outlook - Peter J. Solomon Company

Volume 19, Number 11 • Restaurant Finance Monitor, 2808 Anthony Lane South, Minneapolis, MN 55418 • ISSN #1061-382X
November 5, 2008
OUTLOOK
Finally, a Positive? Commodities Ease
No More Easy Money for Casual Dining
In the midst of a financial presentation for analysts in October,
Ruby Tuesday’s Chairman Sandy Beall told attendees that,
“There are a lot of positives out there.” He stopped himself,
however, and thought better of that statement. “OK, maybe
there aren’t a lot of positives out there. But there are a few
positives, or signs of hope.”
From September 21 to October 5, 2004, Kent Taylor, the
founder of Texas Roadhouse, in Louisville, went on the road
himself, visiting analysts and investors in 15 U.S. cities. “I
bought fancy suits and a $100 tie for the roadshow,” Taylor told
the audience at last year’s Restaurant Finance & Development
Conference, “but when we got to New York, my advisors told
me to stay in my jeans, boots and cowboy hat.”
Given the industry in which Beall’s company operates, casual
dining, he may have been grasping at straws in trying to
provide some positive news during what was an altogether
bleak presentation—his company’s same-store sales have been
falling in the double digits amidst the worst environment for
restaurants in decades.
Yet there may, in fact, be a light at the end of the tunnel: lower
oil prices. Once thought headed for $200 a barrel and gasoline
to $5.00 per gallon, oil fell precipitously this fall as traders
realized consumers are going to be a lot less able to pay $4 for
a gallon of fuel when they’re losing their jobs.
Falling oil prices already have resulted in falling gas prices,
which has lowered distribution costs for restaurants while
giving consumers a few extra dollars in their pockets, possibly
reducing their incentive to cut back on discretionary spending
in the coming weeks.
“The gas situation is positive, because even though Americans
would much rather use dollars on dining out than on putting
gas in the tanks, the fact is that they still have to put gas
in the tank,” said Hudson Riehle, senior vice president of
research and information services for the National Restaurant
Association. “The elevated prices this summer did dampen
restaurant demand. So lower prices is a positive light in this
period of challenges.”
Bill Etter believes the lower oil prices will be a real boon
for the two Champps restaurants he co-owns in Wisconsin.
“I’ve said this two or three years ago, but the biggest scare in
this business would be the rising price of gasoline,” he said.
“When gas hit $4 a gallon this summer, it took away so much
disposable income that we felt it.” Now gas is down well below
$3 a gallon. “People are saving $50 to $75 a month, and they’ll
use some of that to eat out a little more often,” Etter said. “That
has helped a little bit.”
Outlook continued on page 8
Taylor and Texas Roadhouse president, G.J. Hart, who wore a
suit, held 74 separate meetings, rustling up interest in an IPO.
By the time they finished, and Taylor could finally change his
clothes, they’d raised $183 million. The initial stock price for
TXRH was $17.50; at the end of the first day of trading, the
price was $22.40.
The IPO was remarkable for more than Taylor’s garb. It was
the last time a major casual dining chain went public.Robert
Derrington, managing director of Morgan Keegan & Company
in Nashville, said, “In the early ‘90s, casual dining companies
went public early. Logan’s Roadhouse did it with only nine
units.” (Logan’s, based in Nashville, is now owned by a trio of
private equity firms.) Now casual dining chains avoid the public
markets, Derrington said, for reasons that range from cost of
federal regulations to the fear of economic downturns.
He and other industry insiders wonder whether the era of public
casual dining chains may be over. While the large chains are
hurting, regional companies with several different concepts
seem to be faring better. “Independent chains can be more
nimble,” he said, “and can turn on a dime when consumer
tastes change.”
A major barrier to going public today is cost. When the
Sarbanes-Oxley Act (SOX) was passed by Congress in 2002,
its purpose was to eliminate the scandal that caused meltdowns
at major corporations, like WorldCom, Enron and Tyco.
SOX ended the practice of accounting firms (think Arthur
Andersen) both advising and auditing the books of public
corporations; made CEOs and CFOs personally responsible
Casual dining continued on page 10
Inside This Issue
Finance Sources.....................................................pages 2-5
Franchisors Get Creative........................................... page 5
Memoriam: Monitor Cartoonist Andy Nelson.....pages 6-7
Market Wrap........................................................... page 11
© 2008 Restaurant Finance Monitor
FINANCE SOURCES
GE Clarifies Credit Stance
Peter J. Solomon Co. to Focus on Restaurants
So, what is GE Capital Solutions, Franchise Finance’s current
stance on restaurant financing? We asked, and thus, we received.
Exclusive to the Restaurant Finance Monitor, GE weighs in:
Moving Forward in the Current Market
By Darren Kowalske, President & CEO
GE Capital Solutions, Franchise Finance
Peter J. Solomon Company is a 20-year-old investment
banking firm that has made a large mark in the retail sector
due to the experience of its founder, Peter Solomon. Solomon
was previously with Lehman Brothers for more than 20 years
when he had a disagreement with the strategic direction of the
firm and before deciding to cast out on his own.
We are all facing unprecedented times. Financial and economic
market disruptions are affecting companies of all sizes in all
industries, and the restaurant industry and its lenders are not
immune.
Amid this turmoil, GE Capital Solutions, Franchise Finance
has taken proactive steps to ensure that it operates from a
position of strength over the long-term. We have a 130 yearplus history of leading with actions designed to position us for
long-term success and staying power. Companies that don’t
act quickly and decisively can falter.
As examples, our parent company has worked to enhance our
liquidity profile, reduce leverage and raise additional equity
to provide added flexibility in this environment -- all while
maintaining diligent underwriting and risk management
processes. We believe these steps are prudent for our customers,
our company, and the restaurant industry.
GE Capital Solutions, Franchise Finance has been in the
restaurant business for nearly 30 years and we are here for
the long haul. In addition to our deep industry and collateral
expertise, we believe our forward-thinking approach enables
us to successfully support our customers through multiple
economic cycles.
We have made three major acquisitions in the past 18 months
that have broadened our experience and extended our leadership
position in the restaurant industry. We have more than $15
billion of assets under management and, this year alone, we will
fund more than $5 billion. We are committed to remaining
active through this economic downturn, and plan to fund
another $300 million in the fourth quarter this year.
