Restaurant Finance Across America
Burger King And The Private Equity Bubble
Any question that there is something of a private equity bubble was answered this morning when Burger King announced its rumored sale to the private equity group 3G Capital--which until now had been known most as the employer of the guy who married Chelsea Clinton (Marc Mezvinsky). But the price, $24 a share, or $4 billion, was a surprise--shares were trading at $16.45 a share on Tuesday, and you'd have to go back to April of 2009 to find a day when the company's share price even reached $24 a share at all. The price equates to about 9x EBITDA, far more than the 6.6x CKE got, as well as BK's 6.5x enterprise value as of Tuesday. Sure, the brand has some potential, and room to grow internationally, but it's not exactly flying high right now--sales are lagging and franchisees as a whole are angry. At these prices, why not sell?
Business Wire (press release), September 2, 2010 
On Employment: Not Just About Numbers
Friday's closely watched report on unemployment isn't expected to be good news, as evidenced by the most recent ADP Employment Report. It found that private sector industries cut 10,000 jobs in August, further confirming that the recovery has stalled. But the news isn't even that good. According to ADP, goods producing companies cut 40,000 jobs, which was offset by a 30,000-job increase in service-sector workers. Why is this important? Pay. On average, goods-producing workers make $10,000 more than their service-sector counterparts every year. So many workers who do find jobs don't get the pay they once did. Less pay means less money to spend at restaurants.
ADP Employment Report, September 1, 2010
Now Burger King Is, Reportedly, On The Block
Burger King is apparently the latest restaurant company to look longingly at the greener grass of private life. According to the Wall Street Journal and the New York Times, the Miami-based QSR is in buyout talks with private equity groups, one of which is 3G Capital. Burger King has had a rocky ownership history, and it only went public four years ago. But the economy has been brutal on its core customers--young men--ending a string of strong sales since TPG, Bain Capital and Goldman Sachs bought the company from Diageo in 2002. It also has a large group of angry operators. In a note on the reports, Janney Capital analyst Mark Kalinowski called a possible sale "a chance for some investors to cut their losses." Indeed.
WSJ, New York Times, September 1, 2010
Fast Casual Remains An Industry Bright Spot
A Mintel Foodservice report released this morning shows exactly where the fast-casual sector is getting its business from: casual diners. The report confirms that the sector remains the restaurant industry's bright spot, with estimated sales at $23 billion, which is 30 percent higher than in 2006--phenomenal growth considering the economic environment over that time. Yet the study also found that 26 percent of respondents said they went to a fast casual restaurant for lunch over the past month. That remains a far cry from the 60 percent who said they visited a QSR for lunch, but not much less than the 28 percent who said they went to a casual dining restaurant. The upshot: Fast-casual restaurants are quickly becoming a preferred lunch destination over anything with table service. But most of you knew that already.
PR Newswire (press release), August 31, 2010
Logan's Roadhouse: Not Going Public Anymore
When Logan's Roadhouse in June filed a registration statement to begin selling stock, we admitted to a certain amount of skepticism, and for good reason. The 214-unit chain had said it was going public before, back in 2006. That registration was later withdrawn when the company was sold. So we weren't terribly surprised today to find out that Logan's Roadhouse is once again not going public. This time it's being sold to Kelso & Company, a $5.1 billion investment firm that has a relatively limited history of investing in restaurants, but an extensive history buying up other types of companies. By filing the registration statement, then selling, Logan's parent LRI Holdings put itself into position to fetch a better price. And it continued to keep the number of publicly traded restaurant companies dwindling.
Logan's Roadhouse (press release), August 30, 2010
Fixing Dinner
The NPD Group study released earlier this week, which predicts lower per-capita meal occasions over the next decade, emphasizes the restaurant industry's tough future, even without the recession. And the biggest problem is expected to be at dinner, where restaurant visits have been struggling the most as it is. Customers simply aren't going out after work like they used to, thanks to the aging of the population, growing competition from grocery stores, mounting health concerns and an end to growth in the number of women entering the workforce. So as restaurants consider their long-term planning, they're not just going to have to figure out a way to tell diners how they're better than the next guy, they're going to have to tell diners why they're better than a night at home. We suggest ads showing heaps of dirty dishes.
Jonathan Maze, August 27, 2010
Denny's Putting Its Executive Ranks Back Together
Denny's interim CEO, Debra Smithart-Oglesby, is proving to be more adept than her predecessor at one thing: hiring. Today, the company announced that it hired Robert Rodriguez as its new chief operating officer. Rodriguez was most recently the president and COO at Pick Up Stix and before that worked for a who's who in the restaurant business. Last month, Smithart-Oglesby hired Frances Allen as the company's chief marketing officer. Both executive positions were made vacant in a one-week period last December. And they were still vacant in June when CEO Nelson Marchioli was forced to resign following a tough proxy battle. Marchioli's handling of his executive team was a big complaint among Denny's franchisees.
