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Why Panera Might Get Dragged Into a Bidding War

April 11, 2017, 4:32 PM UTC

The $7.5 billion takeover bid that Panera Bread agreed to earlier this month could see a rival offer.

The New York Post on Tuesday, citing sources close to the matter, has reported Brazilian private equity giant 3G Capital is mulling a rival bid that would need to top the $315 per-share price that European investment firm JAB already agreed to pay. JAB’s bid already represented a premium of about 30% above the level that shares traded at before speculation of a potential transaction began—and observers were quick to point out the valuation was already quite lofty. If 3G were to jump into the mix, it would have to cough up a lot of dough to top the JAB offer.

Panera Bread declined to comment.

What makes Panera Bread such a compelling target? Wall Street has lauded the chain as one of the most consistent restaurant operators at a time when traffic trends have been soft as chains digest higher labor costs and as lower food inflation prices have made grocery stores a more compelling shopping destination. There are few other publicly traded national brands with such a compelling and consistent growth story.

Panera has also invested heavily in the digital experience via an initiative it calls Panera 2.0, which includes digital ordering and kiosks that customers can use to place orders. The chain’s tilt to be seen as more healthy in consumers minds has also made it a compelling buyout target.

Observers have said they anticipated Panera’s earnings would rise significantly because of of those moves to re-position the brand. When rumors first swirled about a potential Panera buyout, several heavy hitters were mentioned as suitors, likely because Panera was viewed as a strong restaurant operator. They included Starbucks (SBUX) and McDonald’s (MCD), as well as 3G-backed Restaurant Brands (RTBRF). Restaurant Brands, the owner of Burger King and Tim Hortons, agreed to pay $1.8 billion in cash to buy Popeyes Louisiana Kitchen in February.

Because of that deal, Restaurant Brands was often viewed as a long-shot acquirer for Panera. But of all the vehicles that 3G is behind, it would make the most sense for that company to buy Panera (the other two are packaged foods giant Kraft Heinz and Big Beer’s AB InBev). 3G didn’t respond to Fortune‘s request for comment on the Post story.

When Restaurant Brands inked the Popeyes deal, part of the justification was increasing the pace of restaurant openings for that concept in the U.S. and also in international markets. If Restaurant Brands were to acquire Panera, a similar move could be made to increase the bakery-cafe’s reach. Panera’s only international exposure is Canada, with just under two dozen locations in the Ontario region. It also has just around 2,000 locations in the U.S.

And there’s also the matter of franchising. Restaurant Brands essentially franchises all of the company’s Tim Hortons and Burger King restaurants locations. It only owns a handful of each concept, likely for testing new initiatives, a common practice among franchise-heavy restaurant concepts. The franchise business model is efficient because companies like Restaurant Brands can focus more on menu innovation and keep a lid on overhead costs while leaving the management of restaurants to franchise partners. On the flip side, influence over franchisees can be limited at times.

Panera also franchises but less so than Restaurant Brands. About 56% of the bakery-cafe’s are owned by franchise partners. A higher mix, some Wall Street analysts have argued, could reduce capital expenditures.

Contrarians would likely argue that the economics and timing don’t work out for a potential 3G Capital bid. And brand synergies might also not align. Restaurant Brands has stated that the company’s main business strategy is to become “the most efficient franchised quick-service restaurant operator through a constant focus on costs and sharing best practices.” Popeyes fits into that strategy nicely. But Panera—as one of the largest and most popular fast-casual purveyors—does not. It doesn’t depend on the drive-thru, low prices, and trendy limited-time offers to generate sales. Panera isn’t as natural of a fit, unless Restaurant Brands has the appetite to branch out beyond the fast-food world.

For now, investors aren’t sold on the idea that 3G or another suitor may come in and offer a rival bid for Panera. Panera’s stock was barely budging from the $314 price on Tuesday, which almost perfect matches JAB’s offer.