McDonald Family 09/29/08 Barrand, Inc. Whataburger Restaurants LP 09/26/08 Damon’s International, Inc. GR Acquisition Corporation09/18/08 Centerplate Inc. Kohlberg & Company, L.L.C. 08/18/08 Romano’s Macaroni Grill, Inc. Golden Gate Capital 08/08/08 Woodfire Grill LLC Nicolas Quinones 08/05/08 BUCA, Inc. Planet Hollywood International, Inc. 08/01/08 Rockfish Seafood Grill L.P. Capital Point Partners06/29/08 Krispy Kreme Dougnuts Inc. MGL Asset Management, L.L.C.06/19/08 Oregano’s Pizza Bistro, Inc. Restaurant Acquisition Partners Inc06/16/08 Cafe Enterprises, Inc. Milestone Partners; GE Capital05/20/08 AppleGrove Restaurants, LLC AmRest Holdings N.V.05/09/08 Fransisco Foods, Inc. Strategic Restaurants Corp.04/28/08 Max & Ermas Restaurants Inc. Gary Reinert, Sr. 04/23/08 Wendy’s International Inc. Triarc Companies Inc.03/07/08 Hooters Inc, & Hooters Management Corp. Chanticleer Holdings, Inc.

Select Restaurant M&A TransactionsM&A ActivityOver the previous four years, there have been well over 300 M&A transactions in the restaurant sector. The volume of restaurant M&A transactions has returned to 2006 levels with 74 restaurant M&A transactions closing in 2008. The recent restaurant M&A market has been characterized by companies consolidating with strategic acquisitions in an effort to grow and gain market share. Further, successful restaurants are capitalizing on the current economy by purchasing less successful locations at attractive prices.

ConclusionIncreasing operating costs coupled with a weakened U.S. economy have negatively impacted the restaurant industry. Restaurants that have adapted to meet changes in consumer trends have maintained traffic while those unable to adjust have suffered. Heightened competition for market share in the restaurant space has resulted in a rise in strategic M&A activity. The restaurant M&A market continues to remain active as buyers look for companies that will help boost market share, enhance growth, and exploit synergies.

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