The Dangers of Specialization: Casual Restaurant Edition

With last week’s news that Uno Restaurant defaulted and bankrupt Bennigan’s sold to a PE firm, it seems that the grim reaper of buyouts is moving from consumer to casual restaurants. You may recall my earlier look at the fates of consumer industry-focused private equity firms. You may also recall that Uno is backed by Centre Partners Management, and what remains of Bennigan’s was purchased by Atalaya Capital.

Sector volatility didn’t stop Golden Gate Capital from diving into restaurants at what I’m hoping was a discounted buyout of the struggling Romano’s Macaroni Grill from Brinker International. It was on the block for almost year, and analyst reports called the buyout a neutral move for Brinker. Golden Gate declined to comment.

It’s no secret that buyout-backed restaurants face an uphill battle in a recession. Particularly the casual guys, meaning sit-down chains with higher-than-fast-food price points (think Applebee’s, Red Lobster, Olive Garden, Outback Steakhouse). This brand of restaurant operator, thanks to hefty cash flows and mass market appeal, was a coveted acquisition target in the recent buyout boom. Look no further than the buyouts OSI Restaurant Partners, Cheddar’s Holding Corp, Logan’s Roadhouse, or Del Frisco’s for proof.

But before I bemoan the potentially ugly fates of casual restaurant-focused private equity firms, a little disclaimer.

Some people categorize restaurants as Leisure, others under Retail, yet others under Consumer. I say none of the above; the restaurant industry is a beast with a wholly unique set of issues. Retailers don’t have rising food costs, and they require fewer employees per store than restaurants, so labor costs are less of a concern. And non-restaurant retail companies have seasonality over the course of months, versus throughout the hours of the day. Basically, the dangerous recessionary equation of gas prices plus commodity costs divided by mortgage crisis means one thing for mid-priced restaurants: start cutting.

That said, only five of the 54 PE-backed companies on S&P’s Weakest Links lists are restaurant operators. (More info on them below.) And out of the 29 PE-backed companies to file for bankruptcy this year, only two are restaurants (again, below). They may not be driving poor portfolio performance, but restaurants—especially those fast casual players—certainly face the most volatility.

There aren’t many restaurant-exclusive PE firms, but a Castle Harlan, Sun Capital, Catterton Partners, Restaurant Acquisition Partners, have made investments in the space.

For your viewing pleasure, courtesy of myself and Buyouts Research Editor Eamon Beltran, here is a chart listing the PE-backed restaurant companies on S&P’s Weakest Links, and also the PE-backed bankruptcies in the industry: LBO-Backed Restaurants.xls
Somewhat related: footnoted.org discusses publicly-traded Ruby Tuesday’s ridiculous demolition stunt and subsequent press release.