I have no knowledge about the specific deal. However, I strongly disagree that, as a general matter, buying another concept is an admission of serious problems with the existing business. Hedging one's bets is not a bad idea. Moreover, there can be synergies. If KKD can bring good bread into its stores for take-out, it could be very profitable since the fixed costs of the stores are already paid for. Nor would bread compete very much with donuts. That is not to say that it will work. But the purchase IMHO indicates nothing negative about the existing KKD (which I've never owned or shorted). I have said a number of times that I expect Pnra to buy another concept relatively soon with stock. If that occurs, you will undoubtedly view it as a negative, regardless of price or concept. IMHO, that would be a mistake. I can imagine various concepts (e.g., tossed salads, frozen desserts) that could not only be successful on their own, but could also complement the Pnra menu. That is not to say that any acquisition would be a positive. The question is whether one trusts management to get it right.
"...buying another concept is an admission of serious problems with the existing business. Hedging one's bets is not a bad idea."
-- Hot, a little lesson (& since WSJ is going to B-school he can back me up). It is ABSOLUTELY, 150% NOT MGMT'S RESPONSIBLITY TO HEDGE. Investors can do that on their own, it's called diversification. Investors can do it more cheaply (& better) than any company mgmt. Besides, 'hedging' as you call it can lead to 'empire building' and ultimately diworseification (just ask Peter Lynch). PNRA mgmt should be 110% focused on making better and more healthy bread. They should go to bed with that sole purpose on their mind, and it should be the first thing they think about when they wake up. If they don't I can guarantee you the competition will & that's a position it's better to avoid in the first place. Define you space & enforce it!!! (as Tony Montana would say)....If PNRA should adopt so foolish a strategy of buying another concept to 'hedge' boy would I be exited (not for the reason you think).....Good luck to all.....
From a B-school standpoint, my opinion is meaningless. From an observational standpoint, I agree it is NOT managment's responsibility to hedge. They are responsible to the board, and ultimately, the company's stakeholders (for PNRA, that's the shareholders).
Separately, my take on Montana / KKD is that KKD is trying to broaden their product mix, and be more than just a pure donut supplier. I'm of the opinion they see what's going on over at MCD, and realize that PNRA, Montana, Atlanta Bread, etc., are on to the next trend on the "quick" service side of dining, which is the "fast/casual" category. MCD just put out their atrocious #'s, and they're in trouble. The "fast food" category is eroding before their very eyes, and there's not much they can do about it in the short term.
BTW, this trend in "fast/casual" is going to be around for a while. It appeals to a generation tiring of fast food, and is sticking in popularity. It's got legs to go for several years, until another generation tires of it, and wants to move on to yet something new.
It was with APPB CEO Lloyd Hill. In particular, read this quote late in the article: ---------- IBD: If you were to launch another concept, what would it be?
Hill: We'll buy something that has already proven it has legs so we can expand it nationally. I don't think it would be fast food and I don't think it would be in fine dining. That leaves us with casual dining, which we know very well, or this new emerging segment called "fast casual." ---------- As I recall, isn't PNRA co-locating with some APPB locations? I'd keep this one in the back of your memory banks for reuse a few years from now (Applenara? Panerabee's?)...
Disclaimer: As always, IMHO. Position disclosure: Flat (all of the above)
You don't address the real possibility of synergies. Beyond that, I strongly disagree that Pnra would not focus intensely on the existing business if it had a second concept. It is a matter of having capable managers in place in both businesses. As far as hedging, that is what Au Bon Pain did when it bought Panera. I suspect that most would agree that it turned out to be a pretty good hedge. It would have been even better if the Au Bon Pain business had been stronger. To take another example, do you really believe that Wendy's focuses less on its burger business because it owns Tim Horton's? I don't. The bottom line is that somebody who trusts Ron and his team to successfully run Panera, would probably be happy to have him do the DD on another concept and have a hand in running it, The fact that it would be bought with not inexpensive stock would be a bonus.