The Ratings Game: For Dunkin’, a takeover could be a chance to head out west

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Dunkin’ is in talks to go private in a deal that could value the company at about $8.8 billion

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Dunkin’ Brands Inc. DNKN, -0.38% could have a chance to break out of the Northeast region and head west if it is ultimately acquired by Inspire Brands, analysts say.

“We believe the Dunkin’ U.S. business (~85% of total profits)… represents a significant opportunity for growth outside of its core market (the Northeast, ~60% of U.S. stores), with expansion into less penetrated domestic markets a longtime goal for the brand,” wrote RBC Capital Markets’ Christopher Carril in a note.

RBC rates Dunkin’ stock sector perform.

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MKM Partners agrees.

“As Dunkin’ has been working on expanding its footprint into newer/more western markets, additional partnership opportunities could aide in market entries,” analysts wrote.

The New York Times reported Sunday that the coffee purveyor was in talks with Inspire, and a deal that would value the company at about $8.8 billion could be announced Monday.

Dunkin’ has been private previously, and went public in 2011.

Roark Capital-backed Inspire Brands also owns the Sonic drive-in chain, Arby’s and Buffalo Wild Wings.

News of a possible deal sent Dunkin’ Brands stock soaring 18.3% in Monday premarket trading, putting them on track to open at a record high.

Inspire’s brands have more than 11,000 restaurants with more than $14 billion in sales, according to RBC’s calculations. Dunkin’, which operates with an “asset-light,” all-franchised system, would add 21,000 locations around the world and about $12 billion in system sales.

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Dunkin’, Starbucks Corp. SBUX, +1.61% and other restaurant chains dependent on breakfast customers took a hit early in the coronavirus pandemic as work-from-home orders were put in place.

At the JPMorgan Gaming, Lodging, Restaurant and Leisure Conference in September, Dunkin’ said it was now in “recovery mode” with customers coming in at later times of day.

“Maybe they need a break from their Zooms,” said Katherine Jaspon, Dunkin’s chief financial officer, according to a FactSet transcript. “[S]o we’re really taking advantage of that through things like impactful product innovation, whether that’s snacking, Matcha, introducing oatmeal, which we did recently, and focusing on espresso and latte platforms and things that you can’t really make at home.”

Read: Dunkin’ and Starbucks are in a race to make the fastest espresso

Dunkin’ recently launched a Spicy Ghost Pepper doughnut.

Dunkin’ stock has rallied 27% over the past three months, and is up 17.5% for the year to date. The benchmark S&P 500 index SPX, +0.34% has gained 7.3% in 2020.

KeyBanc Capital Markets is “surprised” by the deal talks since Inspire is usually interested in companies in need of a turnaround and Dunkin’ has “executed” through the pandemic.

Inspire doesn’t do a lot of coffee or breakfast business, though Roark Capital has a lot of experience with “multi-unit franchisors.”

“We believe the market is just beginning to credit Dunkin’ for the capabilities it has put in place that have positioned it to achieve sustainable growth,” wrote analysts led by Eric Gonzalez.

KeyBanc rates Dunkin’ stock overweight with a $97 price target.

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