High Yield Bonds to Help Fund Sbarro Takeout

With most of the high yield market looking at an empty plate lately, one restaurant chain is cooking up a $300 million deal in the offing.

Indeed, the final course on the $400 million takeout of Sbarro Inc., a seemingly never-ending meal, is the financing, the majority of which will be raised with high yield bonds.

The buyout received shareholder approval, but the Sbarro family, which will purchase the 65% of the company it doesn't own, remains, as always, mum. And the Street continues to confer a large spread on the deal - $1.73 at presstime. When money finally reaches the hands of Sbarro shareholders, they will receive $28.85 for each share. At presstime, Commack, N.Y.-based Sbarro, which operates nearly 900 Italian restaurants, closed at $27.125 per share.

Figuring an end-of-September close (although there is no firm indication that will be the date), buying the stock at the presstime level would provide an approximate 71.7% annualized rate of return.

Of the $300 million high yield piece of the financing, a buy-side source said, "It can be done at a price, and I think they'll pay the price." Per the proxy, the Sbarros have given themselves an out if the offering can not be done at a coupon of 11.25% or lower. But as the source and another source close to the situation emphasized, that doesn't mean the family wouldn't agree to go higher on the coupon if need be.

The company could not be reached for comment. Randy Paulson, lead banker for Sbarro at Bear, Stearns & Co., which advised the family and is handling the financing, declined comment.

"If the [high yield offering] doesn't get done by the end of September, then forget it," remarked the buy-side source. After that, companies will be focusing on dealing with the last few months of Y2K concerns, rather than raising debt, the source said.

A high yield/restructuring source's reaction to the likelihood of the Sbarros issuing the debt anywhere close to the 11.25% out was to wish them considerable luck.

Meanwhile, one shareholder unwilling to wait around for the final payout, at least involving a portion of his holding, was none other than now retired Sbarro chief financial officer Robert Koebele. On July 16, he sold 39%, or 10,000, of the 25,667 shares he owned at $27.75 each. When reached late last month, Koebele adamantly refused to respond to questions about the stock sale.

An arbitrator, who had weathered some of the vicissitudes of the situation, said that he got out when the high yield market fell apart recently.

Bruce Geller, a portfolio manager at Dalton, Greiner, Hartman, Maher & Co., which had at one time owned a sizable stake in Sbarro, said, "I'm disappointed that it didn't move to $28.50." The reason the firm sold most of its position roughly two months ago was to infuse the cash into its portfolios, and with "only $1 or so upside . . . it was time for us to move on," he said. He thought financing was readily available, though, he added.