Acquisition

12 Months Ended

Dec. 29, 2020

Acquisition

Acquisition

2.    Acquisition

On October 2, 2019 (the “Closing Date” or “Closing”), we completed the acquisition of North Italia and the remaining business of Fox Restaurant Concepts LLC, including Flower Child and all other FRC brands. North Italia is a restaurant company that operated 21 locations across ten states and Washington D.C. as of the Closing Date. FRC is a multi-concept restaurant company that operated 10 concepts with 47 locations across eight states and Washington D.C. as of the Closing Date. The results of operations, financial position and cash flows of the acquired businesses are included in our consolidated financial statements as of the acquisition date.

We have concluded that the Acquisition represents a single business combination of related businesses under common control within the scope of ASC Topic 805, Business Combinations. The acquisition date was determined to be the Closing Date, which was the date we obtained control by legally transferring the consideration for the remaining ownership interests, acquiring the assets and assuming the liabilities of North Italia and the remaining FRC business.

The Acquisition, which we expect will accelerate and diversify our revenue growth, was completed for consideration consisting of the following components: $288.1 million in cash at Closing, which was primarily funded by drawing on our credit facility; assumption of $10.0 million in debt previously owed by FRC to us; a $12.0 million indemnity escrow amount specifically related to North Italia due ratably over two years; and $45.0 million of deferred consideration due ratably over four years (including a $13.0 million indemnity escrow amount specifically related to the remaining FRC businesses). The assumption of debt previously owed by North Italia to us represents the effective settlement of a preexisting relationship. Since we determined the loans were at market terms, the debt assumed was treated as purchase consideration, and no gain or loss was recorded.

The acquisition agreement also included a contingent consideration provision, a portion of which was considered part of the acquisition consideration, and the remainder of which was considered future compensation expense. The acquisition-date fair values for the acquisition consideration and future compensation expense were $12.8 million and $7.3 million, respectively, determined utilizing a Monte Carlo model based on estimated future revenues, margins and volatility factors, among other variables and estimates. The contingent consideration, which has no maximum payment, is payable on the fifth anniversary of the Closing Date and is based on achievement of revenue and profitability targets for the FRC brands other than North Italia and Flower Child with considerations made in the event we undergo a change in control or divest any FRC brand (other than North Italia and Flower Child) during the five years after Closing. We are also required to provide financing to FRC in an amount sufficient to support achievement of these targets during the five years after Closing.

Since the Acquisition represents a business combination achieved in stages, we remeasured our previously-held equity interests in North Italia and Flower Child immediately before the acquisition to acquisition-date fair value of $122.0 million and recognized a resulting gain of $52.7 million which is included in gain/(loss) on investments in unconsolidated affiliates in our consolidated statements of operations. The fair value of the previously-held interests was determined using a discounted cash flow model based on estimated future revenues, margins and discount rates, among other variables and estimates.

The following table summarizes the calculation of goodwill, as finalized in the first quarter of fiscal 2020, based on the excess of consideration transferred and the fair value of the previously held equity interests over the fair value of the assets acquired and liabilities assumed (in thousands).

Purchase consideration:
Cash at closing	$	288,089
Assumption of debt previously owed by FRC		10,000
Deferred payments		53,471
Contingent consideration		12,786
Consideration transferred		364,346
Fair value of previously-held equity interests		122,000
Total		486,346
Less net assets acquired:
Current assets		23,682
Property and equipment		84,360
Intangible assets		336,280
Operating lease assets		223,455
Other assets		5,842
Current liabilities		(64,814)
Operating lease liabilities		(202,433)
Other noncurrent liabilities		(883)
Total net assets acquired		405,489
Goodwill	$	80,857

Goodwill is related to the benefits expected as result of the Acquisition, including acceleration and diversification of our revenue growth. $29.2 million of the goodwill recorded as part of our purchase accounting entries related to North Italia. During fiscal 2020, we recorded goodwill impairment expense of $79.4 million. (See Note 8 for further discussion of our goodwill assessment and resulting impairment charge.) $74.2 million of goodwill is expected to be deductible for tax purposes.

Property and equipment will be depreciated over useful lives of 3 years to 30 years. The fair value of acquired property and equipment was determined under a trended original cost approach utilizing variables and estimates such as useful lives, hold factors and economic obsolescence.

Intangible assets acquired primarily consist of trade names and trademarks that were assigned indefinite lives based on the expected use of the assets and the regulatory and economic environment within which they are being used. The fair value of the acquired intangible assets was determined utilizing the relief from royalty method based on estimated future revenues, royalty rates and discount rates, among other variables and estimates. During fiscal 2020, we recorded impairment expense of $103.3 million related to the acquired intangible assets. (See Note 8 for further discussion of our intangible asset assessment and resulting impairment charge.)

Operating lease assets include values associated with favorable and unfavorable market leases that will amortize over a weighted-average period of 15.2 years. The fair value of the operating lease assets was derived using an income approach based on market transaction data and estimated discount rates, among other variables and estimates.

During fiscal 2020 and 2019, we incurred $2.7 million and $5.3 million of costs, respectively, to effect and integrate the Acquisition. These costs were expensed in accordance with ASC 805 and are included in acquisition-related costs in our consolidated statements of operations.

Pro Forma Results of Operations (unaudited)

The following pro forma results of operations for fiscal 2019 and 2018 give effect to the Acquisition as if it had occurred on January 2, 2018 (in thousands):

	Fiscal Year
	2019		2018
Revenues	$	2,732,901	$	2,579,019
Net income		74,949		80,800
Net income per share:
Basic		1.71		1.79
Diluted	$	1.68	$	1.75

The above pro forma information includes combined North Italia and FRC actual revenues and net loss of $92.0 million and $1.5 million, respectively, contributed post acquisition in fiscal 2019. The most significant adjustments included in the pro forma financial information are the elimination of the gain/(loss) on our previously-held equity interests in North Italia and Flower Child, elimination of transaction costs, increased interest expense associated with debt incurred to fund the Acquisition, elimination of historical FRC interest expense and corresponding income tax effects.

In the opinion of the Company’s management, the unaudited pro forma financial information includes all significant necessary adjustments that can be factually supported to reflect the effects of the Acquisition and related transactions. The unaudited pro forma financial information is provided for informational purposes only and is not necessarily indicative of what our actual results of operations would have been had the Acquisition and related transactions been completed as of January 2, 2018 or that may be achieved in the future.