June 16, 2015 / 6:44 PM / 2 years ago

Snack time: Canadian restaurant chains seek deals to upsize

4 Min Read

June 16 (Reuters) - Cara Operations Ltd, owner of the Swiss Chalet casual dining chain and Harvey's burger outlets familiar across Canada, is gearing up to lead a consolidation in the country's fragmented restaurant industry.

Canada's largest operator of full-service restaurants, controlled by dealmaker Prem Watsa's Fairfax Financial Holdings Ltd, made a strong stock market debut in April and has made no secret that it's looking to expand through acquisitions.

"Acquisitions are definitely on the radar for Cara and there will be some announcements soon," said a source familiar with Cara's plans. "There's deals in the hopper."

Analysts said while Cara could look to buy more full-service brands such as Jack Astor's or St-Hubert, the company could also be interested in fast-casual cafes that offer options perceived to be healthier and are increasingly popular in the country.

Acquisitions are just about the only way to grow for Canada's few big restaurant groups, analysts said.

"If you're a large Canadian restaurant there is opportunity to grow, but it's really a steal-share game," said Robert Carter, executive director at market research firm NPD Group.

Canadian restaurant traffic has been stagnant at about 6.5 billion annually for five years, according to NPD, and no growth is expected anytime soon as the economy grows only modestly.

But individual deals are likely to be small, given the nature of the country's restaurant industry.

Apart from Cara, the only other big locally based operator - if you exclude Tim Hortons-Burger King parent Restaurant Brands Inc - is MTY Food Group Inc, the owner of fast-food brands such as shopping mall favorite Manchu Wok.

MTY is also likely to be on the prowl.

"MTY and Cara are much less levered than their U.S. peers, so I think there is a lot of firepower in both cases to lever up and buy something material that moves the needle," said Patrick Blais, senior portfolio manager at Manulife Asset Management.

Manulife owns 16.5 percent of Cara and 9.28 percent of MTY.

Ambitious Target

Cara aims to boost revenue to between C$2.5 billion and $C3 billion in five to seven years, up from C$1.7 billion ($1.4 billion) in 2014, according to the company's IPO prospectus.

The company, which has a market value of about C$400 million, declined to comment on its expansion plans.

However, the source said Cara is likely to target companies or brands with revenue of C$80 million-C$160 million.

MTY, valued at about C$630 million, did not respond to requests for comment.

Privately owned Ontario-based Artisano Bakery Cafe, Hero Burgers and Williams Fresh Cafe are some fast-casual chains that could tempt a bigger company, said Bruce Winder, senior adviser at retail consultancy firm J.C. Williams Group.

Overall sales at fast-casual chains rose nearly 30 percent last year, six times the average growth at the top 10 chains in the country, according to consultancy firm Technomic.

MTY has already made inroads into fast-casual, buying the owner of the Extreme Pita and Mucho Burrito chains in 2013. It already owns Thai Express and Sushi Shop.

The prospect of lower costs is also a motivator to do deals.

Canadian restaurants pay two-to-three times more for dairy products and chicken than chains south of the border, said Ed Khediguian, who oversees GE Capital's lending to the restaurant sector in Canada.

Cara's same-restaurant sales rose 2.6 percent last year, while MTY's fell 0.9 percent.

Cara's stock has risen about 50 percent since it went public on April 10. MTY's stock has declined 2.4 percent. ($1 = 1.2321 Canadian dollars) (Editing by Sayantani Ghosh and Ted Kerr)

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