In October, The Cheesecake Factory (NASDAQ:CAKE) completed its acquisition of Fox Restaurant Concepts (FRC). The Cheesecake Factory acquired FRC for $308 million at closing, followed by an additional $45 million over the next four years. The transaction was not a surprise; The Cheesecake Factory had shown prior interest in FRC. Over the last three years, The Cheesecake Factory has invested $88 million in two of FRC's restaurant brands, North Italia and Flower Child.
Let's take a look at whether this decision stands to benefit either of the restaurant brands in such a fiercely competitive space.
Who takes the cake?
The two parties see the acquisition as a joint opportunity. The Cheesecake Factory sees the FRC acquisition as an incubator for new restaurant concepts and a test platform for experimental dining experiences.
Cheesecake Factory CEO David Overton said of the deal, "[We] have decided to bring together North Italia and Fox Restaurant Concepts, including Flower Child, with The Cheesecake Factory to reinforce our leadership position in experiential dining." Dining innovations will be first tested at FRC stores before rolling out at Cheesecake Factory restaurants. While the North Italia brand will be integrated with the larger company, the rest of FRC will remain as an independent subsidiary under The Cheesecake Factory.
FRC founder and CEO Sam Fox, who will remain at FRC as the CEO after the acquisition, comes with an impressive industry resume as a leader in dining innovation. He is a 10-time James Beard Award semifinalist as Restaurateur of the Year and one of the 50 most influential people named by the Nation's Restaurant News over the last five years. As FRC's CEO, Fox introduced other branded stores including Culinary Dropout, Blanco, and The Henry.
In turn, The Cheesecake Factory gives FRC the opportunities to leverage the larger company's infrastructure — which include supply chains and third party delivery arrangements — and additional capital to grow. "With our aligned cultures and philosophies, The Cheesecake Factory is the right partner to embrace our creative spirit, enabling us to innovate concepts, while providing the infrastructure and capital to scale," Fox noted. While The Cheesecake Factory and FRC will share resources and dining innovations, each of the store brands will stand out on their own.
What the Cheesecake Factory can do for Fox
The Cheesecake Factory is already making headway to integrate FRC into its fold. It plans to push the North Italia brand nationwide. To further that effort, the North Italia operations will move from the FRC's headquarters in Phoenix, Arizona to The Cheesecake Factory's headquarters to Calabasas, California and has converted North Italia's point-of-sale systems. By bringing North Italia into its ecosystem, The Cheesecake Factory will have more control and can push more resources as it expands the exposure of the Italian restaurant.
While the other FRC brands will remain in Phoenix and be part of an independent subsidiary, The Cheesecake Factory is also looking to leverage its systems and operations to assist FRC. For example, The Cheesecake Factory renegotiated with its third party delivery providers, including DoorDash, expanding services to FRC and North Italia restaurants.
The Cheesecake Factory sees the FRC acquisition as a driver for growth. The company is looking to open 20 new restaurants in 2020, including six North Italia stores and eight others under the FRC subsidiary. The combined company expects to generate $3 billion in pro forma 2020 revenues, projecting over 8% revenue growth. Pro forma financials are used to highlight the value of a transaction such as an acquisition. The North Italia brand is the most promising, as The Cheesecake Factory plans 20% plus in annual same-store growth for that brand.
Is this the topping on the cake?
It remains to be seen if The Cheesecake Factory's acquisition of FRC will work. Right now, both entities are in the honeymoon period. The Cheesecake Factory is looking to grow the North Italia stores and other FRC brands, while also using the FRC stores as a platform for dining innovation. FRC is looking to the Cheesecake Factory for its infrastructure and capital to support FRC stores while remaining otherwise independent to innovate. This combination may benefit both and can result in The Cheesecake Factory's expansion of the national store footprint and growing its future revenue.