Morningstar

Panera Deal Sets Up Intriguing Synergies

JAB's acquisition of the narrow-moat company could lead to international Panera locations, accelerated delivery hub openings offering a greater assortment, a wider packaged good selection in the mass merchant channel, and more.

Following two days of speculation,

In our April 3 note, we see a number of reasons why JAB would be interested in Panera, including industry-leading loyalty program engagement (51% of transactions) and digital sales penetration rates (24% of sales), expanding delivery capabilities, a growing at-home business, and menu innovations playing into consumers' evolving views on health and wellness (each of which helped to drive first-quarter same-store sales of 5.3%).

The takeover represents a 21% premium to DCF-derived fair value of $260, 34 times our fiscal 2018 EPS estimate of $9.27, and almost 15 times our 2018 EBITDA estimate of $515 million. Based on data from PitchBook, comparable buyout transactions in the restaurant category have averaged 11 times EBITDA and 22 times net income the past five years, so we believe shareholders are getting more than a fair deal and don't anticipate a rival bid. We expect to raise our fair value estimate to $315.

The more interesting question is what happens with Panera as part of JAB's portfolio? Panera will reportedly operate independent of JAB management, but we wonder if this signals a strategic shift from the defensive to the offensive for JAB. Since pursuing an aggressive acquisition spree including Peet's (July 2012), Caribou (December 2012), Einstein (September 2014), Keurig (December 2015), Krispy Kreme (May 2016), and Super Group (November 2016), JAB has largely taken a more passive approach whereby it optimizes the store portfolio and cost structures of its acquired companies.

However, with this acquisition, we start to see some intriguing potential synergies, including smaller-format and international Panera locations, accelerated delivery hub openings offering a greater assortment, a wider packaged good selection in the grocery and mass merchant channel, and marketing/loyalty program integration.

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About the Author

R.J. Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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