Denny's (press release), August 26, 2010
Keeping Food Costs Down
The USDA late yesterday revised downward its consumer inflation forecast for food, both at grocery stores and at restaurants. The government now predicts that menu prices at restaurants will increase this year only 1-2 percent, noting that world economic activity "remains below pre-recessionary levels." Restaurants likely have little choice but to keep prices down, given the state of the consumer. Yet the revised forecast comes amid growing signs of some commodity inflation, especially in wheat and coffee, two food staples, in addition to pork and corn. This sets up a potentially troublesome scenario for smaller operators, many of which are already subsisting on thinner margins as it is. But it could always be worse: Grocery store prices are going up even less.
USDA, August 26, 2010
Former Max & Erma's Owner Expresses Some Regret
Pittsburgh businessman Gary Reinert Sr. owned the Ohio-based casual-dining chain Max & Erma's for less than two years before it went bankrupt. That short but rather eventful period came to an end this week when the chain was sold to American Blue Ribbon Holdings, the owner of the Village Inn and Bakers Square chains. In an interview with the Pittsburgh Post-Gazette published this morning, Reinert said he lost $25 million on the deal and that he spent so much time on the restaurant chain that he neglected his other businesses. He also admits that he "screwed up" by "buying the restaurants" in the first place, even though friends and his bank advised him not to.
Pittsburgh Post-Gazette, August 25, 2010
Aging Population No Help To Restaurants
The aging population will affect the U.S. in countless ways, particularly in tax collections, health spending and pension costs. And it won't help the restaurant industry much, either. According to a study released this morning by the NPD Group, restaurant traffic will grow at a rate that is slower than population growth over the next decade -- due almost entirely to the aging of the population. Older people, the study says, don't eat out as much as younger people, which translates into less traffic at the nation's eateries. This also means that chains' growing reliance on breakfast, drinks and snacks will become more common as the industry adjusts to the demographic shift. Mostly, it means that the already competitive restaurant industry won't get any easier when the recession actually does end.
NPD Group, August 25, 2010
Grocers May Have To Post Calories On Menus, Too
Because they both sell food, restaurants and grocery stores have always competed, but that competition has become more direct in recent years as grocers have added enhanced delis and cafes. This has apparently not escaped notice at the FDA, which today released its guidance for new menu labeling requirements for public comment. These regulations will cover chains with 20 or more locations with the same name and substantially the same menus. In its guidance, the FDA said that grocery store cafes or food courts could fall under the new rule. It is also asking for comments on what other parts of the grocery store should count, too--such as bakeries or delis, salad bars or pizza bars, many of which have done their share to drain lunch customers away from restaurants. The FDA said it "intends to ensure that establishments that offer comparable food items for immediate consumption are treated comparably."
FDA, August 24, 2010
Is The King Also A Bellwether?
Last week, the Monitor's publisher, Mary Jo Larson, appeared on Fox Business to talk about McDonald's. She was asked whether it was a bellwether for the entire industry, and answered smartly that it was not. A better bellwether would be McDonald's chief U.S. rival, Burger King. The Miami-based chain relies on young men, who have been hit hardest by the economic downturn and who would seemingly be eager to return to their previous dining habits once their finances stabilize. So how is the King doing? Meh. This morning, Burger King reported comp sales that were down 1.5 percent in the U.S. last quarter. That's better than the 4.5 percent decline last year at this time, but it's still a red number. Just like much of the industry, the King is improving, but it's not all the way back yet.
Jonathan Maze, August 24, 2010
So Much For That Takeover Idea ...
Earlier this month, Red Robin Gourmet Burgers quietly made it more difficult for an investor to take the chain over. That effort may have kept at least one suitor away -- Sardar Biglari, the chairman of Biglari Holdings, which owns Steak & Shake and Western Sizzlin. Biglari ignited speculation that he was targeting Red Robin when his company said in early July that it had acquired 6 percent of the company's shares for a "passive investment." This morning, less than two weeks after Red Robin swallowed its poison pill, Biglari Holdings in an SEC filing said it no longer owned any Red Robin stock. We don't think Biglari made a lot of money off the deal, if any, as Red Robin is trading at roughly the same level it was when he acquired his shares. We can only speculate then that Biglari has abandoned his plan to own Red Robin and is focused on another target -- Sonic, perhaps?