Our 5000+ customers are our top priority. While the current
volatility does mean we must be more selective, we are honoring
our existing commitments. The current gyrations in the credit
markets make it difficult, even for seasoned players like GE,
to offer pricing and terms that make sense for our customers
and us. Where possible, we are deferring rate quotes until
financial markets settle down.
As a company, GE has a diverse and global portfolio,
experienced teams, and a strong AAA credit rating that was
recently reaffirmed.
These are challenging times for everyone in the restaurant
industry. At GE Capital Solutions, Franchise Finance,
restaurants are our business and we remain committed to
supporting our customers through this cycle and beyond.
He noticed back then that Lehman “was spending more time
focusing on driving returns of their own capital, rather than
driving capital relationships,” said Mitch Hara, managing
director with Peter J. Solomon Company. At the time, Lehman
had decided to use merchant banking funds to compete with
some of their major clients to buy RJ Nabisco. Solomon was
not in agreement, “investing the firm’s capital for a business
we have no business owning,” Hara reports Solomon saying.
“At some point, the client-based model will suffer.”
For more on GE Capital Solutions, Franchise Finance, visit
www.gefranchisefinance.com.
From that, Solomon left Lehman and started his own firm
in 1989. “We don’t manage money, we don’t do research and
we don’t invest,” said Hara. “The firm has always been clientfocused.”
And now, the retail-oriented firm, which has client list that
includes names like Walgreen’s, Office Depot, Williams
Sonoma and Regis Corporation, has set its sights on the
restaurant sector. In fact, Hara himself has been charged
with growing that side of the business. Peter J. Solomon has
history in restaurants going back 10 years, advising on the sale
of the Au Bon Pain Division to Bruckmann, Rosser, Sherrill
& Co., Inc. and Au Bon Pain’s acquisition of The Saint Louis
Bread Company, as well as the sale of Dunkin’ Donuts to
Allied Domecq.
Hara rejoined the firm in 2007 after tenure with Citigroup,
where he led the Specialty Retail Investment Banking Practice,
and Merrill Lynch & Co., Inc., where he was a senior member
of the Retail Investment Banking Group.
“Our practice is financial advisory, largely mergers and
acquisitions advisory work,” said Hara. They work with special
committees and boards of directors, as well as family businesses
and other private companies. They also offer advisory for
restructurings, a portion of their business that may increase
given the current state of the economy.
The firm targets the middle of the market, $250 million in
revenue and up. And what they feel separates them from other
investment banking firms is their ability to complete highly
complex deals. “We don’t tend to do a lot of plain vanilla
work,” he said. “Our work tends to be more structural or highly
complex—almost surgical.” He adds that they have excellent
relationships with the investment community, which he says is
especially helpful in an environment where bank financing has
tightened. Hedge funds and private equity “are now trying to
fill the liquidity gap, and we’ll help bring that to the table.”
For more information on Peter J. Solomon Company, contact
Mitch Hara, managing director, at (212) 508-1676, or by
e-mail at [email protected].
Page 2
Ellis Appointed President of Consensus Advisors
Christopher Ellis recently was named president and managing
member of Consensus, a Boston-based boutique investment
banking and financial advisory services firm. Ellis served as
managing director for the Consensus since April 2006.
With over 20 years of experience in investment banking,
Ellis met the founder and CEO of Consensus, Mike O’Hara,
during a retail bankruptcy they were both working on years
ago. While both O’Hara and Elllis have strong backgrounds
in retail, Ellis also has experience in the restaurant sector,
including providing advisory services to Bruegger’s Bagels. A
few years ago, Ellis decided it was time to get an education from
the other side of the fence. He had done some advisory work
for the owner of a Connecticut-based steakhouse company,
Hospitality Well Done, including raising growth financing in
the 1990s, and later recruiting a purchaser for the business in
2000. The new owners of the business invited Ellis to join the
10-unit steakhouse chain as executive vice president.
He was responsible for the financial side of the business,
but became “fairly involved with operational issues, as I was
interested in that side of the business, it was less familiar to
me and I wanted to gain first-hand experience of operational
issues and choices, and to participate in the execution of
theoretical ideas,” said Ellis. “For five years, to get around
being a transactional person and spend time operating and
understanding a business from that level—it was a tuition for
me, a good application.”
He learned a great deal during that time, particularly that
some people have a “DNA strand well known in the restaurant
business as the ‘service gene.’ People are either born with it
or they aren’t, and it is as necessary in food service as a sense
of smell,” he reports. And while having a gut instinct for the
business is important, Ellis believes he added value by “helping
people use whatever tools were available,” including providing
them with empirical data to help make decisions. “There is
much reliance in restaurants on ‘feel’ and ‘instinct’—good
up to a point, but it is still important to verify and calibrate
regularly.”
Now, he says, he knows what its like for the restaurant operator
on the other side of the table. “From an advisory standpoint,
I feel much better equipped to advise as an outsider.” And
he and O’Hara have taken that one step further for the firm:
“Mike and I try to only have people in a senior level who’ve
actually done it (run businesses)” in the sector in which they
advise. “When we’re giving advice, we’re not just driven by a
banker’s view of the world,” said Ellis.
Consensus, in fact, focuses on complex transactions for those
companies going through changes in their business models,
from mergers and acquisitions to divestitures, and financing
and branding. The firm has extensive relationships with
commercial banks, private equity and other funding sources.
For more information on Consensus Advisors, contact Chris
Ellis, president and managing member, at (617) 437-6516, or
by e-mail at [email protected].
A EI Commits Additional $100 Million for
Investment in Net-Leased Retail Properties
AEI Capital Corporation announces that it is committing
$100 million of new capital being raised through its net lease
property investment funds for dedication to the development
and purchase of net leased retail properties in Minnesota and
other select markets across the country. This equity contribution
—with more than $40 million already in-hand—will continue
to fuel AEI’s “all-cash” investment strategy in this segment of
the commercial property market.
“As an all-cash investment company, we are not operating
under any constraints imposed by the current credit crisis,”
said Robert Johnson, president and founder of AEI Capital
Corporation. “We are currently investing at rental rates ranging
from 7.25% to 8.25%,” Johnson said. “We are working with
local and national commercial property developers and sellers
to invest this capital in net leased retail, office and other
commercial real estate.”
