Take-Out: Arcapita Selling Church’s Chicken

Atlanta buyout firm Arcapita is in the midst of selling Church’s Chicken, according to a source familiar with the situation. The firm has retained Bank of America to run the auction.

Seeing a healthy company go on the auction block is a bit of uplifting news for M&A bankers, who haven’t gotten much action lately. But the term “healthy” is limited to the company’s performance—the offerings of the southern fast food chain won’t keep your cholesterol down.

Texas-based Church’s Chicken has shown stable growth of between 8% and 10% through recession as consumers trade down to less expensive dining.

In first round discussions, the company attracted interest from a select group of ten middle market private equity bidders. The pool of suitors has since been narrowed to three or four, and its unclear whether second round bids have been submitted, the source said.

Because of the company’s strong performance, Arcapita is looking for a pre-credit crunch valuation for the company, and it’s using creative techniques to help buyers get the money together. The firm seeks up to 8x Ebitda for Church’s Chicken, the source said. To make that price feasible, Arcapita has negotiated with Church’s Chicken’s lenders to write an amendment in its credit facility, allowing the company to roll over its debt under new ownership. Meanwhile, Arcapita has agreed to provide one turn of leverage in seller paper.

The source said the deal, which could have yielded up to 10x Ebitda in a frothy M&A market, is not impossible to do, as a number of firms were keenly interested in the company’s characteristics—it has a strong CEO, stable growth and strong market position. The sticking point is getting comfortable with the valuation, the source said.

Arcapita purchased the company in November 2004 from AFC Enterprises, the parent company of Popeye’s Chicken. Arcapita paid $390 million for the company, contributing 20% equity with SunTrust Bank providing senior debt. The firm had planned to conduct a sale leaseback on 90% of its stores, according to reports at the time of the deal. The company has greater than $1 billion in revenue and more than 1500 locations, 400 of which are international.

Arcapita, formerly known as Crescent Capital Investments, does not have a traditional fund structure, although a strong exit on a company like Church’s Chicken may give it the track record it needs to raise one in difficult times. A year ago, Buyouts reported that Arcapita was considering raising a traditional LBO fund backed by investors based in the United States. Currently the firm’s buyout arm uses its balance sheet to finance equity investments. Arcapita then places the equity directly with a group of wealthy investors in the Middle East, primarily in Bahrain.

Arcapita did not return calls by press time.