Dive Brief:

• Fiesta Restaurant Group has sold its Taco Cabana brand to YTC Enterprises, an affiliate of Yadav Enterprises, leaving Fiesta with Pollo Tropical in its portfolio. YTC operates nearly 400 restaurants in 18 states, including Jack in the Box, El Pollo Loco, TGI Friday's and Denny's.
• With this $85 million deal, YTC  gains 142 company-owned and operated Taco Cabana restaurants in Texas and six in Mexico. The system generated more than $239 million in revenues last year. 
• Proceeds from the sale will go toward repaying Fiesta's $74.6 million in debt. Fiesta will also use those funds to accelerate Pollo Tropical's expansion. 

Dive Insight:

This is the second deal in a week in which a restaurant brand was sold to a franchisee. On June 30, Au Bon Pain was acquired by Ampex Brands, a Yum Brands franchisee. And last month, Luby's sold Fuddruckers for $18.5 million to Black Titan Franchise systems, an affiliate of Nicholas Perkins. 

Once a franchisee becomes a franchisor, they benefit from what is essentially a turnkey business operation from the parent company, as well as built-in and captive audiences from existing brand equity.

These deals also illustrates a very active mergers and acquisitions market overall in the restaurant space. In June alone, for example, Fat Brands acquired Global Franchise Group, BBQ Holdings acquired Village Inn and Bakers Square and Luby's sold Fuddruckers. There has also been a surge of M&A activity among restaurant adjacent companies.

According to White & Case LLP, much of this activity stems from the dire environment in the restaurant space stemming from the COVID-19 pandemic, in which over 10% of all restaurants closed. It also illustrates the pent-up cash in investors' hands from sitting on the sidelines for a year and those investors' high expectations for an industry rebound.

There are currently about 150 Pollo Tropical locations throughout Florida, so the runway is long for Fiesta to extend the brand beyond its home state. During the company's Q1 call in May, Fiesta CEO Richard Stockinger said the company is focused on growing in existing and new markets for both company-owned and franchised locations.

In addition to expanding the Pollo Tropical footprint, Fiesta is also looking to upgrade its customer experience tools and invest in its digital platform with features like geofencing. During Q1, Pollo Tropical experienced 60% of its sales at the drive-thru, 10% through delivery and 3% through online orders.

Pollo Tropical finished Q1 2021 with a same-store sales increase of 4.3%, a marked improvement from Q4's performance of negative 8.2%, so the brand has momentum as it becomes Fiesta's sole focus.