AEI’s various investment funds already own a portfolio of
more than 160 properties in 36 states, which AEI manages for
some 11,000 investors. Its tenant list includes such names as
Best Buy, Staples, Jared the Galleria of Jewelry, A.G. Edwards,
Applebee’s, Dick’s Sporting Goods, and other national and
regional companies.
George Rerat, AEI national vice president of acquisitions,
said, “With more capital to invest, we are reaching out to
developers for additional co-development opportunities, and to
sellers who appreciate purchase agreements with no financing
contingencies.” For restaurants, “we seek very strong franchisee
or corporate operators with 40+ stores of the operating brand
open and operating profitably, along with a strong net worth,”
he added. They offer 15-year or greater primary term with
increases.
AEI has launched 33 public and private net lease property
investment funds since its first offering in 1975. Today, AEI
provides fund management services to more than 11,000
investors across the country. For more information on AEI,
contact George Rerat, national vice president of acquisitions,
at (651) 225-7723 or by e-mail at [email protected].
Today, they are taking that expertise and making themselves
available to operators who feel they need that outside help.
“If they are in good shape, how can they stay that way?” And
for those who are having a difficult time, he said, they’ll work
to discover where those difficulties lie and work to give the
company some breathing room. “You need to call a spade a
spade earlier rather than in the 11th hour, when there is time
to still do something about it.”
Page 3
Upcoming Monitor Events
Franchise Finance & Development Conference
May 4-6, 2009
Palms Hotel, Las Vegas
Finance Sources
TM Capital Continues to Make Play for Restaurant Sector
TM Capital was formed 20 years ago as a successor to Thomas
McKinnon, a high-net-worth focused brokerage firm. The
group was being sold to Prudential Securities and the principals
of the investment banking division acquired the investment
banking arm and went off on their own as TM Capital. As an
investment banking firm, TM has had notable engagements
in the restaurant industry:
• Last April, TM was retained by the special committee of the
board of directors of Oceanaire, a multi-unit chain of seafood
restaurants, to evaluate the company’s financing needs and
consider alternatives. They negotiated a financing with existing
investors led by Clarion Capital Partners.
• In 2007, for the Board of Directors of Smith & Wollensky,
TM Capital Corp. acted as financial advisor to evaluate an
unsolicited takeover proposal and consider alternatives. TM
Capital negotiated the sale of SWRG to a consortium formed
by Bunker Hill Capital, L.P. and certain principals of Patina
Restaurant Group for a cash merger price of $11.00/share.
• In 2005, RTM Restaurant Group, the largest Arby’s
franchisee, and also once the largest single restaurant franchisee
in the United States with 775 restaurants, retained TM Capital
to explore strategic alternatives, including the potential sale of
RTM to Triarc Companies, Inc. the franchisor of the Arby’s.
TM Capital assisted RTM in structuring and negotiating its
sale to Triarc in a transaction valued at $725 million.
The Smith and Wollensky deal was a complex one, says Jim
Grien, president of TM. The transaction began when a hostile
bidder surfaced. Founding management wanted to participate
in the transaction, several white knight bidders arose, and it
was a hotly contested bidding war. One bidder went away,
and re-emerged as a different entity. “It was a fascinating
transaction,” said Grien, “where the ultimate winners were
the shareholders.” The share price was approximately $5.00,
the hostile bidder brought it up to $7.50, and it sold at $11.00,
he reported.
Grien says the message they want to send is that TM Capital
is innovative. “We have knowledge in the restaurant industry,
and we will be more aggressive in the next year or two.”
TM is a middle-market investment bank, targeting restaurant
businesses that range in enterprise value from $20 million to
$500 million, sometimes more. But, their sweet spot is $50
million to $300 million. They work with both private and
public companies providing financial advisory on mergers
and acquisitions, going-private transactions and financing
options.
TM Capital has relationships with lenders, bank and non-bank,
senior and mezzanine, that have an interest in middle-market
companies, as well as relationships with international investors.
Companies should think about international relationships,
investors generally believe their investments will strengthen,
as well as the earnings that they generate in U.S. dollars.
said Grien, “both strategic and financial. It’s something we do
well.” TM has alliances with firms in money centers around
the world and “we work collaboratively on the transactions
we execute.”
For more information on TM Capital, contact Jim Grien,
president, at (404) 995-6230, or by e-mail at jgrien@tmcapital.
com; or Mike Locker, principal, at (404) 995-6230, or by
e-mail at [email protected].
More Than One Main Street Bank
Franchise lender Lex Lane wants people to know that his bank,
Main Street Bank based in Texas, is still in business. On
October 10, a bank of the same name was closed in Michigan
by the Michigan Office of Financial and Insurance Services.
With regulators closing a record number of banks over the
last few months, its no surprise that an active lender would
not want to be confused with those going under.
The Texas-based Main Street targets smaller borrowers, with a
sweet spot for those franchisees who own two or more stores,
with capital needs under $3.0 million. For more information
on Main Street Bank, contact Lex Lane, (503) 876-8000, or
by e-mail at [email protected].
J.H. Cohn and Good Swartz Brown & Berns
Combine Firms
J.H. Cohn LLP has combined practices with Good Swartz
Brown & Berns LLP (GSBB), a 120-employee, full-service
accounting and consulting firm with offices in Los Angeles
and Warner Center, Calif. GSBB will operate as Good Swartz
Brown & Berns, a division of J.H. Cohn.
The combination provides GSBB’s audit and tax clients with
access to J.H. Cohn’s technical expertise and represents J.H.
Cohn’s major expansion into Southern California and its ability
to serve clients in the greater Los Angeles area and south through
Orange County into San Diego. J.H. Cohn also maintains an
office in San Diego, which it established in 1978.
The announcement marks J.H. Cohn’s fourth strategic regional
expansion effort in the past 13 months. GSBB offers a full
spectrum of accounting, tax and business advisory services
for middle market private and publicly-traded companies.
GSBB serves clients in a wide variety of industries including
hospitality.
“This is very exciting for J.H. Cohn to be able to expand its
industry expertise and resources to the southern California
marketplace,” said Gary Levy, J.H. Cohn partner and
Hospitality Industry Practice Director. According to Levy,
Jeffrey Bobrosky will be running the Hospitality Service
Group in the LA marketplace. For more information on J.H.
Cohn, contact Gary Levy, partner, at 646-254-7403, or by
e-mail at [email protected].
