PE Eyes Budget Restaurant Deals
October 1, 2008
While the general public may be tightening its purse strings, private equity firms are trying to take advantage of any viable opportunities in the retail industry.
It's not easy.
It’s no secret that the credit crunch has made financing difficult for the private equity industry, but without question things are worse in the retail sector. The industry is seasonal by nature, so it is not uncommon for retailers to have working capital needs and seasonal financing needs, which at one time was standard.
And it goes beyond credit for dealmaking. “This is not a lay up anymore, some stores are really struggling because they can’t even get their usual working capital,” says one banker. “There’s lots of pressure on retailers right now.”
That said, there are areas where deals are getting done despite the environment. For example, at the beginning of the summer, Cafe Enterprises, better known as Fatz Café, was recapitalized by Milestone Partners. Headquartered in Greenville, S.C., Fatz Cafe operates 43 company-owned, full-service casual dining restaurants in North Carolina, South Carolina, Tennessee, Georgia and Virginia. GE and Madison Capital Funding provided the debt.
But the deal doesn’t necessarily mean it’s easy sledding for the restaurants sector. “It’s a very difficult sector right now,” says David Hadley, president with DF Hadley, a national investment bank. “Consumers have weak spending power, and there are increased costs with food inflations, fuel costs and new minimum wage legislation. Restaurants do not have it easy these days.”
This, of course, is reflected in the distress being seen. Steak & Ale and Bennigan’s Grill & Tavern both went bankrupt at the end of July, while Uno Restaurant Holdings, a portfolio company of Centre Partners, had reportedly failed to make an interest payment in August.
The Fatz deal, however, underscores what investors, and perhaps more importantly lenders, are looking for in the retail space – namely deals that play into the consumer’s newfound budget consciousness.
David Landau, a partner with LNK Partners whose firm bought Au Bon Pain in March, says that fast casual dining restaurants are actually seeing an uptick in activity. “There’s simply less money available at the end of each month for consumers to spend, but they are still going out. Instead of going to Applebee’s, some are going to McDonald’s and others are eating at Au Bon Pain, Panera or Chipotle. This economy isn’t good for anyone, but it’s been less bad for these types of restaurants,” he says.
To keep sales up Au Bon Pain has focused on menu engineering and new product introductions, which have led to increases in same store sales in spite of the economy. “The retailers need to keep reinventing themselves without price increases until the market returns to more normalcy,” says one banker. “And no matter what the market conditions are there are always pockets of growth somewhere, private equity firms just need to seek them out.”
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