Foodtastic bids C$1 billion for MTY Food Group at a 32% premium

The offer and the math

Foodtastic set out a proposal to buy MTY for about C$1 billion, pitching C$43 for each MTY share in a letter seen by Bloomberg News. That level sits 32% above MTY's Oct. 30 closing price and implies a total valuation, debt included, of roughly C$1.5 billion.

Heading into the news, MTY had closed Monday at $32.75, up about 1%, for an equity value near C$748 million. In early Tuesday trading before the open, the shares were up about 22%.

Montreal based Foodtastic, run by CEO Peter Mammas, operates more than 1,200 locations across roughly 30 banners, among them Milestones Grill + Bar, Second Cup and Freshii. This year it bought Kinton Ramen and in May signed a deal to bring Dunkin' back to Canada.

How the companies got here

Foodtastic approached MTY twice in the past month but was turned down without an explanation or meaningful talks, according to the letter. Mammas said in an emailed statement, "We are therefore disappointed that MTY has rejected the proposed transaction without engaging in substantive dialogue," adding, "Nevertheless, we are confident that MTY's shareholders will recognize the compelling value of our proposed transaction and that it represents a superior path forward to MTY's standalone strategy." MTY's spokesperson did not return a request for comment right away.

The timing follows MTY's strategic review that weighed selling part or all of the business. The company said an independent-director committee and the full board voted unanimously that pursuing the current strategy would create greater value. On Oct. 9, the company said it would restart buybacks, weigh a substantial issuer bid, raise the quarterly dividend 35%, bringing it to 50 Canadian cents per share, cut back on corporate-operated locations, and further emphasize franchising.

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Recent results and leadership change

MTY's latest quarter showed softer trends. For the 13 weeks ended Aug. 30, same store sales eased 1.9% overall, including a 2.7% drop in the US. Net income fell to C$24.8 million, versus C$27.9 million a year earlier. Normalized adjusted EBITDA - profit before interest, taxes, depreciation and amortization - was C$60.8 million, down from C$74 million.

The footprint also shrank by 74 net restaurants in the quarter, with 50 tied to a plan to close corporate operated sites. Despite that, free cash flow after lease payments increased to C$28.5 million from C$25.8 million. On Tuesday, MTY said director Victor E. Mandel took over from Chief Executive Officer Eric Lefebvre, effective immediately. A representative for MTY didn't reply to a request for comment immediately.

What Foodtastic is saying and what to watch

Mammas also argued MTY has underdelivered, saying, "MTY is a great company with excellent opportunities, but it has unfortunately not lived up to its full potential in recent years." He added, "Beyond delivering premium value to shareholders, we believe Foodtastic is well-positioned to provide the best path forward for all MTY stakeholders, including franchisees and employees," noting Foodtastic's experience as a Canadian franchisor and "dedicated steward" of brands. A Foodtastic representative didn't get back to a request for comment on short notice.

People familiar with Foodtastic's thinking said the buyer remains open to talks with MTY's board but is not ruling out other steps if directors refuse discussions. They said Foodtastic, together with its backers, would provide the funding for the transaction, with financing slated to be finalized upon signing a definitive agreement, assuming MTY grants further access to its financials.

The bottom line for investors

The bid gives shareholders a concrete price to measure against MTY's go it alone plan and explains the stock's pre-market pop. Key variables now: whether MTY engages, allows due diligence, and how investors weigh a C$43 cash offer against management's strategy. Context: Oaktree Capital Management has supported Foodtastic since 2018, first via a C$47 million joint-venture commitment and then with an additional C$50 million in 2021. MTY was established in 1979 by Stanley Ma and operates over 80 brands across Canada, the US and overseas.

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