FountainVest buys China QSR restaurant operator from EQT

The deal is part of a larger agreement with Papa John’s International to open more than 1,350 new restaurants across South China by 2040. It is the largest franchise development agreement in the history of Papa John’s and one of the largest announced in the pizza industry in recent years. CFB currently owns and operates approximately 160 restaurants in Shanghai and southern China.

Advantage Partners is the franchise partner in Beijing and Tianjin, having acquired 34 restaurants from Papa John’s International in 2018. These were the last establishments directly owned by the parent company outside of the US.

EQT bought a majority stake in CFB in 2013. It claims to have evolved the company from a two-brand master franchisee into a multi-brand food and beverage platform that now includes Brut Eatery, XiaoMian, and San Dao Ru Chuan, as well as Papa John’s and Dairy Queen. The number of stores grew from 500 to more than 1,100, partly by switching from a direct-own to a sub-franchise model.

EQT also digitalized CFB’s front-to-back-end operations, significantly improving the company’s operational efficiency. In addition, digital marketing strategies and local social media and aggregation platforms were used to drive more online and walk-in traffic, according to a statement.

Dairy Queen, which is owned by Berkshire Hathaway, has more than 6,000 restaurants across 20 countries. CFB is the company’s largest franchise globally, but not the only one in China. Hop Hing Group Holdings – Hong Kong-listed company currently subject to a take-private offer – operated 193 outlets across Beijing, Tianjin, and northern China as of June 2021.

CFB is one of the largest franchise holders for Papa John’s outside the US. There were 5,569 restaurants globally as of September 2021, including 2,246 across 48 markets outside of North America. The international operation, which is entirely franchised, generated USD 123.9m out of USD 1.81bn in revenue in 2020.

Master franchise agreements require the local partner to open a specified number of restaurants within a defined period, with the option to sub-franchise an agreed portion of the business. Papa John’s International typically receives a royalty fee equal to 5% of sales, or 3% in markets where there is sub-franchising.

“This partnership with FountainVest marks another major milestone in achieving Papa John's global growth potential, reflecting both the scale of our brand’s global opportunity and the quality of franchisees that are investing in our future,” said Rob Lynch, CEO of Papa John’s, in a separate statement.

“Papa John's has enormous global development whitespace in the US and in attractive growth markets, especially relative to our peers. Our new development agreement with FountainVest alone stands to grow Papa John's current global unit count by 25%.”

China’s quick service restaurant (QSR) space appeals to private equity because it is cash generative, conducive to rapid rollouts, and plays into broad consumption themes. Sub-franchising can also be a reassuringly predictable business model. The risks are just as obvious: projections might be too ambitious, execution flawed, or a brand doesn’t catch on locally.

Notably, private equity investors are involved in the China operations of Yum Brands, McDonald’s, Burger King, and Pizza Express.

Last year, a special purpose acquisition company sponsored by the founding managing partner of China’s Ascendent Capital Partners, agreed to merge with Tim Hortons China. The coffee-and-doughnut chain’s local entity was established as a joint venture between Restaurant Brands International (RBI) – owner of the global franchise – and US-headquartered private equity firm Cartesian Capital Group.

FountainVest is currently raising its fourth China fund, which has a target of USD 2.8bn and a hard cap of USD 3.2bn. A first close of more than USD 1bn came in the final quarter of 2020.

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• Topics
• Greater China
• Buyouts
• Trade sale
• Consumer
• China
• Fountainvest Partners
• EQT Partners