“It is an interesting time to be talking to non-U.S. investors,”
Page 4
DJM Realty Purchases Properties from GE
The Business of Brokering a Deal
DJM Realty closed on the purchase of 16 restaurant properties
from GE Capital Solutions, Franchise Finance. According
to Mark Dufton, principal with DJM, the company has since
sold most of those locations.
If you are a long-standing reader of the Monitor, or just started
to read us in the last few months, you may have noticed our
ongoing feature listing some of the brokers and other financial
intermediaries that serve the restaurant space. Our purpose
was to provide you, the multi-unit operator, access to these
companies that assist in buying and selling businesses and
securing financing. It’s tough out there, and sometimes having
assistance along the way is worth its weight in gold.
The purchase consisted of 11 vacant properties and five with
tenants, mostly QSR. While DJM sold these locations, Dufton
says the company can also hold or redevelop properties, as well.
QSR is somewhat easier to sell, “because there are a number of
alternative uses” for the buildings. He adds that more casual
dining units may be coming up for sale, and those are a bit
more difficult, because their alternative use is more limited.
DJM is a diversified real estate consulting and advisory
firm. DJM purchases, evaluates, restructures, disposes of
and facilitates the acquisition of all types of real estate both
nationally and internationally. They do not require outside
financing to purchase properties, they can acquire and disburse
locations on a national level, and they can close quickly, says
Dufton.
For more information on DJM Realty, contact Mark Dufton,
principal, at (631) 752-1100, or by e-mail at mdufton@
djmrealty.com.
Community South Bank Finances Restaurant
Community South Bank recently provided $1.0 million in
SBA 7(a) financing for Baci Italian Bistro’s new location in
Mesa, Ariz. Operating in Arizona since 2002, the restaurant is
owned by the family of Frank Greco, and focuses on delivering
a casual, authentic Italian cuisine. Stuart Wrba, first vice
president and business development Officer, arranged the
financing. Wrba opened the bank’s loan production office in
Arizona in June. Community South is a community bank
headquartered in Parsons, Tennessee. It is privately held by
Tennessee Central Bancshares, Inc. and currently has over
$650 million in assets. For more information, contact Stuart
Wrba at 480-503-8884.
Popular Small Business Capital to Discontinue
SBA Lending
An active participant in franchise lending for the last few years,
Popular Small Business Capital has announced it will cease
SBA-guaranteed lending, with the exception of five states. The
bank has downsized their operations, cutting 600 jobs in both
commercial and consumer departments.
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612-767-3216 to start receiving the Monitor online.
Bankers One Capital
Bankers One Capital is a debt and private equity placement
firm that specializes in the franchise, restaurant, hospitality, and
commercial real estate investment industries. Our clients are
national and consist of both single-unit and multi-unit franchise
operators, owner-occupied and commercial real estate investors.
With both conventional and SBA-guaranteed financing,
transactions range from $150,000 to $50 million and include
the financing for new unit development, business acquisitions,
partner buyouts, new equipment loans, new construction, real
estate purchases, built-to-suit, and sale/leaseback financing.
Equity capital structures consist of preferred and mezzanine
equity to bridge any sponsor equity gaps. For more information,
contact Reginald Heard at 877-262-1333 or by e-mail at rheard@
bankers1capital.com.
The Cypress Group
For nearly 20 years, The Cypress Group has provided a full
range of investment banking and strategic advisory services
to the franchise and multi-unit restaurant industry, including:
mergers & acquisitions, financings and recapitalizations,
valuations, litigation support and advisory services. The Cypress
Group is solely focused on the restaurant industry aiding large
multi-unit franchisees and company-owned or franchised
restaurant concepts and their principals achieving their capital,
growth and liquidity objectives. The Cypress Group and its
professionals are internationally recognized leaders within
the industry and have a long track record of successful client
representation. Since inception in 1990, The Cypress Group
has completed more than one hundred transactions representing
approximately $2.5 billion in total transaction value. For more
information, contact Dean Zuccarello, CEO, at 303-680-4141
x111 or by e-mail at [email protected].
Diamond Financial Services
Diamond Financial Services can creatively structure and
package small business and franchise loans to allow the best
possibility of financing. They are a direct source to the nation’s
largest and most aggressive SBA and conventional lenders.
Financing solutions can be applied to business acquisitions,
franchise purchasing or start-ups, building and leasehold
improvements or expansions, equipment purchases, debt
restructuring, working capital, franchise fees or the buying
out of partners. For more information, contact Steve Mariani,
president, at (919) 782-3101 ext.13, or by e-mail at stevem@
easysba.com.
Page 5
ANDY NELSON
In Memoriam
Andy returned to the Monitor in March of this year—it took
us three years to track him down— as his ballpark artistry
was coming to an end. We were excited to see him return.
He was soon to be in great form. His most recent cartoon in
October—starring Henry Paulsen— was one of his classics.
MAY 1998
Throughout the ‘90s, Andy’s cartoons reflected the state of
the restaurant business at the time, and a reflection of the
general society as a whole as seen through the financial eyes
of the Monitor. Eatertainment restaurants, politicians, fastgrowth companies and pompous restaurant executives were
often targets. The “hot-market” exuberance and subsequent
financial problems of chains such as Planet Hollywood were
especially vulnerable to Andy’s humor. One memorable
cartoon featured Bruce Willis and Demi Moore arguing
in divorce court that neither of them wanted the Planet
Hollywood stock. Boston Chicken and their frequent use of
the term “home meal replacement” was also target of Andy’s.
Andy even poked fun at the Monitor and the Restaurant
Finance & Development Conference on occasion.
FEBRUARY 1995
Why the time lapse? In 2000, Andy became busy working on
his true passion: baseball art. Andy was the illustrator of the
Minneapolis Review of Baseball and its successor, Elysian Fields
Quarterly, both acclaimed baseball journals. Andy spent most
of the past few years on the road painting detailed murals at
minor league baseball parks around the country. His murals
can be seen at ballparks of the St. Paul Saints (Midway
Stadium), Fort Myers Miracle (Hammond Stadium),
Sioux Falls Canaries (Sioux Fall Stadium), Brockton Rox
(Campanelli Stadium), and the Hudson Valley Renegades
(Dutchess Stadium).
