Inspire Brands Buys Sonic at a Tasty Premium

In this segment from MarketFoolery, host Chris Hill and Motley Fool Asset Management's Bill Barker discuss the news that privately held Inspire Brands -- formerly Arby's Restaurant Group -- is picking up Sonic (SONC) for $2.3 billion.

The growth of umbrella groups operating multiple restaurant chains -- Inspire also holds Buffalo Wild Wings and the much smaller Rusty Taco -- has some merits, especially given the challenges facing the industry. Meanwhile, it's been a good year for Sonic stock already, and the guys are of the view that this is one last win for them.

A full transcript follows the video.

This video was recorded on Sept. 25, 2018.

Chris Hill: Let's move to the second acquisition of the day. That is Inspire Brands, which is the parent company of Arby's, Buffalo Wild Wings and Rusty Taco, buying Sonic for $2.3 billion. That assumes the debt that Sonic had on the balance sheet. That's a premium of about 19%. If you're a Sonic shareholder, drinks are on you tonight.

Bill Barker: It's been a good year for Sonic shareholders. Before we go there, do you know what the Inspire Brands company motto is?

Hill: No.

Barker: "We ignite and nourish flavorful experiences."

Hill: OK. [laughs] That's something.

Barker: They have Rusty Taco, Buffalo Wild Wings, I can see the ignition there, the igniting. You have a little bit of spice there. But it seems wordy, doesn't it? "We sell food" probably was a little too simple. But really, that's what they do.

Hill: Now all of my questions for Inspire Brands have nothing to do with the Sonic acquisition. They have everything to do with how many people it took to come up with that.

Barker: That was a committee. That was not one person coming up with that.

Hill: Oh, no, no, no! That was a bunch of people.

Barker: That may have taken a year.

Hill: And, by the way, somebody was married to each one of those words. Someone was like, "Look, whatever else we come up with, flavorful has to be in there." "Look, I'm OK with that as long as we have some version of ignite or ignition."

Barker: "We're not a restaurant. We're not selling food. We're selling experiences."

Hill: Yes.

Barker: That's going after those millennials who want experiences rather than things.

Hill: You know what, millennials? You want an experience, get yourself into an Arby's. That'll be an experience.

Barker: Yeah. Or a Rusty Taco.

Hill: I mean, to go back to --

Barker: Talk about the actual story?

Hill: To no longer making front of Inspire Brand's motto, this continues the trend. This continues the trend that we've seen over the last couple of years in this industry, which is, it's hard out there to be a publicly traded restaurant. In the case of Sonic, it was, "How much? Sure. For that amount of money, we will hop on board."

Barker: Yeah. There definitely are some economies of scale when you're putting together restaurants that are working with a similar demographic. Your marketing can be streamlined and the food costs can be streamlined by acquiring more operations. Not getting into what the price tag was, it looks to me like it makes sense. Arby's, Buffalo Wild Wings, Tacos, and Sonic all fit comfortably into the same sort of category in my mind. Which of those have you been to?

Hill: I've been to Buffalo Wild Wings. I've not been to a Rusty Taco. I looked at the website, there are only 28 of them, and they're concentrated in the western half of the country. I've never been to Sonic. A very long time ago, probably when I was in college, I went to an Arby's. And you?

Barker: Sonic, Arby's, Buffalo Wild Wings, but not Rusty Taco. Maybe when you're in Denver, you can hit one. Maybe.

Hill: Yes, they have them in Colorado.

Barker: It's a must stop.

Hill: Depending on how close it is to the hotel that I'm staying at.

Barker: I don't know if you've heard, but it's a pretty flavorful experience.

Hill: [laughs] That's what I've heard.

Barker: Getting back to Sonic, a good year for the stock. A relatively tough year for restaurants in general. I think that if they got a price it's worth being acquired at, with the economy being where it is and with the future of these types of restaurants being a little less certain, I think, than they had been, although certainly more secure than your mall-based retailers, I'd prefer to be hopping on board a conglomeration of known brand restaurants than something that is stuck to malls. It's a little different, but it's still been challenging, more than ever. People are eating as much as ever and eating out more and more is still the trend. But the inflation in input costs for food has been pretty dramatic this year. It's really been eating up the margins of a lot of these companies.

Hill: We've talked about this with other umbrella brands in the restaurant space. Most recently, last week, we were talking about Darden Restaurants, and their portfolio of eight different restaurant brands. I like to think that, whether it's Darden Restaurants or Inspire Brands, they are getting as much data as they can on all of their different locations; and, to the extent that it makes sense, they are swapping out concepts. They're looking at, maybe some Arby's locations and saying, "Those aren't really working. Rather than shut them down completely, we're going to flip them, and now they're going to be a Sonic or a Rusty Taco," or that sort of thing. But maybe I'm giving them too much credit.

Barker: No, I think that makes sense, to have that optionality in your business and not be married to a single concept. If you're Sonic and you're a stand-alone company, your choices are, "How many more restaurants can we build?" If you have been in business as long as they have, there's a good chance, if you're a good operator, that you're in the best locations already. You're not getting around to premier locations where you're going to increase your per restaurant transactions. So, I think, as you see with something like Taco Bell, and KFC and Pizza Hut, where there may be all three available in one location, that might be something that someday you're going to see with these companies.