Can Billion-Dollar Buying Spree Save FAT Brands’ Reputation?

As FAT Brands acquired nine new restaurants chains over 18 months, their plan for integrating these firms has attracted criticism from financial experts, given the scandals surrounding Chief Executive Officer Andy Wiederhorn.

Five acquisitions totaling almost $1 billion have expanded the FAT Brands system to 2,300 restaurants in a network of 17 chains. With $2.2 billion in sales, FAT Brands' latest assets include Fatburger, Johnny Rockets, Fazoli's, and Native Grill & Wings. These purchases came just months after the U.S. Securities & Exchange Commission opened investigations into FAT Brands and Wiederhorn regarding FAT's 2020 merger with Fog Cutter Capital Group. Wiederhorn owned over 80% of Fog Cutter's shares before the merger, which he says was executed to preserve the company's $100 million net operating loss carry-forwards for tax purposes. In February 2022, a class-action lawsuit was filed against Wiederhorn, accusing him and three other senior directors of "looting" the company, "running FAT Brands into the ground and bleeding it of its cash."

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The first phase of integrating these new brands involves the development of 875 new stores, all paid for by franchisees. Their second priority is refinancing their debt to lower the cost of capital. FAT Brands recently implemented four separate securitization deals totaling $900 million. They are all 30-year, interest-only, fixed-rate bonds. Wiederhorn told the Financial Times that because the company used unrated debt to expedite the acquisitions, they're seeking an agency to rate the bonds, as a rated bond "gets a couple of points lower" in interest. This technique is raising criticism from financial experts.

"Their debt has skyrocketed from about $30 million in December 2018 to over $480 million today," said an anonymous analyst at Seeking Alpha. "The company is now highly leveraged and has a debt-to-equity ratio of approximately 10, which definitely adds a lot of risk to the bullish thesis."

Skepticism from experts is also due to Wiederhorn's now-tarnished public image. In February 2022, The Los Angeles Times published an article investigating allegations against Wiederhorn and his son Thayer, FAT Brands' Chief Operating Officer, for wire fraud, money laundering, and attempted tax evasion. Wiederhorn's attorney categorically denies these claims.