Prior to the early 1990s, the vast majority of restaurants were privately owned and operated. But that decade ushered a multitude of initial public offerings, including restaurant brands, like Applebee’s, IHOP, Darden, Landry’s, and Starbucks, that remain industry leaders today.

In the intervening years, IPOs have never quite hit that ’90s flash point in terms of volume (though average deal values have increased). Like other sectors, restaurants have floated into and out of Wall Street in a somewhat cyclical manner.

But 2020 warped the typical economic cycle, and one unexpected byproduct was a spate of special purpose acquisition companies (SPAC). Under this business model, companies are formed without any commercial operations and go public with the specific goal of acquiring an existing, private business. Not only do SPACs expedite the process of taking private companies public, they can also drive up the sale price.

SPACs were already on the rise before the pandemic, but 2020 proved a banner year, with NASDAQ declaring it to be, “The Year of SPAC IPOs.” And the momentum isn’t slowing. By March, the number of 2021 SPAC offerings had already surpassed last year’s total.

Restaurants have also embraced the model, with industry executives and investors banding together to form their own SPACs. Tastemaker Acquisition Corp. is one of the more high-profile, food-focused SPACs to emerge in the last year. Co-CEOs Dave Pace and Andy Pforzheimer bring extensive and complementary expertise to the venture. As the former CEO of Jamba Juice and current chairman of the board at Red Robin, Pace brings public market savvy while Pforzheimer, the founder and former CEO of Barteca Restaurant Group, has an intimate understanding of creating and growing concepts from the ground up.

In January, Tastemaker Acquisition posted $276 million in its IPO, well over the initial $200 million bid. The company hit the ground running, which is par for the course with SPACs (the Securities and Exchange Commission requires such companies to make their acquisitions within two years or the money must be returned to investors).

Pace and Pforzheimer sat down with FSR in mid-April to discuss Tastemaker, the wave of SPACs, and where the market is headed.

Had you two been exploring SPACs before the pandemic began?

Andy Pforzheimer: No, Dave and I were kind of thrown together by people who came to us separately with the idea that whatever else happened with COVID, it was going to create some dislocation, and it might be an interesting time to look at up-and-coming companies. We both talked to [investor] Chris Hagar separately, and it’s kind of a funny story: Chris told me who he was talking to, and I said, ‘If you have Dave Pace involved, you don’t need me.’ Later when he talked to Dave, he said the same thing. So Chris thought that was amusing and had us call each other. Not only did we both see what was going on with COVID in terms of restaurant opportunities, but we also came from really different backgrounds. We both have 40-plus years in the business but not a ton of overlap in what we focus on. So it seemed like a fun opportunity to go deeper.

How did your professional backgrounds complement each other?

Dave Pace: I started out with PepsiCo and when we spun it out, I was at Yum! Brands and then Starbucks. I also spent time at Bloomin’ Brands, was the CEO of Jamba Juice, and now I’m chairman of Red Robin. My background is in the public company side, whereas Andy is the founder-entrepreneur who built his own business up successfully and then sold it. We realized that we do see the world similarly, but it would be great to partner with somebody who comes from the opposite side.

AP: With the SPAC world, you’re looking at a private company, often run by a founder or a founder in conjunction with a private equity group (which is sort of what I’ve been doing for the last number of years) who’s about to make the scary jump into the public markets. So I think it’s pretty useful to have both of us talking to these people. I typically understand what’s going on in that founder’s head, but Dave can understand much better what they’re worried about and what the answer is. It’s very reassuring to have somebody who’s been there, done that. So yeah, I think we’re a good duo.

Why are SPACs suddenly such a hot commodity?

DP: I think there’s a couple of things. There were a bunch of companies that were thinking about going public before COVID, and it delayed them. They were ripe to be in the public markets either through an IPO or through a SPAC.

