Pizza Hut owner Yum Brands just spent $375 million to finally take on McDonald's hamburgers

Brian Sozzi
·Executive Editor
Updated

Yum Brands veteran and new CEO David Gibbs is wasting no time putting his stamp on the business.

Actually, make that a grill mark.

Gibbs — who officially took over from longtime Yum Brands (YUM) CEO Greg Creed on Jan. 1 — signed off on the $375 million acquisition of The Habit Grill on Monday. The purchase price of $14 a share represents a 33% premium over Habit’s Jan. 3 closing price. Yum Brands said it will fund the transaction using cash on hand and available borrowing capacity under its credit facilities.

Habit will join a portfolio of iconic Yum Brands fast-food businesses: Taco Bell, Pizza Hut and Kentucky Fried Chicken.

Shares of Habit (HABT) — which were down 6% over the past year leading up to the deal news — surged 32% in early trading. Yum Brands shares fell slightly.

“We are excited about the growth aspects of the deal. The thing for me is that it’s a fast casual concept with a broad menu. More than 40% of the sales come from outside of burgers. It has a nice business in grilled chicken sandwiches, sushi grade tuna sandwiches and veggie burgers and salads. It’s all really on trend with consumers,” Gibbs told Yahoo Finance in an interview.

Gibbs didn’t rule out making future acquisitions provided the opportunity is right.

In this Friday, April 19, 2019 photo, travelers look at a menu at a Taco Bell restaurant inside Miami International Airport in Miami. Yum Brands, which operates Taco Bell, reports financial results Wednesday, May 1. (AP Photo/Wilfredo Lee)
In this Friday, April 19, 2019 photo, travelers look at a menu at a Taco Bell restaurant inside Miami International Airport in Miami. (AP Photo/Wilfredo Lee)

Yum Brands expects the acquisition to have a minimal impact on non-GAAP earnings this year. It expects Habit to be accretive in 2021 and thereafter.

For Yum Brands, at least on paper the acquisition of the California lifestyle-inspired burger brand appears to be a win for several reasons.

First, Habit gives Yum Brands a long sought after credible entry into the lucrative premium burger segment in the United States via 300 or so locations. Second, Yum Brands’ expertise in aggressively opening restaurants globally using a franchisee model should serve it very well in extracting value from the Habit deal. At the moment, Habit is a U.S.-focused hamburger concept with seven locations in Shanghai.

And lastly, Yum Brands is acquiring a profitable business in Habit that has seen its same-store sales strengthen the past six quarters amid improvements to the menu and operations.

In a note published Monday, Wells Fargo analysts wrote the deal gives Yum Brands “a new growth engine for the company and franchisees across domestic and international markets with relatively low menu overlap today vs. the existing portfolio. At first blush, we would view this deal as a positive for YUM.”

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Watch The First Trade each day here at 9:00 a.m. ET. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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