OCTOBER 1995
Our longtime cartoonist Andy Nelson died on October
19th at the age of 52. We featured Andy’s first cartoon in
the Monitor in September 1994. We published a total of 55
of Andy’s cartoons in the Monitor from that date through
the end of 2000. Six new cartoons were published so far this
year.
Perhaps the most clever cartoon Andy drew for the Monitor
was the one where Jack Kevorkian’s secretary asked the former
doctor of assisted suicide if “we do restaurant chains.”
—John Hamburger
Page 6
OCTOBER 2008
We will greatly miss Andy, his gentle nature and wonderful
sense of humor. I attended his memorial service. It was held
at Midway Stadium in St. Paul, the home of the St. Paul
Saints. The ceremony was conducted at home plate and was
attended by hundreds of Saints baseball fans and friends of
Andy. In a video made before his death and displayed on the
scoreboard during the ceremony, Andy talked about what was
important to him: that leaving your mark on the world meant
that you give back more to society than you take out of it.
Andy never cared for monetary things. After the ceremony,
all of the guests gathered for hot dogs, peanuts and Cracker
Jacks. It was only fitting.
SEPTEMBER 1998
FEBRUARY 1999
OCTOBER 1994
MAY 1996
AUGUST 1999
DECEMBER 1997
SEPTEMBER 1996
SEPTEMBER 1994
Page 7
OUTLOOK
Commodities continued from page 1
The lower oil prices did enable Etter to convince most of his
vendors to eliminate their fuel surcharges, which together
totaled $190, he said.
The big question is whether oil prices can help ease the recent
commodity price inflation. Commodities rose 8.8 percent
through September, on top of last year’s 7.6-percent increase,
according to the NRA—Riehle noted that it’s been the worst
inflationary period for commodities in more than 30 years.
There are already signs prices are falling. The same issues
bringing down oil prices are bringing down corn prices, largely
because of reduced demand for ethanol. And lower corn prices
will ultimately lower other farm products. “The outlook is better
now than it was six to eight weeks ago,” said David Maloni,
who watches commodity prices with the American Restaurant
Association. “It definitely helps from a cost standpoint, and
from a consumer standpoint.”
In fact, corn prices once trading at more than $8 a bushel had
fallen below $4 by October. Maloni expects corn to trade at
roughly $4.50 a bushel next year—though he also noted that
chicken and beef prices should rise. Protein production has
fallen, he said, because of the recent surge in feed prices.
At Yum! Brands, where commodity inflation cost the company
$32 million in the third quarter alone—normally the level
it typically sees in a full year, according to the company—
commodity prices are expected to ease late this year, said Rick
Carucci, the company’s chief financial officer. Carucci said the
company is “hopeful” that the declines will yield benefits to
the company’s cost structure next year. “It looks promising,
but we will not count on it for now, because it’s too early,” he
said in a conference call with investors.
Dave Brandon, CEO at Domino’s Pizza, said in a conference
call that he hopes to find some relief in food costs next year,
although it’s difficult to predict. Lower oil prices are “helping
us a lot.” Yet he noted that its cheese prices—perhaps his
company’s biggest cost problem—have yet to come down.
Beall is more optimistic. “Commodities are looking good next
year,” he said. He added that lower gas prices could save his
company a half a million dollars thanks to lower distribution
costs. Lower food costs won’t help Ruby Tuesday’s next year,
he noted, because the company has its prices locked in, but
he said that that commodities are “not working against us.
They’re neutral, or they’re working in our favor.”
Nevertheless, overall wholesale prices have fallen this summer.
The producer price index fell 0.9 percent in August and 0.4
percent in September, according to the Labor Department.
That fall was driven by a broad decline in commodities, reports
Morgan Keegan research.
The increase in commodities has cost Minneapolis-based
pizza and hoagies chain Davanni’s $750,000, according to the
company. So recent declines in wheat prices have been helpful,
said Bob Stupka, the small chain’s chief financial officer. The
company has some prices locked in, but for the most part has
to go with the market prices.
Affecting the bottom line
Restaurant companies that have felt the unprecedented rise in
commodities just as demand for their services have softened
view the news with optimism, albeit somewhat cautiously.
And the prices are starting to show up on the expense side,
though that depends on whether they have prices locked in
with their suppliers.
Like other chains, Stupka said the company locked in on its
price of flour earlier this year—right before the price began
falling. That contract has ended and its prices are more modest,
“but it’s still higher than what it was” before the run-up. Stupka
also sounds a much more cautious note about commodities
overall. “It’s just an unsettling time,” he said.
Miami-based burger giant Burger King said recently that it
expects commodity costs to moderate the rest of this year and
next, boosting the company’s profitability. CEO John Chidsey
said in a conference call that the company has already seen a
substantial decline in the price of some commodities since their
peak in July, including the price of beef, cheese and oils.
Marco’s Pizza expects to see a 38-percent drop in the price of
its flour come November and December, a needed relief for
the company which was forced to lock in flour prices at their
peak this summer amidst a worldwide wheat shortage. That
contract will run out in November, said company President
Jack Butorac.
Marco’s is already seeing lower prices on cheese, another big
commodity. The company hedged on cheese prices, Butorac
said, and will lock in at a single price once it falls to a level
with which the company feels comfortable. “We see good
things going on,” Butorac said. “Twelve months ago, it was a
perfect storm. Everything bad that could happen was going
on. Now, we feel pretty good about where we are. We’re a lot
smarter than we were 12 months ago.”
Bill Etter’s units have contracts that are locked in at a certain
percentage above costs, so he’s ridden the wave of commodity
prices as they’ve gone up and, more recently, down. “Cheese
has been down, and produce has been pretty decent lately,”
he said. “These are the best prices we’ve had since maybe last
winter.” He’s expecting dry goods to follow suit later this year.
“It gives me some optimism that I didn’t have two or three
months ago,” he said.
No Resting on Laurels: Franchisors Get Creative
To Help Franchisees
By most accounts, restaurants are experiencing the worst
environment in three decades, and the worst may be yet to
come—economists believe unemployment will spike next year
and that it’ll be late in 2009 before the economy improves.
A recession presents dual challenges for franchisors, which
must not only take care of their own bottom lines but keep
local owners afloat, too. While the greatest attention has
focused on the bankrupts like Bennigan’s and Mrs. Fields,
many restaurant franchisees are also feeling the pain.
