Slideshow: Restaurant Bankruptcies Make PE Queasy

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.)


[slide title=”Buffets Inc.”]

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.

[slide title=”Perkins & Marie Callender’s Inc.”]

Sponsor: Castle Harlan Inc.
Background: Castle Harlan bought the Memphis, Tenn.-based family restaurant chain in 2005 for $245 million, of which $65 million was equity.
Result: Trouble started in 2008, as consumers started tightening their belts amid rising fuel costs and the home mortgage crisis that presaged the darker economic downturn to come. Filed for bankruptcy in June, listing $290 million in assets and $440.8 million in liabilities.

[slide title=”Sbarro Inc. “]

Sponsor: MidOcean Partners
Background: MidOcean bought the Italian food chain in 2007, at the height of the then-booming economy, for approximately $450 million. Soon the credit markets tightened and consumers stopped eating out as much, while prices for flour and cheese spiked.
Result: Filed for bankruptcy in April 2011. In September, Sbarro reached agreements with creditors to sell itself out of bankruptcy.

[slide title=”Village Inn and Bakers Square”]

Sponsor: Wind Point Partners
Background: In 2003, Wind Point bought Denver-based VICORP Restaurants Inc., the owner and operator of the Village Inn (best known for breakfasts) and Bakers Square (lunch & dinner, tasty pies) chain of restaurants for $225.5 million.
Result: Filed for bankruptcy in April 2008, citing the rising cost off food and economic downturn. By then it had closed 56 restaurants, leaving it with 343, and trimmed its workforce by 1,750, according to the Denver Business Journal.

[slide title=”Uno Restaurant Holdings”]

Sponsor: Centre Partners
Background: Centre bought the Boston-based operator of Uno Chicago Grill restaurants in 28 states in 2005 for an undisclosed amount.
Result: Filed for bankruptcy in January 2010 to restructure what CEO Frank Guidara called its “burdensome debt load,” according to the Boston Business Journal. Its creditors eventually bought it. Company also cited cautious consumers and rising prices for cheese and wheat. Won court approval for its bankruptcy reorganization plan in July 2010.