America Runs On Dunkin’, But Dunkin’ Runs On Private Equity

Source: Marker, Rob Walker
Photo: Erik Carter

How an iconic company became a lucrative vessel for dealmakers

In the 1980s, Fidelity mutual fund manager Peter Lynch became a personal finance superstar partly by insisting that investing wasn’t all that complicated. He had no taste for even slightly tricky financial instruments like futures and options, preferring “boring companies that do steady business,” as a 1989 interview with the New York Times put it. For example, there was Lynch’s investment in Dunkin’ Donuts stock, which he bought after he “noticed that many people seemed to like its coffee.” That was it; that was the insight.

Back then, Dunkin’ Donuts really did have a clear, linear story: It was a small business founded in the 1950s that grew steadily through franchises, first in the northeast then nationally and internationally. The company went public in 1968; by the late 1980s, it had more than 1,700 locations, and its “Time to Make the Donuts” ad campaign was a fixture. The growth prospects looked good if, well, a little boring.

But since then, the story has been more complicated. This isn’t because the business itself changed in any radical way — it’s still a collection of franchises selling breakfast foods and coffee. What’s changed is that its relationship with investors has become distinctly unboring.

The company fended off a hostile takeover, got absorbed by a publicly traded conglomerate, then was snapped up by high-flying private-equity players in a leveraged buyout. A few years later, it went public again in a buzzy IPO. And now, it’s in the process of another sale — the recent headline-making $8.8 billion acquisition by private-equity-backed Inspire Brands that will take the company private once more in one of the richest-ever deals in the restaurant category. While Inspire hasn’t announced concrete long-term plans, it’s expected that, ultimately, the resulting enterprise will… go public.

As puzzling as all that back-and-forth may sound, it’s actually not that uncommon. “The cycle from public to private ownership (or vice versa) is what enables investors to capture the value they see,” says John Benson, a director in the restaurants, hospitality, and leisure practice at AlixPartners, a consulting firm. “Capturing value,” in this case, means spotting some kind of opportunity that current ownership has missed — increasing productivity or cutting costs or leveraging new technologies. When the new owner or investors have achieved their goal, they may decide to “capture” that “value” by selling the enterprise to new owners, possibly through the stock market. Aside from those owners and investors, plenty of side players profit, too: investment banks, financial advisers, law firms, accounting firms, and other entities necessary to grease the dealmaking process.

Sometimes this doesn’t work out. In recent years, Payless Shoes, Hertz, Toys R Us, and Neiman Marcus among others have been taken over by private-equity groups that promised to streamline and improve them — only to go bankrupt or liquidate outright. But new owners and investors do inject new ideas and dynamism into complacent firms, and academic research suggests private-equity funds outperform the broader market. Companies moving from public to private ownership multiple times happens “across industries,” Benson adds, “and it has happened in the restaurant industry before as well.” Examples include Burger King and Canadian doughnut chain Tim Hortons; beyond food, AMC Theatres has bounced between private and public configurations, and Avis has cycled through even more.

In the case of Dunkin’ (the chain dropped “Donuts” from its name in 2018), the potential new value always boiled down to growth potential, which each new corporate structure was supposed to enhance. And Dunkin’ has, through all those changes, grown. It has 12,900 locations now and is worth around $8.75 billion. Then again, its oft-cited rival Starbucks began its expansion from a handful of Seattle locations in the mid-1980s and has more than 30,000 now; it went public in 1992, has remained a public company ever since, and is worth $115 billion.

Which is why, as it now inherits yet another new owner, a look at Dunkin’s history not only offers a de facto tour of Wall Street’s ever-evolving bag of tricks and trends, it raises the question of whether this menagerie of corporate structure strategies has really been productive. Every time ownership or investor structure changed, banks and advisers and lawyers collected fees, but it’s not clear how much this twisty trajectory really accomplished for the actual business. What, in the end, is the point of all these machinations — including its latest — other than to line the pockets of the dealmakers?

