Thanks, Sale-Leaseback! Arcapita Takes 2x Return on Church’s Chicken

Selling a company for less than you bought it for is typically a sign defeat. But thanks to a lucrative sale-leaseback, that’s not the case for Arcapita’s sale of Church’s Chicken to Friedman Fleischer & Lowe. The firm made 2x its money net of all carried interest and fees.

News of the sale itself shouldn’t be a surprise to peHUB readers, since we first reported it on June 8. However, we didn’t have the exact math. So here’s how Arcapita earned twice its investment:

The firm purchased the southern food chain from parent company AFC Enterprises in 2003 for $390 million. Immediately the firm sold the company’s real estate in a sale-leaseback transaction, making $162.5 million. That technically makes the “true price” $227.5 million. The firm put in $82 million in equity and Suntrust Robinson Humphrey provided $160 million of debt financing.

The official announcement of the sale to Friedman Fleischer & Lowe did not provide a deal value, but peHUB learned the deal was between $300 million and the original purchase price of $390 million. Ebitda is around $50 million. That means the deal multiple was somewhere between 6x and 7.8x Ebitda. Not bad for a restaurant company in a recession. When Arcapita first went to market the firm sought 8x Ebitda for the company.

I spoke with Stockton Croft, head of Arcapita’s U.S. Corporate Invesmtent Group, about the motivation for selling, the possibility of the firm raising a traditional buyout fund, the reason for selling now of all times.

What kind of growth did the company experience under your ownership and what did Arcapita do to bolster that growth?

Ebitda growth over the four to five years we owned Church’s Chicken was 60%..  We are an international firm and so we focused heavily on developing international growth. We brought the company to the UKU, India and Russia, for example. We helped them get focused on that and got them away from the Popeye’s brand, which was a sister company and competitor to Church’s, so we helped them build a new brand. We did a lot of the hard work in extricating it from Popeye’s.

Why did you decide to sell now, in what was surely a difficult deal-making environment?

The main two reasons are the business is performing well and growing. Not only same store sales and Ebitda, but our store base is expanding internationally as well. The management team is one of our best teams out of the 70 or so companies we own worldwide. They were willing to roll over significant equity in the deal.

How did you get the deal done?

FF&L brought a strong finacing package to the table and they had a good repore with management team. They have consumer secotr experience. For example, they did very well with Tempur Pedic (which went public in 2004).

We previously wrote that Arcapita planned to provide one turn of seller financing, but then changed its mind.

We offered it but FF&L chose not to. The capital structure has three agents: Bank of America, Golub Capital and Wells Fargo.

We also wrote that Arcapita may be interested in raising a traditional buyout fund after getting a few exits under its belt. Is that still a possibility?

We looked at that last fall and almost engaged someone to do it, but it’s a very difficult fundraising time. It’s a strategic option we’re looking at, and having an exit like this in this environment will help with our investors if we ever did think about that.

What size fund would you look to raise?

Traditionally we’ve invested around $300 million of equity per year. It would be a co-investment fund so somewhere in the $500 million to $1 billion range, but that would only be for part of out investment. Arcapita Bank would invest the remainder of it.

Previously: Church’s Chicken Selling To Friedman Fleischer – Source, Take-Out: Arcapita Selling Church’s Chicken