Blue-Chip Specials

Basking in a favorable investment climate, chains explore ownership options.

By Kristina Buchthal, Senior Editor -- Restaurants & Institutions, 7/1/2006

Giant chains cast large shadows, and 92-unit Corner Bakery Cafe has emerged from a huge one behind 1,130-location Chili’s Grill & Bar at Dallas-based Brinker International.
In February, Brinker divested Corner Bakery, selling it to CBC Restaurant Corp., a holding company formed by Il Fornaio (America) Corp. of Corte Madera, Calif., and private equity firm Bruckmann, Rosser, Sherrill & Co. LLC, New York City. The chain again is planning ambitious growth.

“Chili’s certainly drives the Brinker engine,” says Corner Bakery Chief Operating Officer Jim Vinz. “When you think about the size of Corner Bakery Cafe and what it brought to Brinker, it was a pretty small piece of that pie.”

Corner Bakery is one of more than two dozen Top 400 chains that changed ownership since the beginning of 2005. Though differing in approaches, all the concepts have taken steps believed by their management to better position them for growth.

A few, including Chipotle and Tim Hortons, were spun off as separate public companies by parents seeking to focus on larger brands (McDonald’s Corp. and Wendy’s International, respectively). Damon’s Grill, Claim Jumper, Uno Chicago Grill are among those acquired by private equity firms. And a few companies, including Morton’s Restaurant Group, have opted to become publicly traded.

“Going private gets us that singular focus on what our business needs are,” Vinz says. “We are not casual dining, we have different needs from reporting to point of sale. We have three dayparts and casual dining has two.”

After Dallas-based Brinker purchased Corner Bakery in 1995, the chain’s locations were retrofitted with the point-of-sale (POS) technology used at Chili’s. Because Corner Bakery has a different business model, the concept never adequately adapted to the system, Vinz says, noting that it had to use a separate POS system to manage its large catering business and that the two technologies could not be linked.

Now, the chain is pursuing plans to open 20 new restaurants annually in each of the next three years. By comparison, Brinker averaged eight Corner Bakery openings a year.

The Free-Press Effect
Chipotle also found its initial public offering to be quite lucrative, measured both by finances and publicity.

The Denver-based fast-casual Mexican chain hosted its IPO in January, and saw its share price double from $22 to $44 on the first day of trading. The offering netted the chain $173 million and created a large amount of news about the company and its products. The free media brought more customers into its restaurants, says Chipotle Chief Financial Officer Jack Hartung.

When the chain was owned by McDonald’s (which still controls a minority stake), its profitability and performance were “completely under the radar screen,” overshadowed by the enormity of brand McDonald’s, Hartung explains.

When the stock offering’s success was reported in the media, the stories often referenced the chain’s use of naturally raised chicken and its management-training program.

“We do think the IPO brought more people in,” Hartung says. “When attention gets paid to us, part of our story gets out.”

Quiet Quarters
Sizzler, too, is finding that shifting to private ownership from public helps management focus on long-term expansion plans. When the chain was a part of publicly traded Worldwide Restaurant Concepts Inc., much of its executives’ attention was directed at quarterly earnings at the expense of long-range planning, says Ken Cole, chief executive officer of the Culver City, Calif.-based chain.

Worldwide Restaurant Concepts (including the Pat & Oscar’s chain) was purchased by Australian private investment firm Pacific Equity Partners in September 2005. Since then, Cole has worked to reengineer the brand, phasing out buffet service and developing a new, higher-quality à la carte menu. Sizzler’s current growth plan—to open 26 stores over the next three years—would be difficult to achieve under public ownership, especially if the company posted negative quarterly results, Cole says.

Under private ownership “you can lay out your long-term strategy and work within it,” he adds. “Private equity investors certainly have a time frame in which they want to get their return on investment, but they look at it as a long-term process.”

Public ownership also has its advantages—particularly the cash infusion from an IPO.

Morton’s Restaurant Group, parent of Morton’s, The Steakhouse, launched its IPO in February, raising $95 million that the company primarily plans to use to reduce debt. Burdened with less red ink, the chain plans to open five to seven new restaurants every year for the next several years.

“We are not encumbered by higher interest rates and higher debt service. It’s a much more simplified capital structure,” says Ron DiNella, senior vice president and chief financial officer of Chicago-based Morton’s Restaurant Group. “We easily can sustain this type of growth from cash generated from operations.”

On the Horizon
The pace of restaurant-ownership change hasn’t slowed. Columbus, Ohio-based Bravo Development Inc. (operator of Brio Tuscan Grille and Bravo! Cucina Italiana) recently agreed to be acquired by New York City-based private equity firms Castle Harlan and Bruckmann, Rosser, Sherrill & Co.

Louisville, Colo.-based Rock Bottom Restaurants announced it is considering alternatives, including raising private equity and going public. And Carpinteria, Calif.-based CKE Restaurants (parent of Carl’s Jr. and Hardee’s) says it will consider spinning off or selling its La Salsa Fresh Mexican Grill concept.

More restaurant IPOs in the works:

• El Pollo Loco Holdings Inc. in Irvine, Calif., plans to go public this year, raising about $135 million. The company hasn’t set a date for its initial offering. El Pollo Loco is owned by Trimaran Capital Partners of New York City.
• Gordon Biersch Brewery Restaurant Group in Chattanooga, Tenn., expects to raise $58 million from its initial public offering this summer.