Yum! Brands (NYSE:YUM) has traditionally operated restaurants seen as an alternative to the more traditional burgers and fries establishments offered by McDonald's (NYSE:MCD) and Restaurants Brands International's (NYSE:QSR) Burger King. The company owns Taco Bell, Pizza Hut, and KFC -- three non-burger chains that greatly expanded the fast-food market.
These days, McDonald's and Burger King face all sorts of burger-focused challengers. A number of companies have launched or expanded higher-end fast-casual burger chains that put pricing and quality pressure on the established burger-based players.
After focusing on being the alternative for so long, Yum! has decided to jump on that burger-based trend and take on the big players more directly by buying the Habit Burger Grill (NASDAQ:HABT) chain for $14 per share, or approximately $375 million.
What is Yum! doing?
It's a bold move that gives Yum! a brand that can stretch its appeal to new consumers. It's entering a very crowded space, but it can leverage what it already knows about its existing customers to deploy new Habit locations.
"As a fast-casual concept with strong unit economics, The Habit Burger Grill is a fantastic addition to the Yum! family and has significant untapped growth potential in the U.S. and internationally," said YUM! CEO David Gibbs in a press release.
Habit, he explained, offers higher-quality burgers than a traditional fast-food chain, but at a value price. That should position it well within the Yum! portfolio.
"The transaction is a win-win because it allows us to offer an exciting new investment to our franchisees and to expand an award-winning, trend-forward brand through the power of Yum!'s unmatched scale and strengths in franchising, purchasing and brand-building," said Gibbs.
Why this is good for investors
Habit Grill faced a very tough road on its own. There are more than a few chains vying to be the fast-casual leader for burgers, and competing as a stand-alone is hard, especially when you offer a limited menu. Now Habit can open stand-alones and leverage existing multiunit Yum! locations. That should allow for relatively quick, well-planned expansion.
Shareholders got a roughly $3 per share premium from where Habit was trading at the previous close. That's a nice return that could easily be rolled into shares of the new, larger Yum!.
For Yum! investors, the benefits are obvious. The company gets a product line that has some positive name recognition that complements its existing offerings. That's a deal that's not always easy to find, and it's hard to not see Habit becoming the fourth pillar of the company's growth strategy.
Habit has been a technology-forward company, and Yum! can ramp that up. This is a case where the big company can learn from the smaller one, as well as the other way around.
"Over the past few years, we've focused on becoming a total access brand by growing our delivery business, expanding our online ordering and mobile channels and enhancing the in-store experience by introducing drive-thrus, kiosks and technology-centric solutions for operations," said Habit CEO Russell Bendel in the press release.
It's very rare that a deal makes this much sense. Yum! could use a differentiated burger brand, and Habit could use a deep-pocketed owner. Both companies get what they need, and that should be good for shareholders.