SEC, August 23, 2010
Restaurant Sales Quietly Improving
We've been hit with a steady stream of negative economic news this week, particularly on the job front, but despite fears of a "depression" or a Japan-style "lost decade," restaurants have quietly been picking up steam. William Blair analyst Sharon Zackfia said in a report today that overall restaurant sales trends improved for a 10th straight month in July--led, as you could probably imagine, by fast-casual chains, followed by fine dining. Even QSR, the poorest performing group, has stabilized recently. Restaurants' overall same-store sales gained 0.6 percent in the second quarter. While that's not much, it sure is better than the 4.8-percent decline last year. The Census Bureau, meanwhile, said last week that restaurant sales were up 0.2 percent in July. We still worry about unemployment, and the economy is clearly struggling to emerge from the recession, but at least the public is more willing to spend a few bucks on a night out.
Jonathan Maze, August 20, 2010
In The Monitor: Restaurant Strategies Unmasked
The numbers look really awful: The economy remains in the grip of a severe housing bust and credit contraction, with high unemployment and income stagnation. And now the restaurant business must deal with more deflation--can anyone say the $1.00 double cheeseburger three times--and deleveraging, which favors savings and debt repayment instead of consumption. Not exactly a ringing endorsement for the 70% of GDP consumer economy that the restaurant industry plays a big role in. Now the debate is whether the economy is headed for recession again. A few economists and many Americans think we never really came out of the last one. ...more
Landry's Roller Coaster Sale Price
The proxy statement Landry's filed earlier this week ahead of its October shareholder meeting is not easy reading. But it does provide a painfully detailed look at its negotiations with CEO Tilman Fertitta, who is taking the company private. The 171-page document is difficult to sum here, but it does describe a remarkably challenging negotiation combined with bad timing that delayed the transaction for over two years. Fertitta first offered to take Landry's private at $23 a share. Then he reduced the price to $21, then $17, then $13.50, amid the declining economy and credit markets and damage to restaurants by hurricanes. That transaction was canceled in 2009 over financing issues. The issue was raised again a year ago. The Landry's board played "hardball" and got the per-share price up to $14.50 from $13. Then two investors, Pershing Square Capital and a pension fund, began making noise. Lawsuits were filed. The stock price rose. And ultimately Fertitta agreed to pay $24.50.
Jonathan Maze, August 19, 2010
Restaurants As Job Creators
In my years writing about business and government for various publications, I not once heard economic development officials drool over new restaurants as job creators. So a recent release from Red Robin, linked below, got my attention. The chain is opening a new restaurant in Tampa, which will create 100 jobs, and pointed out that it is accepting applications. The release came out the day that McDonald's held a nationwide job fair. Perhaps these are signs of the state of the employment picture, that restaurants now feel confident enough to brag about the jobs they create. But perhaps they should brag no matter what the economy is like. Restaurant jobs are underrated, we feel, and if you don't believe us, just check out the job histories of most of McDonalds' top executives--and many of its now-millionaire franchisees.
Jonathan Maze, August 18, 2010
Agadi Surfaces At Friendly's
Harsha Agadi, former chief executive at Church's Chicken, has surfaced at another franchise chain. Friendly's Ice Cream, owned by Sun Capital Partners, yesterday named Agadi its chairman and CEO. Agadi replaces Ned Lidvall, who according to a release left to "pursue other interests," an excuse that never fails to pique our inner skeptic. (Other interests? Really? What, is he going take up stamp collecting?) Agadi helped guide Church's growth into a $1 billion company, but was replaced as CEO by Mel Deane six months after the chain was sold to the private equity firm Friedman Fleischer & Lowe.
Friendly's (press release), August 18, 2010
Fidelity Buys Up Another Troubled Brand
Fidelity Newport, a subsidiary of Florida-based Fidelity National Financial, is adding another struggling restaurant chain to its lineup. The company apparently won the bid for the bankrupt Ohio-based Max & Erma's chain, according to a filing this morning. Terms were not available, but the bid had to be at least $25.7 million. The casual dining chain went bankrupt last year, less than two years after Pittsburgh developer Gary Reinert bought the company for $10.2 million. Fidelity and Newport Global Advisors last year purchased the bankrupt company that operates the Bakers Square and Village Inn family dining chains.
Business First of Columbus, August 17, 2010
Benihana Reaches A Deal With An Activist
Benihana, the Florida-based Japanese steakhouse that is up for sale and facing a proxy battle at the same time, reached a deal yesterday with one of its activists, Coliseum Capital Management. Under the agreement, the company will nominate Coliseum co-founder Adam Gray as its Class A director. The existing director is Darwin Dornbush, who had previously been nominated by the company in advance of the shareholder meeting next month. Gray has been seeking a board seat since May. He and Coliseum began buying up company stock last year and emerged as an activist in February before Benihana's plan to issue more stock, a plan that won a shareholder vote that month by a thin margin. Still to be resolved is Benihana's dispute with its largest shareholder, a company controlled by the family of the chain's late founder, Rocky Aoki. The Aoki family has nominated two to the Benihana board.
SEC, August 17, 2010
