North-Asia buyout firm The Longreach Group said on Wednesday it had agreed to buy Wendy’s Japan, the same day that Japan delayed a sales tax hike which would have weighed on consumer spening in the world's third-largest economy.
Using the capital received from Longreach, Wendy’s Japan will buy all of hamburger and pasta fast food chain First Kitchen, a wholly-owned 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 a planned sales tax hike until 2019. Also one of Wendy's key competitors, McDonald's Japan is struggling to recover in the wake of food-safety scandals. The fast food chain posted its first loss in eleven years in 2015 after a Chinese supplier said it had sold expired meat to companies including McDonald's Japan.
Wendy’s Japan is a franchisee of The Wendy’s Company, the US burger chain, and will have exclusive rights to develop the Japanese market. Wendy’s reentered the Japan market in 2011 after letting the former franchise agreement lapse in 2009, resulting in the closure of 71 restaurants.
Wendy's is looking to bulk up quickly in Japan and the purchase of First Kitchen gives it scale without having to buy up real estate piecemeal. Wendy’s has about 6,500 franchise and company-operated restaurants in the United States and in 28 countries and US territories worldwide. First Kitchen operates 136 stores in Japan.
The deal also marks the first time Suntory has sold to a private equity-controlled company. Longreach has bought assets from blue chip Japanese firms before such as Hitachi, but private equity as an asset class has struggled to gain traction among conservative Japanese managers selling assets.
Food importer Higa Industries acquired 51% of Wendy’s Japan in 2011 and after Longreach's acquisition will retain a minority share.
The president of Higa Industries, Ernest M. Higa, previously built the Domino's Pizza franchise in Japan before selling it to another private equity firm, Bain Capital, in 2010. Bain recently hired former Wendy's International executive, Ralf Alvarez, to head another food chain among its portfolio companies, Skylark.
Longreach has also invested in Japanese fast food chains in the past. It acquired 24.9% of McDonald’s Japan in 2005 from the Fujita family after the passing of Den Fujita.
Wendy’s Japan and First Kitchen are already working together and opened two combined “Wendy’s First Kitchen” stores last year in Tokyo.
Wendy’s Japan has entered into a new and exclusive license agreement with Wendy’s that will enable the expansion of the Wendy’s First Kitchen business in Japan.
Wendy's First Kitchen hopes to compete with the broader appeal of its menu and flexible offerings designed to keep the restaurant busy outside regular meal times.
Longreach has deployed leverage in its acquisition, as debt is relatively cheap and plentiful in Japan's current negative interest rate economy. The private equity firm manages two funds with about $1.4 billion of committed limited partner and co-investment capital.