Page 8
Much of the focus of restaurants has been on expanding hours
and product lines while emphasizing discounting, even in
the face of higher food prices, believing that these efforts will
boost the top line and help both franchisor and franchisee.
Yet some believe that franchisors should pay attention to the
condition that their owners are in and develop a strategy to
keep them from going under.
“I don’t think the effects of the current economic crisis have
been felt yet at the retail level that they’re going to be,” said Eric
Karp, a Boston-based attorney who represents franchisees and
works with franchisee associations. Karp has been talking with
franchisors about developing overall strategies for dealing with
struggling franchisees. He compares the situation to the recent
government decision to improve the credit crisis by investing
in banks, rather than helping individual homeowners. “It’s
the same with franchising,” he said. “In the past, franchisors
deal with struggling franchisees rather than taking a systemic
look at what’s wrong with the system. No franchisor is going
to incentivize franchisees to not pay royalties, but they ought
to be thinking ahead about what’s going to happen.”
Several franchisors are, in fact, taking steps to help their local
owners deal with the tough economy. “We don’t think this
is a blip that should be ignored,” said Paul Steck, president of
the 100-unit Philadelphia-based Saladworks. “We think the
economy is going through a true, quantum change in how it
does business.”
Saladworks has focused on boosting sales at local units. It
recently added another local-store marketing manager to help
franchisees come up with marketing plans unique to their
restaurant and customer base. Thus far, the company has had
success with direct-mail campaigns. It also tested a “roving
billboard,” or a billboard on the back of a truck driving through
city streets. “You’ve got to get out and talk to the community
surrounding a specific store,” Steck said. “You have to generate
additional traffic to your restaurants. People eat three meals
a day no matter what. To sit back and do nothing to generate
increased traffic is a mistake.”
Local-area marketing efforts are a big part of many franchisors’
efforts. Atlanta-based sandwich chain Rising Roll Gourmet
has, like Saladworks, added a local marketing expert to its
staff to help franchisees develop “grass roots” marketing
efforts around their units, said Mike Lassiter, the 12-unit
chain’s CEO. Yet the chain has also focused on its costs. With
commodity costs increasing a year ago, the company worked
on efforts to reduce the cost of building a store, as well as the
cost for operating it.
The company reduced its footprint from 2,400 square feet to
2,000 square feet—even while increasing the number of tables
in its dining room—by eliminating “dead” space. That will
reduce the initial investment, as well as rent and common-area
charges. It also cut $15,000 from the cost of building a store
by switching from brick walls to sheet rock, and it removed
some Mexican tile and replaced it with vinyl.
Ohio-based Marco’s Pizza, likewise, has been working on its
cost structure over the past year. The company created a task
force to cut the cost of opening a store by 15 percent. The task
force has yet to reach that mark, but has already made some
recommendations, such as reducing the number of menu boards
from three to two, said Cameron Cummins, vice president of
marketing and development.
In addition, to help units early in their life, the company now
keeps new stores at a greater distance than the 3-mile radius
allowed in the franchise agreement. “That makes sense,” he
said. “We have 174 stores. We don’t necessarily need them too
close together. We have the entire country.”
And Marco’s also has a plan to help struggling franchisees.
When a unit’s sales falls under a certain threshold, the company
will use its royalty payments to promote that store locally.
Cummins provided a simple reasoning for the company’s plan:
“If that store goes to its demise, what good is it to us?”
To be sure, it likely behooves franchise systems to work with
their struggling franchisees, either by helping with local
marketing or by more serious efforts, such as through work-out
agreements or breaks on royalties. The difficult economy can
hurt even strong owners, and selling units can be especially
troublesome with credit tight and numerous franchises already
on the market.
Many advisers and consultants who work with franchisors tell
their clients to work problems out before taking more significant
steps like termination. “We are preaching tolerance and patience
in this economy,” said Adam Siegelheim, a franchise attorney
out of New Jersey. Siegelheim has a personal example of what
could happen when a franchisor does terminate a franchisee
in this environment: A judge who’d just seen numerous home
foreclosures wouldn’t terminate one of Siegelman’s client’s
franchisees—even though the owner had refused to submit to
an audit, destroyed financial records, claimed she never took
cash and listed employees as “volunteers.”
Beef O’Brady’s, a casual dining chain based in Tampa, has
seen its share of struggling franchisees and, at the moment,
works with them on a case-by-case basis. In the meantime,
the company has boosted its field staff—even though revenues
this year are off 4 percent—so it could work more closely with
struggling store owners, said Nick Vojnovic, the company’s
president. “About a year ago we told our franchisees to hang
onto their hats because it’s going to be a tough ride,” he said.
He noted the company has increased its communication with
franchisees on best practices.
Some franchises’ efforts have gone even further, and include
lending directly to owners who are having problems. That’s
what Michigan-based Dominos is doing. The pizza delivery
chain, which is struggling in the U.S., recently said that it
planned to make short-term loans to its higher-rated stores
that are struggling because of economic conditions.
“It’s never my preference to lend to franchisees,” David Brandon,
Dominos chief executive, said in a conference call. “But I’m
not going to let A and B franchisees fail if there are ways to
help them with short-term solutions.”
Page 9
—Jonathan Maze
OUTLOOK
Casual dining continued from page 1
for public financial filings and required corporations to set up
internal auditing controls. According to The CPA Journal, the
cost of first year of compliance with SOX for a company with
over $5 billion in revenue could exceed $4.6 million. A 2004
survey by law firm Foley & Lardner LLC, in association with
KRC Research, found that the average annual cost of being a
public company with a revenue under $1 billion jumped from
$1.25 million in pre-SOX 2001 to $2.86 million in post-SOX
2003—an increase of 130 percent.
When Taylor talked to Chain Leader Magazine in 2003
about his reluctance to take Texas Roadhouse public, he never
mentioned federal regulations. Instead, he said he didn’t want
to lose control of the chain he had grown from a single unit
in 1993 to the 142 restaurants he had then. While Taylor said
he wasn’t tempted by the big money an IPO would bring, he
admitted that his team of senior managers, market partners
and managing partners to whom he’d been granting stock
options through the years, would welcome the windfall.
Voting for Independence
While Texas Roadhouse grew to its current level of 300 lookalike units, other casual dining companies have moseyed
along a completely different trail. In 1971, Chicagoan Rich
Melman and his partner, the late Jerry Orzoff, raised $17,000
and opened an upbeat, eclectic restaurant in that city’s Lincoln
Park neighborhood. They named it R.J. Grunt’s, after their
initials and the sound a pig makes when eating. Today R. J.
