Is Jollibee About to Bite Off Sandwich Maker Pret A Manger in Record Deal?

The largest foreign acquisition ever to come out of the Philippines could be in the works as the country's best-known fast-food chain orders out for lunch.

Jollibee Foods (JBFCY) is bidding for the British sandwich shop Pret A Manger in a deal that would well be north of $1 billion, according to Reuters. 

It's a combination as odd as fries with your oatmeal.

Jollibee is one of the most-recognizable brands out of the Philippines, washed down well with the beer from San Miguel (SMGBY) . But its food is an artery-clogger. "Pret," as the sandwich class knows it, veers toward healthy options such as crayfish-and-avocado protein pots and hummus-and-veggie wraps.

Jollibee is known for its fried chicken and burgers. The acquirer's joyous bee is ubiquitous in the main cities of the Philippines, where it has 750 stores, but little known overseas. You'll find 22 outlets in California, and a smattering in other U.S. states.

That belies its size. The chain, started as an ice-cream parlor in the 1970s by the Chinese-Filipino businessman Tony Tan, has a market capitalization of $5.2 billion. Its expansion is rapid enough that Jollibee hasn't updated its Web site with its two latest locations in Hong Kong.

But its growth has been as much through acquisition as organic expansion -- it bought the Chowking chain of Chinese fast food in the Philippines in 2000. It has recently snapped up several fast-food chains in China itself, too. It bought 40% of the upscale Denver-based chain Smashburger for $100 million in 2015.

Pret A Manger had been preparing for a potential initial public offering in New York, according to reports this May. The private-equity shop Bridgepoint Advisers was looking to raise as much as $1.9 billion, according to Bloomberg, citing confidential sources.

London-based Bridgepoint bought the Pret chain for €500 million ($600 million) from its founders and one-third owner McDonald's (MCD) in 2008. Pret reported revenues of $1.1 billion in 2016.

Jollibee's bid is still in the works, but it would appear to be well below the mooted IPO valuation of Pret. That's based partly on the values of rival food chains such as Shake Shack (SHAK) and Chipotle Mexican Grill (CMG) . Still, any Jollibee offer is "at an early stage," according to Reuters, apparently with room for a substantial move upwards.

Each time I wander past Jollibee's first store here in Hong Kong, in Central, you get a waft of lard that's an unmistakable and dominant part of the olfactory environment across the Philippines. The chain last year opened another Central branch and a third, in Mong Kok, by some counts the world's most-crowded neighborhood.

Jollibee has an incredibly loyal following. The original Central store is always crammed with Filipinos, many of them the domestic helpers that together with Indonesian maids make up by far the largest expatriate population in Hong Kong. The store is down a lane off Connaught Road Central, one of Hong Kong's busiest.

It's right next to World Wide House, which has a small mall full of stores selling mobile-phone cards, cheap clothes, Filipino food and the rainbow-colored shaved-ice dessert halo-halo. There are also plenty of finance outlets offering personal loans and remittances to send cash back home.

There's also a cluster of Jollibee stores in the Middle East, which is where many Filipino men head to work in construction, while many Filipinas work as maids. It's a sad state of affairs that a qualified nurse or university graduate from the Philippines still finds it better-paid to head overseas into work that hardly requires their skills. 

A Pret deal could mark a move into more-upscale offerings for the chain. It would also mesh well with the bee's plan to buzz global.

A U.S. listing for London-based Pret was seen as the launchpad for an international expansion, with the United States clearly a major target market. That's a concern that's all the more pressing with Britain preparing Brexit -- the company has said only one in every 50 applicants for its U.K. jobs is British. 

But private bidders for the company were also emerging as IPO talk swirled, with JAB Holding bandied about as a possible suitor. JAB, which already owns Krispy Kreme Doughnuts and Caribou Coffee, in July completed the acquisition of the soup-and-sandwich chain Panera Bread for $315 per share, or the equivalent of around $7.5 billion. 

Pret has 20 stores around me here in Hong Kong, and has hit the University of Pennsylvania and University of Chicago as part of a push onto college campuses. As of the end of last year it had 444 stores globally, including 74 in the United States, 329 in Britain, 19 in France, two in China and a sole spot in Dubai.

Monde Nissin, the metro Manila-based maker of Lucky Me! instant noodles, paid £550 million (then worth $831 million) in 2015 for the British company Quorn, which makes meat substitutes to go in protein-based nuggets and burgers.

At the time of publication, Alex Frew McMillan had no positions in the stocks mentioned.