Yum Brands has traditionally operated restaurants seen as an alternative to the more traditional burgers and fries offered by McDonald's and Restaurants Brands International's Burger King. The company owns Taco Bell, Pizza Hut and KFC – three nonburger chains that greatly expanded the fast-food market.
McDonald's and Burger King face all sorts of burger-focused challengers. 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 decided to jump on that burger-based trend and take on the big players more directly by buying the Habit Burger Grill chain for $14 per share, or approximately $375 million.
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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 knows about its 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," Yum CEO David Gibbs said in a news release.
Habit, he said, 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," Gibbs said.
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 a business offers a limited menu. Habit can open stand-alones and leverage 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 offerings. Habit could become the fourth pillar of the company's growth strategy.
Habit has been a technology-forward company, and Yum can ramp that up. 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," Habit CEO Russell Bendel said in the news 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.
Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
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