William Rosenberg, then in his mid-thirties, opened the first Dunkin’ Donuts in Quincy, Massachusetts, about 10 miles south of Boston, in 1950. An eighth-grade dropout and product of the Depression, he clawed his way through the food business with a series of enterprises and experiments. Dunkin’ was the one that stuck. After opening his fifth store, he moved to a franchising model as a strategy for quicker growth. With casual chains just taking off as an idea, it was an exciting time to be in the food business, and as Rosenberg later wrote in his memoir, Time to Make the Donuts, he took a “trip across the country to see what was doing with donut stores.”

Rosenberg concluded that his combination of standardized, clean roadside shops with fresh coffee and doughnuts could be a winner, and by 1963, there were 100 Dunkin’ Donuts locations pulling in revenue of around $10 million. Rosenberg’s son Robert, a graduate of the Cornell Hotel and Restaurant School and the Harvard Graduate School of Business Administration, started to serve as president and CEO in that same year, when he was 25.

Five years later, the company went public, formally changing its name from Universal Food Systems (an umbrella for a cafeteria catering service, small hamburger chain, and other enterprises that were sold off or closed) to Dunkin’ Donuts Incorporated. This was near the height of the so-called go-go stock market of the late 1960s. Fast-food and franchise businesses were both hot; Dunkin’ followed successful IPOs from McDonald’s, Kentucky Fried Chicken, and Howard Johnson. The stock went out at $20 and closed at $26; within a year it soared to $66, valuing the company at $120 million.

The early 1970s stock market crash combined with a series of missteps by Dunkin’ pummeled its share price over the next few years. But the business soldiered on; its Munchkins doughnut holes were a hit, and it added muffins to the menu. The company also increased its advertising spend and fended off rivals like Winchell’s and Tim Hortons. By 1983, there were 1,226 outlets, including 130 operated under licensing agreements abroad; the company posted earnings increases for 40 straight quarters. The stock recovered, and finance superstar Lynch named Dunkin’ Donuts as one of his “ten baggers” — much more than a home run — in One Up on Wall Street.

The company seemed to have settled into the right structure. But that was about to change.

The change had less to do with the doughnut business than shifts in the ways Wall Street worked. In his memoir, the founders’ son-turned-CEO Robert Rosenberg writes that through the 1980s, “patient capital” — meaning founders and individual shareholders with long time horizons — was being replaced. Increasingly, fast-growing mutual funds and other institutional investors wanted immediate results. That shift, he argues, helped fuel a “boom in hostile takeovers” as both conglomerates and so-called corporate raiders looked for growth and profits in firms they judged had untapped potential. In this environment, Dunkin’ — a solid company with strong cash flow and lots of growth potential — was a target.

In early 1989, Unicorp Financial Corporation, a holding company with interests in finance and energy businesses, made an unsolicited run at Dunkin’ Donuts, which took a series of defensive actions to spurn the overture. “Basically, we want to remain an independent company,” Rosenberg told the press.

Legal squabbling followed, and other potential buyers emerged, driving up the share price. In late 1989, the company accepted an all-cash offer of $47.50 a share — or $325 million — from Allied-Lyons PLC, a British liquor enterprise that also owned Baskin-Robbins and Tetley tea company. A new round of investments advisers and lawyers collected their fees to finalize the deal.

The company would transition from a stand-alone enterprise to a unit of a transnational giant. In what would become a sort of mantra every time Dunkin’s ownership structure changed, Allied-Lyons’ CEO praised the new acquisition’s cash flow and potential for expansion.

But Wall Street wasn’t done with Dunkin’ yet: Private equity was waiting in the wings.

During this stretch, the chain began to outgrow its New England roots — “Dunkies” as shorthand for Dunkin’ coffee still makes Boston slang roundups — a transition that can be a challenge. “The ability to build a scalable brand sometimes detaches from the original,” says Spencer M. Ross, an assistant professor of marketing at the University of Massachusetts’ Manning School of Business. He has fond memories of childhood visits to a Connecticut Dunkin’ Donuts as a kid. He also remembers when he started to notice Dunkin’ Donuts-emblazoned 18-wheelers, undercutting the old idea of a mom-and-pop bakery. “The strategy was to build a bigger brand; that means more things to more people,” Ross says.