Grunt’s is still open and Melman has grown his company, called
Lettuce Entertain You Enterprises, Inc., into 75 eateries. While
Lettuce has replicated a few of its concepts, like Wildfire, with
eight restaurants in three states and Washington, DC, many
of their 34 creations are one-off establishments.
Phil Roberts began opening one-off restaurants in his
native Minneapolis/St. Paul in the late 1970s. Muffaletta, a
neighborhood café with an outdoor patio, just celebrated its
30th anniversary. Figlio, an Italian bistro he opened in 1984
is still there, too. In 1993, when Roberts opened a family-style
Italian restaurant and called it Buca di Beppo, he thought of
it as a single-location concept. “But we had stumbled onto
something,” Roberts said in a recent interview, “and had lines
waiting out the door, even in winter. People from the financial
community started calling me.”
Roberts expanded Buca by selling off ownership pieces to
angel investors. He resigned as president in 1998 when the
company went public and left entirely in 2003, well before
a SEC investigation showed that Buca’s executives were
stealing money from the company. Roberts also stepped out
of another concept he started in Minneapolis in 1999, the
Oceanaire Seafood Room, once it started growing, although
he remains a stockholder in the upscale 16-unit chain. His
Parasole Restaurant Holdings now operates nine restaurants,
including Chino Latino, an over-the-top nightclub, and two
Good Earths, plain-Jane natural foods establishments. More
concepts are being planned.
“I have a short attention span,” Roberts said. “I’m not a onetrick pony, although I admire people like David Overton, who
started and grew the Cheesecake Factory.” The fact that most
restaurant founders are entrepreneurs like Roberts is another
reason that founders of regional chains are not anxious to
go public. “When companies do gain scale and size,” said
Derrington, “they look to more professional leaders and their
entrepreneurial founders may drift away from the business.”
Public Pains
When Texas Roadhouse held its third quarter conference call
on October 27, there was no sign of Kent Taylor’s cowboy
drawl. All questions were answered in great financial detail
by Hart, who is now CEO, and CFO Scott Colosi, who had
spent 10 years in investor relations at Yum! Brands. But it
was the content of their statements that goes to the heart of
public casual dining’s problems today. Hart and Colosi said
that third quarter profits had slumped and that earnings will
be flat for the 2008 fiscal year. The men said they would try
to improve the stock price by buying back more shares and
boost profits by reducing new store openings and promoting
less expensive entrees customers could “trade down to.” The
market was not impressed and the next morning the stock fell
to an all-time low of $6.15.
Cheesecake Factory’s shares dropped to an eight-year low the
same day; Brinker was trading at $8.64 and Ruby Tuesday’s
shares hit $2.16. In a note to investors, Derrington called
casual dining’s third quarter “ugly,” and hinted that things
could get worse in 2009.
Kevin Brown, the president and CEO of Lettuce Entertain
You, said in a telephone interview, “We would not consider
going public because we would lose control over our own
destiny. I couldn’t run a company that had to make changes
in 2009 that could hurt us in 10 years. And I wouldn’t want
anyone hammering me about the stock price.” An independent
company, Brown said, is opportunistic. “We’re always striving
for greater innovation. We don’t walk around here saying ‘We’ve
got to be bigger.’ We say ‘How can we make things better?’”
And when customers tire of a concept, Lettuce shutters it
quickly (remember Lawrence of Oregano?) and replaces it
with something else.
Larry Miller, a restaurant analyst with RBC Capital Markets
in Atlanta, said public casual dining chains are not in trouble
today because of their size, but “because they are too much
alike. They focused on one thing – growing units, and not
on making themselves different. They will not all survive,
nor should they.” Generally, Miller said, large chains have an
advantage in scale “which should help them withstand this
unprecedented downturn better than independents. There’s
safety in numbers.” Another advantage of public companies,
the ability to attract talent with stock options, falls away when
stock valuations are low, he said. “But I think we’ll see another
wave of restaurants going public in three to five years.”
In the meantime, Derrington said he wonders if the talent public
companies attracted when their stock prices were rich, “will
become despondent over their worthless options, leave and start
their own entrepreneurial ventures. This is actually healthy. It’s
all part of the evolution of the restaurant industry.”
Page 10
—Julie Bennett
Market WRap
NPC International, Inc.
DineEquity, Inc.
Ruths Hospitality Group
DIN—NYSE
RUTH—NASDAQ
Acquisition of 99 Pizza Hut units
Deal to sell 66 Applebee’s stores to
franchisees announced
Sale-leaseback of five locations
Date Acquired: September, 2008
Seller: Colonial Foods, LLC
The Deal: NPC acquired 99 Pizza Hut
units (incluing nine fee-owned properties)
of which 96 are located throughout
Virginia, two in Maryland and one in
West Virginia. The stores are comprised
of 46 delivery/carry-out units, 50 dinein restaurants and 3 Pizza Hut/YUM!
Brands multi-brand locations. The units
generated sales of $81.8 million in 2007.
Purchase Price: $35 million
Financing: The acquisition of Colonial
Foods was funded with available cash
and borrowings on the Company’s $75.0
million revolving credit facility.
Date Announced: October 27, 2008
Deal Summary: Applebee’s signed an
agreement to sell 66 company-operated
restaurants to three separate franchisees,
all of whom are new to the system. The
deal includes 22 restaurants in Houston,
Texas, to Wellington Yu; 37 restaurants
in Dallas, Texas, to Sunil Dharod; and
seven restaurants in Albuquerque, New
Mexico to Andy Patel.
Purchase Price: Not disclosed
Date: September 17, 2008
Transaction: The company sold five
restaurant properties—Metairie, LA;
Palm Beach and Sarasota, FL; Columbus,
OH; and Palm Desert, CA. and leased
them back over a period of between 12
and 20 years.
Purchase Price: $17.6 million.
