In a few short weeks last fall, there was a seismic shift in the Canadian foodservice landscape. With a couple of swift mergers, investments and acquisitions, Toronto-based Fairfax Financial Holdings Ltd. became a major player in the Canadian restaurant industry. Now nearly 1,000 restaurants across the country — including iconic brands such as Swiss Chalet, Harvey’s, Milestones, East Side Mario’s, Kelsey’s, Casey’s and The Keg — fall under Fairfax’s umbrella. But why would a financial holding company such as Fairfax — which owns numerous insurance businesses worldwide and has investments in such diverse companies as Blackberry Ltd., Torstar Corp (publisher of the Toronto Star newspaper), and retail chains William Ashley and Sporting Life — want to dive head-first into foodservice?
“We’re value investors,” explains Fairfax’s president, Paul Rivett. “We try to find good businesses with good management, good opportunities and try to buy them at a reasonable price. And that led us to the restaurant business. But we didn’t get up one morning and say ‘let’s focus on hospitality,’ it was more of an opportunity from a value perspective.”
Fairfax’s foodservice story began in late 2011. Vaughan, Ont.-based Cara Operations Ltd. (owners of Swiss Chalet, Harvey’s, Milestones, Montana’s and Kelsey’s) had been working on a deal to acquire Mississauga, Ont.-based Prime Restaurants Inc. (owners of East Side Mario’s, Casey’s, Fionn MacCool’s, D’Arcy McGee’s, Paddy Flaherty’s, Tír Na Nóg and Bier Markt). But in the eleventh hour, Fairfax made an offer Prime couldn’t refuse — $71 million, compared to the nearly $59 million Cara was offering. Fairfax took over approximately 82-per-cent ownership of Prime, and the restaurant company went from publicly traded to privately owned in early 2012. (Interestingly, at around the same time, Fairfax also made a significant investment in Imvescor Restaurant Group — the Moncton, N.B.-based owners of Pizza Delight, Mikes, Scores and Baton Rouge — but divested itself of its Imvescor shares in April 2013.)
Fast-forward to October 2013: Fairfax made a major financial investment in Cara and then assisted it in purchasing Prime, making Prime a wholly owned subsidiary of Cara. A Cara press release dated Oct. 31, which noted that the two companies together now have combined system-wide sales of almost $1.7 billion with more than 840 corporate-owned and franchised restaurants across Canada, referred to Fairfax as a “strategic financial partner.” At the time of the deal, specific financial details weren’t disclosed, although the press release stated that “Cara’s legacy remains intact, as its founders, the Phelan family, continue as controlling shareholders.” Fairfax’s 2013 Annual Report later disclosed that Fairfax had invested $100 million in Cara, giving it “a fully diluted 49-per-cent interest.” When asked what was attractive about Cara, Rivett says, “We thought those were all iconic brands; they just needed a renewed focus.” As part of that renewal, a change in leadership was made. “We were able to bring in someone who we thought was just a great leader and manager, a turnaround guy, Bill Gregson,” says Rivett. Previously executive chairman, president and CEO of The Brick furniture chain (a former Fairfax investment, sold to rival furniture chain Leon’s in 2012), Gregson now helms Cara as president and CEO.
But, the story doesn’t end there. In November 2013, Fairfax purchased 51 per cent of Richmond, B.C.-based Keg Restaurants Ltd. “The Keg was a completely different opportunity,” says Rivett. The Fairfax folks had met with David Aisenstat, the iconic steakhouse chain’s owner and CEO. “[We] got to know him a little bit and understood his business and thought it was a unique opportunity for an investment in a franchise that has a 40-plus-year history of success and excellence in that category,” explains Rivett. The chain brings in approximately $500 million in annual sales and has more than 100 locations across Canada. Like the Cara deal, exact details were undisclosed at the time of the transaction, but the Fairfax Annual Report revealed Fairfax paid $85 million for its shares in The Keg.
