Michael Locker, Principal of TM Capital, discusses Restaurant M&A with Nation’s Restaurant News

New York, NY, March 21, 2010 — The restaurant industry’s merger-and-acquisition market is heating back up after a near blackout on buyouts caused by the credit crisis and the slumping economy.

Combine two recent multi-million-dollar deals for Church’s Chicken and CKE Restaurants with the rising temperature surrounding potential purchases of Hooters of America and Papa Murphy’s Take ‘N’ Bake Pizza. Add a sprinkle of investor activism at Denny’s Corp. and Red Robin Gourmet Burgers Inc., typically a precursor to buyout talk, and the industry has a ready-to-bake recipe for robust deal making. —The restaurant industry’s merger-and-acquisition market is heating back up after a near blackout on buyouts caused by the credit crisis and the slumping economy.

Behind this new round of transactions is pent-up demand for quality investments—not just distressed assets—and a massive supply of money at many private-equity firms, which have been waiting on the sidelines for more than a year. In addition, leveraged financing from larger banks, although still not as generous as it used to be, is finally starting to loosen. —The restaurant industry’s merger-and-acquisition market is heating back up after a near blackout on buyouts caused by the credit crisis and the slumping economy.

“While it may have taken a year to recalibrate—for buyers and sellers to understand the new order—the floodgates will open after a few of these deals close at what should be viewed as very attractive EBITDA multiples,” said Mark Saltzgaber, a restaurant industry consultant who has worked on various transactions. Saltzgaber also is a former board member of Lone Star Steakhouse & Saloon, Pasta Pomodoro and Stir Crazy. —The restaurant industry’s merger-and-acquisition market is heating back up after a near blackout on buyouts caused by the credit crisis and the slumping economy.

According to Saltzgaber’s recent research, private-equity firms raised more than $590 billion between 2007 and 2008. With the market meltdown in late 2007, mergers and acquisitions virtually came to a halt, and there is currently a vast supply of capital looking to be put to work. —The restaurant industry’s merger-and-acquisition market is heating back up after a near blackout on buyouts caused by the credit crisis and the slumping economy.

As demand for investment outstrips the supply of quality assets in the struggling restaurant space, the values placed on quality deals today may look more like those seen in the transaction heyday of 2006 and 2007. —The restaurant industry’s merger-and-acquisition market is heating back up after a near blackout on buyouts caused by the credit crisis and the slumping economy.

“Because of tremendous private-equity demand, I believe valuations realized this year will be higher than you would reasonably expect given the not-so-distant financial meltdown, especially for quality assets,” Saltzgaber said. —The restaurant industry’s merger-and-acquisition market is heating back up after a near blackout on buyouts caused by the credit crisis and the slumping economy.

The most recent case in point is CKE Restaurants Inc., the parent company to Hardee’s and Carl’s Jr., which agreed in late February to a $928 million buyout deal with private-equity firm Thomas H. Lee Partners. The deal, which includes $619 million in cash and the assumption of about $309 million in debt, currently values the restaurant company at about six times its EBITDA. The agreement includes a “go shop” clause through April 6 that requires CKE to entertain any higher bids for the company, and speculation exists that more players will indeed come to the table offering even higher multiples. —The restaurant industry’s merger-and-acquisition market is heating back up after a near blackout on buyouts caused by the credit crisis and the slumping economy.

Carpinteria, Calif.-based CKE Restaurants operates or franchises more than 3,100 restaurants, and its main brands of Carl’s Jr. and Hardee’s are sometimes co-branded with its Green Burrito and Red Burrito brands. At press time the company had yet to file its full-year financials. Through the company’s November-ended third quarter, it had posted declines in corporate revenue, earnings and same-store sales. Its restaurant-level margins and cash from operations had improved, however. —The restaurant industry’s merger-and-acquisition market is heating back up after a near blackout on buyouts caused by the credit crisis and the slumping economy.

According to sources, CKE Restaurants represents a quality asset because of its better-burger branding and focus on premium products, versus the discounted price-point-based menu offerings of many quick-service competitors. —The restaurant industry’s merger-and-acquisition market is heating back up after a near blackout on buyouts caused by the credit crisis and the slumping economy.

“We believe the scale and timing of Thomas H. Lee’s acquisition of CKE may indicate a reawakening of restaurant M&A interest, due to the attractive value proposition, strong cash flows and favorable risk-reward scenarios currently presented in the space,” said Michael Locker, a principal at middle-market investment bank TM Capital Corp. —The restaurant industry’s merger-and-acquisition market is heating back up after a near blackout on buyouts caused by the credit crisis and the slumping economy.

Another restaurant asset that many predict will showcase a high valuation for buyers is Papa Murphy’s, which they say could snatch a double-digit multiple. On the block since late November through its private-equity owner, Charlesbank Capital Partners LLC, Papa Murphy’s is in a second round of bidding and interest has been very strong, sources familiar with the process said. —The restaurant industry’s merger-and-acquisition market is heating back up after a near blackout on buyouts caused by the credit crisis and the slumping economy.

Papa Murphy’s holds certain key elements that investors are looking for today. It franchises nearly all of its 1,100 locations, and its take-home pizza offerings have hit a consumer sweet spot, making the chain nearly recession-resistant during the past few years. The chain opened more than 100 locations during each of the past two years and has posted positive same-store sales growth. —The restaurant industry’s merger-and-acquisition market is heating back up after a near blackout on buyouts caused by the credit crisis and the slumping economy.

“There are a lot of people who still like the [restaurant] space and want to put their money to work,” said Jeffrey Sherry, a director at investment bank Stifel, Nicolaus & Co. who focuses on restaurant and consumer investment banking. “Many are excited about what the next round will look like.… This is the new breed of deals.” —The restaurant industry’s merger-and-acquisition market is heating back up after a near blackout on buyouts caused by the credit crisis and the slumping economy.

Sherry said growth expectations for restaurant assets would be different than they were years ago, when investors expected sales and returns from strong unit growth. Today, restaurant chains will be expected to gain market share through concept differentiation and a strong message that attracts consumers. Sherry said fast-casual concepts are attractive for those reasons. —The restaurant industry’s merger-and-acquisition market is heating back up after a near blackout on buyouts caused by the credit crisis and the slumping economy.

“If you have a chain or brand or concept that connects with the consumer, there always will be demand,” he said. “There is no longer a fear of where the bottom is.… A renewed sense of optimism can help drive deals.” —The restaurant industry’s merger-and-acquisition market is heating back up after a near blackout on buyouts caused by the credit crisis and the slumping economy.

Adam S. Birnbaum, a managing director at financial services firm Grandwood Capital LLC, said the restaurant industry’s longtime core group of investors—those like Castle Harlan, KarpReilly, or Bruckmann, Rosser, Sherrill & Co., which recently completed a minority investment in Ruth’s Chris—could fare very well in this next round of transactions. —The restaurant industry’s merger-and-acquisition market is heating back up after a near blackout on buyouts caused by the credit crisis and the slumping economy.

“They have been through the wars and know when to get in,” he said. “This is the kind of environment when new concepts get picked up.… People are saying, ‘This deal got together, why not another?’”— slockyer@nrn.com —The restaurant industry’s merger-and-acquisition market is heating back up after a near blackout on buyouts caused by the credit crisis and the slumping economy.

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