But the interesting twist with a SPAC is that COVID created a scenario where you had fairly normal performance up until the end of 2019, then 2020 was pretty much a write-off. 2021 is a transition year back, and people generally think 2022 will start getting back to normal. When you do an IPO, you can only talk about your past results, and when you tell me about past results, at this point in time, it’s not very attractive. With a SPAC, you have the unique advantage of being able to tell the story forward. So you can tell what happened up through 2019 and 2020, but you can also supplement that by telling the story of ’21, ’22, ’23, and as far out as you think is realistic. That provides a real advantage at this particular moment in time; it wasn’t as relevant during traditional years.

AP: In the typical boom-and-bust cycles of the market, companies all go public and then they stop going public and then they go public again. What happened in 2020 was you had this interesting confluence of not only companies that were ready to go public, but you also had this five-year drought on the market. There hadn’t been any restaurant companies that had gone public since 2015, when you had a little spurt with Chipotle and Shake Shack. During that time, restaurants were very popular, private equity companies had a lot of money, they bought them up, and they held onto them.

So 2020 was the year that a lot of these companies were going to say, ‘OK, time to show off to the public market, time to be a big company,’ and all of a sudden, boom: The wind is taken out of their sails, the balloon deflated. And these were very good companies; they had taken the time to have their books audited and maybe they spent some real money on a good CFO. They’d taken all the necessary steps, but now it could be two or three years before they’re able to point to a nice, solid, full fiscal year in an IPO. And so for a bunch of them, this was the best alternative.

In terms of scoping out strong acquisition targets, were there any advantages to the chaos of last year?

AP: In a normal year, the rising tide lifts all ships. Everybody’s numbers look pretty good. Everybody is a genius when the market is good. 2020 kind of ripped the Band-Aid off management teams. When have you ever gotten as good a view as you did in March, April, and May of last year as to which CEOs are nimble, which CEOs are thinking on their feet, which CEOs are creative, what companies are resilient, what companies have loyal fans that will line up around the block to pick up a bag? This was a once-in-a-lifetime opportunity to see behind the curtain of a lot of these companies.

DP: As we talked about who we wanted to partner with in this process, we were very clear that we were interested in growth companies with strong management teams. We were not looking at value plays for distressed companies that might have weak balance sheets or other issues that needed a lot of attention. We wanted growth stories, strong management teams, and great futures that we could help accelerate in the public markets.

Is a certain foodservice category or segment a more attractive acquisition than others?

AP: I would say no. There are interesting, creative management teams and exciting growth stories in fast casual, full-service dining, delivery technology, and even specialty products. If you had a better way to make heat-proof to-go containers, this would be a great time for you. So no, I don’t think there’s a segment of the industry we’re looking at. It doesn’t even have to be a restaurant per se. It has to match that sort of growth and strong management profile, and it should be something where we can add value. I’ve never run a to-go container business, but I understand a lot about how they work and who their customers are and what makes a good product and a bad product.

Do you have a specific timeline in mind for Tastemaker Acquisition Corp.?

DP: SPACs are set up generally to do a single merger, although there are exceptions. Our process is to weed through a long list of potential partners. We knew who we were going to call, so we probably had 25–30 companies that we reached out to immediately on day one. We continue to refine that list as new opportunities come along. The process will whittle itself down to the point we have one partner that we agree to terms with and now it’s a merger. It’s a continuous process that began the day after our IPO when we started calling potential partners, management teams, PE sponsors, banks, and so forth. This is a space where you move as fast as you can. You have two years to complete it; otherwise you have to return the money to the investors.

How does a SPAC deal differ from a typical acquisition?

AP: SPAC is an interesting product. In some weird ways, you’re negotiating to ‘buy a company,’ but in some ways you’re not, because it’s a merger. You want to have alignment with the company that you’re targeting, and then you turn around and you sell the idea of how good the company is and how reasonable the price is to the public market. You’re not their adversary—you’re their sponsor; you’re their partner. Because in the end, the market will tell you whether the price was right or wrong. There aren’t a lot of things that distinguish one SPAC from the other. They either have the money or they don’t, and they don’t really get to set the price.