Although Cara declined to be interviewed for this article, The Keg’s Aisenstat, who retained his position as CEO, opened up about Fairfax. The leader and his existing team still run the show at the steakhouse, but they welcome “big-picture” help from Fairfax. “They are very emphatic that they don’t want to run restaurants. They want to be helpful wherever they can, but their job is not to figure out how to run a restaurant company. They’re a big financial company, that’s their job. They want to invest in people who have some success in their field, and they want to help them maximize their potential, but they don’t want to stick their nose into the nitty gritty. And they’ve been very true to that so far,” says Aisenstat, who notes that having investors such as Fairfax has been humbling. “They’re good, courteous partners. When you’re working with someone like that, and you’re trying to show them that they placed their faith properly, it’s great motivation. Until a few months ago, I only had to impress myself, and I long ago realized that was pretty easy,” he laughs. “So this will make me work harder and do better.”
Anyone following industry trends might wonder, however, why Fairfax would get involved with companies that focus on the less-than-thriving full-service dining segment when the real growth potential now seems to be in quick-service and particularly “fast-casual” markets. But it all comes back to the word “value.” Fairfax follows the same “value investment principles” as well-known American investor Warren Buffett; it essentially means investing in companies the investor sees as being priced lower than their “intrinsic value.” Value investors seek out companies that they believe possess great strengths, but those strengths might not be apparent to everyone, so they’re able to scoop them up at a good price.
Doug Fisher, president of Toronto-based hospitality consulting firm FHG International Inc., says this is indeed a good time to buy foodservice companies. “Coming out of recessions has always been a great time to buy restaurants. It’s an ideal time to capitalize on the five- to seven-year growth period ahead of us, before the next recession, and to restructure and reformulate,” he says. Paul Holden, financial services analyst with CIBC World Markets in Toronto, adds that these foodservice investments are in line with Fairfax’s modus operandi over the past few years to favour acquiring privately held companies over publicly traded ones. “My impression with these specific investments [in foodservice] is also that they’re all the ‘high-free-cash flow’ type businesses, meaning they kick off a lot of cash flow, which would be attractive to Fairfax as well,” adds Holden.
Many analysts have speculated that Fairfax’s involvement in these foodservice companies may lead to some streamlining among brands, with possible closures of underperforming and/or redundant units. But, according to Rivett, this type of decision will ultimately be up to the individual restaurant companies. The question of streamlining remains to be seen, with Cara declining to comment and the Keg’s Aisenstat simply saying, “We’re always evolving, but nothing out of the ordinary.”
In Fisher’s opinion, there are pros and cons to Fairfax’s new industry presence. On the “pro” side — for the industry, at least, although not so much for consumers — is having one company control so many restaurants in a similar market segment means that menu prices could possibly be raised across the board. “If you could get rid of some of that competition to let prices go up 10 to 15 per cent, the restaurants can all do better and operating profit can go up,” he says. “But, on the other hand, it’s really difficult now for people to come into the marketplace and work within the marketplace, given that all of a sudden there’s so little competition in that casual market. Personally, I think it’s a really unhealthy thing for the competitiveness in the marketplace,” says Fisher. Rivett, however, insists this isn’t an issue. “It’s a highly competitive market with more than 60,000 restaurants in Canada, of which we only [own] approximately 1,000. The Cara acquisition and the Keg acquisition stand separately and are not seen by us as a consolidation play.” Aisenstat concurs. “It’s a big industry,” he says. “Nobody’s ever going to corner the market, and I don’t think that’s Fairfax’s intention.”
It is Fairfax’s intention, however, to continue investing in foodservice where it makes sense. “We continue to meet with more entrepreneurs in the space,” says Rivett. “We’re meeting more companies and more people who are interested in having a partner like us: a strong capital partner that won’t interfere in the business. So we’re absolutely looking for more opportunities [in foodservice], but from a perspective of, does it make sense, is it a good value proposition, a good management team, that sort of thing.”
Eventually, Fairfax would like to start expanding its restaurant brand interests abroad, but Rivett doesn’t see this as an action item for the very near future. “There’s still plenty of expansion opportunity within Canada,” he says. However, international expansion could be a good long-term plan, as Fairfax’s global reach could help grow its investments across the pond and beyond.