North-Asia buyout firm The Longreach Group said on Wednesday ithad agreed to buy Wendy’s Japan, the same day that Japandelayed a sales tax hike which would have weighed on consumerspening in the world's third-largest economy.
Using the capital received from Longreach, Wendy’s Japan will buyall of hamburger and pasta fast food chain First Kitchen, awhollyowned subsidiary of beverages conglomerate Suntory Holdings.
The timing of the deal appears to be fortuitous.
Japan's prime minister Shinzo Abe told lawmakers he will delay aplanned sales tax hike until 2019. Also one of Wendy's keycompetitors, McDonald's Japan is struggling to recover in the wakeof food-safety scandals. The fast food chain posted its first loss ineleven years in 2015 after a Chinese supplier said it had soldexpired meat to companies including McDonald's Japan.
Wendy’s Japan is a franchisee of The Wendy’s Company, the USburger chain, and will have exclusive rights to develop the Japanesemarket. Wendy’s reentered the Japan market in 2011 after lettingthe former franchise agreement lapse in 2009, resulting in theclosure of 71 restaurants.
Wendy's is looking to bulk up quickly in Japan and the purchase ofFirst Kitchen gives it scale without having to buy up real estatepiecemeal. Wendy’s has about 6,500 franchise and company-operated restaurants in the United States and in 28 countries andUS territories worldwide. First Kitchen operates 136 stores in Japan.
The deal also marks the first time Suntory has sold to a privateequity-controlled company. Longreach has bought assets from bluechip Japanese firms before such as Hitachi, but private equity as anasset class has struggled to gain traction among conservativeJapanese managers selling assets.
Food importer Higa Industries acquired 51% of Wendy’s Japan in2011 and after Longreach's acquisition will retain a minority share.
The president of Higa Industries, Ernest M. Higa, previously built theDomino's Pizza franchise in Japan before selling it to another privateequity firm, Bain Capital, in 2010. Bain recently hired former Wendy'sInternational executive, Ralf Alvarez, to head another food chainamong its portfolio companies, Skylark.
Longreach has also invested in Japanese fast food chains in thepast. It acquired 24.9% of McDonald’s Japan in 2005 from the Fujitafamily after the passing of Den Fujita.
Wendy’s Japan and First Kitchen are already working together andopened two combined “Wendy’s First Kitchen” stores last year inTokyo.
Wendy’s Japan has entered into a new and exclusive licenseagreement with Wendy’s that will enable the expansion of theWendy’s First Kitchen business in Japan.
Wendy's First Kitchen hopes to compete with the broader appeal ofits menu and flexible offerings designed to keep the restaurant busyoutside regular meal times.
Longreach has deployed leverage in its acquisition, as debt isrelatively cheap and plentiful in Japan's current negative interest rateeconomy. The private equity firm manages two funds with about $1.4billion of committed limited partner and co-investment capital.
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