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Restaurant Operators to Increase Capital Expenditures, M&A Activity

In spite of margin pressures caused by rising commodity prices, the foodservice industry should also see increasing capital expenditures as well as strong merger and acquisition activity this year, according to the 21st edition of the Chain Restaurant Industry Review, released by GE Capital, Franchise Finance.

A survey of the largest 150 operators and top 100 chains found that restaurant operators are concentrating on expanding within their current markets (44.4 percent) and reimaging units (31.1 percent), according to Industry Review, a study conducted by GE Capital.

These cap-ex opportunities coincide with a strategic shift at the franchisor level. Earlier in the decade, brands had focused on building co-owned units, according to a GE Capital release. More recently, they have shifted their asset strategy to franchising to capitalize on a targeted brand focus, achieve a steadier revenue stream and mitigate risk, thereby creating opportunities for well-established franchisees.

The Industry Review survey found that operators see commodities as the number one factor that will impact their business in 2011, followed by financial markets and gas prices.

U.S. restaurant merger and acquisition activity is expected to continue to be strong in 2011 due to the improved credit environment and increased liquidity, according to GE Capital. Sponsor-backed M&A deals jumped 578.2 percent in 2010 while non-sponsor deals rose 44.3 percent. Private equity firms are looking to put capital into the restaurant industry due to its unit growth potential, strong cash flow generation and strong cash-on-cash returns.