DP: It is a facilitation. Once you get a relationship going with the other party then you’re really just playing catch with ideas to get all the pieces to fit together, to get something that you’re prepared to take to the market. It’s a very different relationship than a typical acquisition process. It’s really much more of a partnership, much more of, ‘OK, we’re all on one side of the table now, how do we present this to the public markets?’ And that actually eliminates all the kind of historical adversarial relationship and really makes it a lot of fun because you know you’re trying to get one plus one equals three.

Are SPACs here to stay?

AP: My best guess is they’ll be more of a player than they have been. I think what you see now is a reaction to what Dave said about being able to tell a forward story, but also a reaction to the business community just saying, ‘Wait a minute; the whole world changed.’ Zoom was an annoyance that I couldn’t bother to learn; now it’s a $100 billion company. The world flipped upside down, and there’s a bit of a land grab. Do I think there’ll be 400 SPACs chasing things around five years from now? No, I don’t think so, unless things are equally as chaotic as they were last year. That said, if one of these SPACs does find a really solid restaurant company with good management and fundamentals, they go public via the SPAC, the stock does well, the SPAC sponsors add value, then sure, why not? I think there’s a lot of ways in which it’s a very good fit for restaurants.

DP: I think SPACs should be an emerging vehicle for investors. All the aspects of it make it attractive to the company, the partner, and the investor. But I think time will tell based on experience. If there are, as Andy said, successes that can be pointed to, then it will pick up momentum and you’ll see more of those. By the same token, if there is a series of SPACs that go off the rails or fail, I think it will discourage people from using them in the future. But I think all of the elements of it are there to make it a very attractive vehicle for all parties. It’s now about executing on all of these opportunities that are out there and doing it well. If that happens, I think you’ll see more and more of it.

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Considering the SPAC Route?

For restaurants that have flirted with the idea of a public bid, now could be an opportune time, especially given the proliferation of SPACs. Nevertheless, going public isn’t the right fit for all brands. Tastemaker’s Dave Pace and Andy Pforzheimer share six points to consider before making the jump.

1. Have real numbers ready. All too often, restaurants are trading on future earnings or current multiples of revenue, but real-world numbers are far better. “The best thing to do is to deliver solid numbers—so real revenue, real EBITDA,” Pace says. “Those are the things that are going to attract investors time and time again.”
2. Know your business and be consistent. Navigating the fast-paced world of Wall Street requires not only intimate knowledge of one’s own brand but also market foresight. “The public markets expect you to give them advice on what’s coming and then they trust that you’re going to deliver it,” Pace says.
3. Do your due diligence. Whether considering an IPO or a SPAC merger, restaurants are more likely to succeed if they first sort out their house. “Your accounting systems have to be set up to accommodate the unique vagaries of being in the public markets: dealing with the SEC, dealing with investor relations, dealing with all the accounting treatments,” Pace says.
4. Pick the right partner. Since SPACs don’t vary widely in terms of financials, partnering with the right one often comes down to gut feel. “It’s really only two things that matter. One is, do we like these people? Are they good at what they do? Two is, are they going to be able to bring the money to finish this process? Are they not going to trip on themselves with all the SEC issues?” Pforzheimer says. “It sounds sort of funny because you’re talking about these billion-dollar deals, but a lot of it does come down to that.”
5. Bring an X factor. With a rush of successful restaurants entering the public sphere, differentiation is key. “It doesn’t hurt to have a little X factor,” Pforzheimer says. “Something in your concept has to show white space. People get excited about that when there’s a new public offering.”
6. Go in strong. Switching from private to public will neither solve existing problems nor make a struggling company suddenly profitable. “At the end of the day, you’ve got to have a strong base business, and don’t let that get away from you,” Pace says.