By 2005, Dunkin’ Donuts had expanded to about 6,000 locations. Rosenberg had retired. And the hostile takeover heyday had waned. But Wall Street wasn’t done with Dunkin’ yet: Private equity was waiting in the wings.

The 1990s and early 2000s saw new, trendier rivals emerge, notably Krispy Kreme doughnuts and, of course, the Starbucks coffee juggernaut. Dunkin’ rolled out new espresso machines in many locations. But its parent company — by then known as Allied Domecq — was increasingly focused on a growing spirits portfolio. And when Allied Domecq was acquired for $14 billion by French liquor giant Pernod Ricard in 2005, Dunkin’ Brands (which included Baskin-Robbins), though profitable, looked out of place.

Triarc, then the owners of the Arby’s chain, was rumored to be preparing a bid along with “three teams of private-equity shops,” including JPMorgan Chase and Kohlberg Kravis Roberts among others, according to a New York Times report from the period. Ultimately, one of the “teams” — Bain Capital Partners, the Carlyle Group, and Thomas H. Lee Partners — acquired Dunkin’ Brands for $2.4 billion in 2005.

Another round of advisers pocketed fees: Banker JPMorgan Chase and law firm Debevoise & Plimpton were hired to advise on the deal, and Lehman Brothers helped devise a complicated $1.7 billion debt securitization strategy to enable the buyout.

Whatever Dunkin’ may have gained from private equity — and its growth certainly continued during this period — some of its public rivals seem to have gotten by just fine without it. Like Starbucks. Or McDonald’s.

Even in the midst of the boomy 2006–2007 economy, private equity was criticized by some as a vehicle for stripping companies of value, slashing workforces, and pocketing profits. Bulent Gultekin, a finance professor at Wharton who has studied private equity for years, characterizes its rise as another way of holding complacent public company management accountable: Access to new forms and larger pools of debt made it possible for a wider array of investors to take a company private, improve its model and execution, and sell it at a profit. “There were some excesses,” he concedes — like the infamous RJR Nabisco takeover war that enriched dealmakers and inspired the hit book and movie Barbarians at the Gate but fizzled as an actual business maneuver or the debt-fueled 1980s takeover of Federated Department Stores that ended in bankruptcy. But more broadly, he argues, “it helped the market.”

A sympathetic take on the private-equity boom appeared in Fortune (co-authored by management guru Ram Charan) a couple of years after Dunkin’ Brands was acquired by Bain, Carlyle, and Thomas H. Lee, arguing that private companies were simply better managed. “Private-equity firms want to buy companies for their portfolio, fix them, grow them and sell them in three to five years,” the article said. “Facing a goal like that changes a manager’s mindset — usually in positive ways.”

In Dunkin’ Brands, the new owners had bought a growing and profitable business, so the “fix” was not exactly obvious. But one of the voices in the Fortune story was Jon Luther, Dunkin’s CEO at the time — Charan had done some consulting for Dunkin’ — who added that the company got more attention and connections from private owners than it did as part of a conglomerate. But there had been no dramatic change: Luther wasn’t an outsider brought in to save the day; he was already Dunkin’s CEO. And the core vision and goals remained familiar — a good cash-flow franchise operation with growth potential and coffee that people seemed to enjoy.

Wharton’s Gultekin, while underscoring that he hasn’t studied the Dunkin’ story in any detail, points out that all private-equity owners can do to prepare a business for sale is either cut costs or increase revenue, preferably both. “It isn’t really rocket science,” he says.

But it’s worth noting that whatever Dunkin’ may have gained from private equity — and its growth certainly continued during this period — some of its public rivals seem to have gotten by just fine without it. Like Starbucks. Or McDonald’s, which first went public the same year Dunkin’ did and today has more than 38,000 locations and a market cap of nearly $160 billion.

