Two restaurant companies owned by Sun Capital Partners Inc. recently filed for bankruptcy, highlighting the risks for the many sponsors that have bought into the cyclical sector in recent months, Buyouts reports in its upcoming issue.
Friendly’s Ice Cream Corp. and Real Mex Restaurants Inc. filed for bankruptcy within days of each other, citing a sluggish economy, high rent costs, slow consumer spending and high costs for essential commodities, such as the cream used in Friendly’s ice cream.
Restaurants have been one of the more popular sectors for private equity investors over the last year or so. In 2010, buyout shops bought at least 24 restaurant companies; those with disclosed deal values added up to $5.66 billion, according to Thomson Reuters — more in terms of disclosed deal value than any other year in recent memory, including 2007, when sponsors backed 28 restaurant companies with a disclosed deal value of $4.86 billion.
The deals continued into 2011, with Golden Gate Capital Corp. taking California Pizza Kitchen Inc. private and Roark Capital Group buying Il Fornaio and Corner Bakery Café, to name a couple examples. [Reuters reported today that Bain Capital was close to buying Japanese restaurant chain Skylark for $3.4 billion.]
But restaurants are especially cyclical and risky, vulnerable to consumer confidence, dining trends and commodity prices. “They have such a high mortality rate, and there’s a fadishness to restaurants that makes the predictability of cash flow unclear,” Tom Hicks told Buyouts back in 2003.
Some auctions seem to be on hold or are taking longer than expected: peHUB noted that Highland Capital Partners planned to sell its rib chain Tony Roma’s by the end of June, but that didn’t happen, and Castle Harlan Inc. and Lauren Crown Capital have been trying to exit upscale steakhouse Morton’s since March.
Here are a few relatively recent restaurant deals that haven’t worked out too well for sponsors, presented alphabetically by restaurant.
Bernard Vaughan is a Senior Editor at Buyouts Magazine. Follow his tweets @BVaughanReuters.
(Note: Data for the following slideshow come from firm websites, Buyouts archives and Capital IQ, unless otherwise noted.)
Sponsors: CI Capital Partners Sentinel Capital
Background: Sentinel and CI bought the Eagan, Minn.-based operator of buffet-style restaurants in 2000 for $665 million.
Result: Problems surfaced as consumers stopped eating out as much amid high gas prices. A costly acquisition of Ryan’s Restaurant Group Inc. in 2006 also failed to produce expected synergies. Filed for bankruptcy in January 2000 after it couldn’t find new lenders to provide debt with more favorable terms.