Dunkin’ Coffee? Cheap. Dunkin’ Deal? Priciest Ever.

(Bloomberg Opinion) -- Dunkin’ Brands Group Inc. just served up one highly caffeinated deal that will give its stock price a jolt come Monday.

The Canton, Massachusetts-based coffee chain is selling itself to Inspire Brands for $106.50 a share, a 26% premium to its 20-day trading average before talks between the two sides were made public. The deal values Dunkin’ at $11.3 billion including debt, which works out to almost nine times Dunkin’s trailing 12-month revenue and more than 23 times Ebitda. That makes it the most expensive acquisition that the restaurant industry has ever seen. It’s worth noting that Dunkin’s sales and profit are both depressed this year because of Covid-19 shutdowns and social distancing. But even using last year’s unaffected figures, the Dunkin’ deal is still in the same league as the 2017 sale of Popeyes Louisiana Kitchen to Burger King’s parent company, which previously held the title of priciest takeover ever. 

It’s an opportune time for Dunkin’ to sell, and not only because its stock price more than doubled over the last five years. While Inspire Brands may not be a familiar name, the firm owns Arby’s, Buffalo Wild Wings, Jimmy John’s and Sonic. Therefore, Inspire has locations and franchisee connections across the Midwest and western U.S., where Dunkin’ is currently making a big expansion push. As of now, Dunkin’ shops are still mostly concentrated in the Northeast and where Northeasterners tend to retire — Florida. But after this deal, watch out, Starbucks. Inspire could bring Dunkin’ closer to making its slogan “America Runs on Dunkin’” come true.

“We’ve got 8,500 restaurants East of the Mississippi, 500 West of the Mississippi. … The key for us is making sure that we penetrate the western part of the United States.” — Current Dunkin’ CEO Dave Hoffman tells investors in November 2017

Inspire is making a bet on Dunkin’ just days before the most consequential U.S. election in memory, and during a year in which most acquirers have chosen to stay on the sidelines — M&A in the U.S. is down almost 40%. But this is a deal that doesn’t care who’s president, because in good times and in pandemic times, Dunkin’ has shown it can thrive. That’s partly thanks to work that began before the coronavirus, such as dropping “Donuts” from the Dunkin’ name to broaden its appeal, menu enhancements that extend beyond breakfast, partnerships with delivery services such as Grubhub Inc. and curbside pickup. Dunkin’ has also been at the forefront of the dairy-free trend, as one of the earliest chains to offer almond milk as an alternative and now oat milk, the latest fad. Speaking of dairy, the company is the parent of Baskin-Robbins, and about 1,300 of Dunkin’s 9,630 U.S. locations at the end of last year were Dunkin’-Baskin combos.

Dunkin’ has also invested heavily in its mobile app. It surpassed 5.4 million 90-day active users of its DD Perks mobile rewards program in the third quarter, and one in five purchases are now made digitally. The grab-and-go mobile ordering function has been particularly helpful during Covid so that customers can be in and out quickly. Its prices also remain generally more affordable than fancier coffee shops. Seasonal offers — such as “Free Coffee Mondays” for Perks members who order a food item — help keep app users loyal. But if there’s one request Perks fans can make of Dunkin’s new owner, it’s this: Please, fix the app’s frequent glitches.

Tinker with the app, yes, but not with the Dunkin’ brand, for its East Coast devotees are very finicky. They went berserk when Dunkin’ did something as seemingly innocuous as switching from foam cups to paper for environmental reasons. After all, this idiosyncratic coffee shop wrote a blog post in September titled “What is a Cappuccino?” and recently introduced tiny cream-cheese-stuffed bagel balls, neither of which you’re likely to see at Starbucks — know your customer!

Dunkin’ had the third-highest operating margin among publicly traded U.S. restaurants last year, in large part because it's 100% franchised. That not only makes costs lower and more predictable for the parent company, but it also made Dunkin' a clean acquisition target. And if Inspire can help Dunkin’ persuade more Americans to love to mild coffee, bagel balls and whatever other food concoction it comes up with, the private equity-backed firm might just have its ticket to going public when markets recover from the virus. The trick is to not lose what makes Dunkin’ the beloved “Dunks,” “DD,” and “Dunkies” to so many. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.

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