Buyer: Sovereign Investment Company
Terms: Not disclosed
INCOME StATEMENT
Twenty-six weeks ended June 29, 2008
INCOME StATEMENT
Twenty-six weeks ended June 24, 2008
Revenues......................$377,724,000
Net Income..................... $6,176,000
Balance Sheet
As of June 24, 2008
Cash................................$6,187,000
Long Term Debt..........$410,804,000
Shareholders’ Equity....$175,753,000
SUMMARY:
NPC International is the largest Pizza
Hut franchisee and operates 997 Pizza
Hut units in 27 states. The company’s
operations represent approximately 15%
of the domestic Pizza Hut restaurant
system and 18% of the domestic Pizza
Hut franchised restaurant system. NPC’s
stock is controlled by Merrill Lynch
Global Private Equity.
Nine months ended September 30, 2008
Revenues................... $1,258,103,000
Net Loss.......................($31,991,000)
Balance Sheet
INCOME StATEMENT
Revenues.................... $206,701,000
Net Income..................... $7,286,000
Balance Sheet
As of June 29, 2008
As of September 30, 2008
Total Assets...............$3,584,667,000
Long Term Debt.......$2,284,428,000
Shareholders’ Equity....$185,218,000
Total Assets.................$260,278,000
Long Term Debt............$96,750,000
Shareholders’ Equity......$88,067,000
SUMMARY:
DineEquity operates more than 1,350
IHOP restaurants in 49 states and
internationa lly wit h locations in
Canada and Mexico. In November
2007, the company acquired Applebee’s
International, a public company, for $2.1
billion in a leveraged buyout. Applebee’s
is the world’s largest casual dining brand
and operates 1,900 company and franchise
operated restaurants in 49 states.
SUMMARY:
Ruth’s Hospitality owns the Ruth’s Chris
Steak House, Mitchell’s Fish Market,
Mitchell’s Steakhouse and Cameron’s
Steakhouse concepts.
The company financed the Applebee’s
transaction by way of a whole business
securitization backed by Applebee’s assets
and additional borrowings under IHOP’s
existing securitization structure. Lehman
Brothers acted as sole structuring advisor
and sole underwriter on the transaction.
The company has been under pressure
in 2008 to sell company stores and
company real estate in order to reduce
the debt incurred in the transaction. To
date, the company has completed the sale
of 181 Applebee’s real estate locations
and 41 company-operated Applebee’s
restaurants.
Page 11
There are more than 120 Ruth’s Chris
Steak House restaurants, including
twelve international franchisee-owned
restaurants in Mexico, Hong Kong,
Taiwan, Tokyo, Aruba, and Canada.
Domestically, there are 19 Mitchell’s Fish
Markets, two Mitchell’s Steakhouses and
one Cameron’s Steakhouse. The company
was previously located in New Orleans
but now is headquartered in Heathrow,
Florida.
The Back page
Redstone Grill Growth Felled by Ponzi Scheme—Founder Vlahos and Wife Lose $29.2 Million
Wayzata, Minn-based Redstone Grill, operator of five
upscale casual dining restaurants, now finds its growth plans
in jeopardy after its founder, Minneapolis restaurateur Dean
Vlahos, and his wife Michelle, lost close to $30 million in
an apparent Ponzi investment scheme. The Vlahoses invested
$29.2 million in The Petter’s Company, a now bankrupt
Minneapolis-based company which is alleged to have bilked
almost $3 billion from investors including Vlahos and
numerous private equity funds. The extent of Vlahos’ loss was
disclosed in a recent bankruptcy court filing.
Prior to founding Redstone, Vlahos was the founder/CEO
of Champps Americana restaurants, which he sold to Daka
Corporation in 1996 for approximately $57 million in stock.
The price was unusually high considering Champps operated
only four company stores and 11 franchised outlets.
The financial killing Vlahos made on Champps catapulted
him into a new financial league, and he flaunted his newfound
wealth. He acquired mansions in Minneapolis and two more
in Palm Beach, Florida. He founded Redstone Grill in 2000.
Petter’s Company founder, Tom Petters, a Minneapolis
businessman, became a close friend of Vlahos, and the two
vacationed together and spent time in Las Vegas casinos.
Vlahos became the honorary chairman of the John T. Petters
Foundation, a charity named in honor of Petters’ son who
was killed in Italy.
The wealth and high lifestyle unraveled in September. The FBI
arrested Petters and charged him with fraud in connection
with the investment scheme. According to the FBI, Petters
promised interest rates of upwards of 20 percent to investors
in return for interests in closeout inventory that would be
purchased by one of Petter’s operating companies and later
sold to large retailers such as BJ’s Wholesale and Sam’s Club.
The FBI say that Petters created false documents and there
was little, if any inventory.
The FBI says that Petters took the investors’ funds to pay
returns to earlier investors, invest in other business ventures
and lead an “extravagant” lifestyle which included owning a
private, Boeing 757 jet. Nevada Gaming Enforcement agents
said that Petters was the single largest comp at the Bellagio
Hotel in Las Vegas and suffered gambling losses in excess of
$10 million.
Workout experts say there will be little in the way of recovery
for investors in the Petters scheme. According to two sources
familiar with the case, Vlahos invested most of his net worth
with Petters, and just recently advanced an additional $10
million to Petters within the last six months.
How does the Vlahos loss impact Redstone Grill? Petters was
a large investor in Redstone Grill, controlling as much as 12
percent of the company’s outstanding stock. The company
recently raised $10 million in a rights offering with Petters
and Vlahos buying the majority of the stake. The company
also acquired a $16.5 line of credit from GE Capital which is
now on hold. Needless to say, the prospects of raising growth
capital will be difficult.
David Goronkin, the former Famous Dave’s CEO who
joined Redstone last year as CEO, resigned immediately
when the Petters fraud was disclosed. Goronkin felt the future
prospect for growth was diminished by the Vlahos losses.
In a recent interview with Minneapolis-St. Paul Business
Journal, Vlahos denied any knowledge of the Petters
investment scheme despite his having a close relationship
with Petters. He also downplayed his investment losses.
“We have to be thankful for the money we did make on the
investment,” he said. “Now you never make it until you get
your principal back. So it was money made, but without the
principal, I suppose it was a big break-even.”
Despite the positive spin, the loss has been devastating to
him financially and personally. He is in the process of divorce
proceedings with his wife, Michelle. His two Palm Beach
mansions are on the market. His Minneapolis mansion is on
the market for $10.9 million. His net worth has been savaged
and he may face personal bankruptcy.
And perhaps the biggest insult to Vlahos from his best friend’s
defalcation: Vlahos has to work again. He is back running the
day-to-day operations of Redstone Grill.
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