Diversified Royalty Corp. Expands with Cheba Hut Acquisition for Strategic Growth
- Diversified Royalty Corp. acquires Cheba Hut's trademarks for US$36 million, enhancing its portfolio and revenue sources.
- The acquisition is financed through US$18 million from an amended facility and US$5 million from new credit facilities.
- Cheba Hut's projected system sales for 2025 are over US$187 million, positioning it as a valuable asset for Diversified Royalty.
Diversified Royalty Corp Expands Portfolio with Cheba Hut Acquisition
Diversified Royalty Corp. (TSX: DIV and DIV.DB.A) announces a strategic acquisition that significantly enhances its portfolio. The company acquires the trademarks and intellectual property of Cheba Hut Franchising, Inc. for US$36 million in cash. This marks Diversified Royalty's ninth royalty stream and its second acquisition in the United States, underscoring its commitment to expanding its footprint in the growing franchising sector. The deal not only diversifies its revenue sources but also strengthens its financial profile with an expected increase in adjusted revenue.
The acquisition is financed through a combination of resources, including US$18 million from an amended acquisition facility and an additional US$5 million from new credit facilities. Following the acquisition, Diversified Royalty licenses the Cheba rights back to Cheba Hut for a substantial 50-year term, initiating with an annual royalty payment of US$4 million. This payment is set to adjust annually to account for inflation or a minimum increase, demonstrating a forward-looking approach that aligns with the company's growth strategies. CEO Sean Morrison emphasizes that this deal represents approximately 7% of the company's pro-forma adjusted revenue, highlighting its potential to contribute meaningfully to overall financial performance.
Cheba Hut operates 77 franchised locations and has recorded system sales of US$149 million in 2024, with projections of over US$187 million for the fiscal year ending December 31, 2025. This robust growth trajectory positions Cheba Hut as a valuable addition to Diversified Royalty's portfolio. Scott Jennings, the founder of Cheba Hut, expresses optimism about the partnership, recognizing Diversified Royalty's capability to support the brand's growth while maintaining its integrity. The acquisition is also expected to enhance Diversified Royalty's tax pools by approximately CAD$51 million, elevating the total to CAD$424 million, which can be leveraged for tax depreciation.
In addition to this acquisition, Diversified Royalty's strong financial standing allows for future growth opportunities. The company's strategic focus on diversifying its revenue sources continues to pay dividends, positioning it favorably within the competitive landscape of royalty financing. As the franchising sector continues to evolve, Diversified Royalty's approach to acquisitions signals its intent to remain a key player, leveraging established brands to drive sustainable growth and profitability.