Still, it’s plausible that Dunkin’ benefited from clearer focus and other advantages “public firms just haven’t figured out,” as Fortune argued. Maybe management just believed being private was simply the best thing for the business.

Until, of course, the company had its next IPO.

The financial crisis of 2008 and the Great Recession that followed tapped the brakes on private-equity’s momentum. But by 2010, the markets were steady enough for Dunkin’s owners to start collecting a return on their investment. That November, they refinanced the company’s debt and in the process took a $500 million dividend.

“The next move for the company? It’s going public,” CBS reported a few months later. A slew of IPOs at the time involved private-equity-backed firms, many carrying heavy debt, pivoting to the public markets, and much of the Dunkin’ IPO proceeds were expected to go toward paying down its $1.89 billion or so in remaining debt.
That July, the IPO priced at $19 a share, for a $2.4 billion valuation. It was about the same amount Bain, Carlyle, and Thomas H. Lee paid six years earlier, back in 2005.

During this stretch, Dunkin’ boosted its growth with lower franchising fees, and at the end of 2010, the chain had about 9,700 locations — but by then had been surpassed by Starbucks’ 16,900. Revenue at locations open more than a year was up 2.7%, compared with 7% at Starbucks. Since going private, the chain continued to focus more on coffee drinks, introducing the “America Runs on Dunkin’” marketing campaign, adding espresso “Turbo Shots,” and making other tweaks, like putting egg-white breakfast sandwiches on the menu.

That July, the IPO priced at $19 a share for a $2.4 billion valuation. It was about the same amount Bain, Carlyle, and Thomas H. Lee paid six years earlier, back in 2005.

The offering was lauded as a success, opening at $25 a share and closing its first day of trading at $27.85, a 40% pop over the offering price. Investors, DealBook said, were attracted to — yes, you’ve heard this one before — the company’s “simple consumer story and its capacity for growth.”

If that theme is familiar, so was the supporting cast poised to benefit from the transaction: JPMorgan Chase, which had helped take the company private, returned to help with the IPO. Lehman had, of course, gone bankrupt during the intervening financial crisis, but Barclays, which had picked up much of its assets, was brought in, too. According to DealBook, a total of 14 underwriters — including Goldman Sachs, Wells Fargo, and Morgan Stanley — took in a combined $27.5 million in fees.

In the IPO’s aftermath, Reuters Breakingviews wondered why the market had greeted Dunkin’ with such apparent enthusiasm. Here was a company with a “relatively mature and stable franchise model” and a lot of debt. Even some of the underwriters’ analysts eventually issued skeptical coverage, including neutral ratings from Barclays, Wells Fargo, and Bank of America Merrill Lynch and a sell from Goldman.

François Degeorge, a professor of finance and managing director of the Swiss Finance Institute, has studied the effects of shifts between various public and private structures. While he has not looked at Dunkin’s history specifically, he says there can be reasonable justifications at specific moments in the life of a company to switch back and forth among different structures. For example, a major revamp may be easier to carry out in a private context without spending a lot of time on public explanations. On the other hand, having a share price set by the markets could be advantageous for making acquisitions (which is not something Dunkin’ has done) or making stock options a more appealing part of executive pay packages (which it has done).

It was just the same basic strategy — pushing growth and solid cash flow — under a different banner.

Still, he acknowledges that shifts from one ownership structure to another can “raise eyebrows” for multiple reasons: the transaction costs, potential conflicts of interest, and possible negative effects on other stakeholders (like employees) when the change involves, say, a slew of layoffs or a new business model. And it’s worth noting that a company doesn’t require a different ownership or investor structure to make significant changes: Think of Amazon, a public company since 1997, still run by its founder, that has morphed and metastasized from books to retail to cloud services to a delivery infrastructure to its own tech products like Alexa and other categories.

But with Dunkin’, there had been no great drama. Instead, it was just the same basic strategy — pushing growth and solid cash flow — under a different banner. Dunkin’ shares rose in the new bull market, and in 2012, Bain, Carlyle, and Thomas H. Lee sold off the last of their holdings, profiting a reported $600 million each. The chain was still growing, and its earnings were up. One might reasonably conclude, then, that being a stand-alone public company was clearly the best structure for Dunkin’ after all.

Until this year, when it decided to go private again.

In the years after its IPO, DNKN shares were choppy but trended upward, ultimately outperforming the S&P 500. In 2018, CEO Nigel Travis stepped down, and Dave Hoffmann, a longtime McDonald’s executive who had been running Dunkin’s U.S. operations for two years, moved up. That year, consistent with its long-running emphasis on coffee beverages, the company removed the word “Donuts” from the name of its flagship chain. It added new menu items, including a Beyond Meat plant-based “sausage” sandwich as well as offering almond and oat milk. Other than that, no radical changes.

Are such loyalists — let alone buyers of Dunkin’ onesies and candles — even aware of the supposedly fundamental ownership maneuvers that animate the world of Wall Street deals?

As a business, the once-again-public Dunkin’ didn’t really seem like a new animal. For all the global expansion and multiple corporate structures, it’s hard to say how much the most diehard brand fan has really noticed any fundamental change. Ross, the UMass marketing professor, points to a video that went viral in the run-up to the election of a woman waiting to vote early at Fenway Park. She was sporting logos of all four major Boston sports teams. “And I got my Dunkies,” she added in a near-parodic Boston accent, waving her Dunkin’ iced coffee. Are such loyalists — let alone buyers of Dunkin’ onesies and candles — even aware of the supposedly fundamental ownership maneuvers that animate the world of Wall Street deals?

Either way, the company soldiered on. Dunkin’ revenue hit $1.4 billion in 2019 with profits of $240 million. The number of franchised outlets continued to grow, steadily if not explosively, to more than 12,500 by this year — when DealBook broke the news that the company was in talks to sell itself.

The buyer: Inspire Brands, which owns a portfolio of food chains including Arby’s, Sonic, Jimmy John’s, and Buffalo Wild Wings and which is backed by private-equity firm Roark Capital. (Roark, named after the central character in Ayn Rand’s The Fountainhead, also backs Jamba Juice, Moe’s Southwest Grill, and Auntie Annie Pretzels). The talks drove up DNKN shares by as much as 33% before Inspire formally agreed in October to buy Dunkin’ for $106.50 a share, valuing the company at $8.8 billion. Including the assumption of Dunkin’s debt, Inspire will pay about $11.3 billion, one of the richest restaurant deals ever.

With the pandemic, breakfast-time restaurant sales have fallen sharply across the board. Dunkin’ took a hit in the second quarter of 2020, with a 20% revenue dip and plans to close 800 locations. But it bounced back relatively quickly, benefiting from its existing drive-through infrastructure and digital ordering systems it was investing in and building out pre-pandemic.

Perhaps another factor driving the deal: pent-up M&A demand. According to Reuters, merger and acquisition deals were down 22% in the first nine months of 2020 as pandemic uncertainty froze dealmakers in place. That started to change during the third quarter, leading to an M&A spike. The Dunkin’ takeover, DealBook noted, “could inspire other private-equity firms to jump into the fray for pandemic-proof targets.”

Dunkin’ declined to comment on the deal for this story, but a press release pointed out the high acquisition share price and quoted its CEO: “We are excited to bring meaningful value to shareholders,” Hoffmann said, pledging that the new arrangement will “continue to drive growth for our franchisees.” Inspire has not disclosed its longer-term plans. With the deal, it adds a coffee play to its portfolio, and perhaps its experience with drive-through logistics and digital ordering can be applied across the firm’s other brands. And of course, there’s its potential for growth.

But some observers have an educated guess about where this might lead: “Owning a dominant chain like Dunkin’ could be the final touch Inspire needs,” DealBook reported, “before going public.”

https://marker.medium.com/why-wall-street-wont-leave-dunkin-donuts-alone