A Blog by Jonathan Low

 

Jul 4, 2020

The Reason Bankrupt Restaurant Chains Are Finding Buyers

Investors believe they and their real estate will recover after the pandemic. JL

Aisha Al-Muslim reports in the Wall Street Journal:

Five U.S. restaurant companies have recently found suitors to acquire them out of bankruptcy, in contrast to the host of troubled retailers failing to attract buyers amid the Covid-19 pandemic.The buyers are betting that restaurants will rebound after the pandemic. That view doesn’t extend to retailers that have struggled to adapt to changing consumer preferences; the growth of e-commerce, particularly Amazon.com Inc.; and the obsolescence of malls.
Five U.S. restaurant companies have recently found suitors to acquire them out of bankruptcy, in contrast to the host of troubled retailers failing to attract buyers amid the Covid-19 pandemic.
Chains that own casual-dining brands including Krystal, Logan’s Roadhouse, Gordon Biersch, Bar Louie, Brio, Bravo and the U.S. division of Le Pain Quotidien have all found takers for their bricks-and mortar locations after filing for bankruptcy protection this year.
The buyers are betting that restaurants will rebound after the pandemic. That view doesn’t extend to retailers that have struggled to adapt to changing consumer preferences; the growth of e-commerce, particularly Amazon.com Inc.; and the obsolescence of malls.
None of the major bricks-and-mortar retailers that filed for bankruptcy in 2020 looking for a buyer has been able to sell its stores, according to BankruptcyData.com.

The recent wave of retail bankruptcies has come as government-mandated coronavirus closures tipped struggling companies over the edge. Restaurants were ordered to close their dining rooms, though many have continued to serve customers through drive-throughs, carryout, curbside pickup and delivery.
“A path to success for restaurants is clearer to an investor than one for retailers,” said Stephanie Lieb, a bankruptcy lawyer at Florida-based Trenam Law.
One reason restaurants are often viewed as more attractive is their franchising models, which require less of a capital investment from the chain’s owner, said Aaron Cheris, a partner at Bain & Co. and head of its Americas retail practice.
Earl Enterprises Inc., the parent of Planet Hollywood, this month bought Italian-style eateries Bravo and Brio from FoodFirst Global Restaurants Inc. in a deal valued around $30 million and involving about 50 restaurants out of nearly 100 locations. The sale price was a fraction of the $100 million that investment firm GP Investments Ltd. paid for the chains in 2018.
Bravo and Brio “needed some parental love and care, which I am going to give them,” said Robert Earl, chairman of Earl Enterprises.
The company plans to fold the chains into an umbrella of brands it is calling “The Best of Italy,” which includes its Bertucci’s and Buca di Beppo labels. Totaling about 200 locations, it will have a rewards program to compete with larger chains.
“I’m willing to take the chance,” Mr. Earl said. “I think it’s a very good economic risk.”
Meanwhile, retailers that haven’t found suitors in bankruptcy include home-goods seller Pier 1 Imports Inc., which decided to wind down its operations; department-store company Stage Stores Inc., which is still looking for a buyer even though a bid deadline has passed; and J.C. Penney Co., which is giving its lenders until July 15 to decide if they want to swap their debt for equity and take control of the company.
Many of the bankrupt restaurant chains that have found buyers agreed to deals using credit bids, an increasingly popular tactic where lenders buy a company in exchange for canceling debt that they are owed, sometimes assuming liabilities and fronting little cash. Lenders also use credit bids to set a floor price to ward off unreasonably low bids.
Investment manager Fortress Investment Group LLC was recently handed the keys to Southern burger chain Krystal Co. and CraftWorks Holdings Inc., the company behind Logan’s Roadhouse, Gordon Biersch and seven other chains. Fortress, an affiliate of SoftBank Group Corp., was a senior lender to Krystal and CraftWorks.
The CraftWorks deal for about 190 restaurants was valued at $93 million. The Krystal acquisition, which involved Fortress’s operating partner Golden Child Holdings LLC, was valued at nearly $50 million for a total of about 300 company-owned restaurants and franchise locations.
Golden Child, founded by Jonathan Childs, also franchises several dozen Pizza Hut locations and has fallen behind on payments for those, according to franchisee documents viewed by The Wall Street Journal. The restaurant investment firm owes more than $2.4 million to the franchisee ad fund, documents show.
Golden Child and Fortress declined to comment.
In today’s environment, there won’t be several parties vying for a company outside of the existing equity owners, senior lenders and landlords, as they stand to lose the most, said Lawrence Katz of Virginia-based law firm Hirschler Fleischer PC.
“You make the best of a bad situation, but who knows if it is going to work or not,” Mr. Katz said.
Lenders to bankrupt gastrobar chain Bar Louie, led by private debt credit manager Antares Capital LP, acquired more than 50 locations in May with a credit bid of $82.5 million. Bar Louie had canceled an auction two months earlier after not receiving any other qualified bids.
“Rather than allowing the Bar Louie franchise to fail, Antares and the bank group decided…to support the company’s operations and growth,” said Michele Kovatchis, senior managing director and head of the credit advisory group of Antares Capital.
The U.S. division of Belgian bakery chain Le Pain Quotidien on Tuesday sold itself to Aurify Brands LLC—which runs restaurants including the Little Beet and Melt Shop—in exchange for $3 million in bankruptcy financing. The sale, which received court approval Friday, paves the way for the reopening of more than 40 of 98 locations as early as mid-July.
“The buyer has stepped up in the ninth inning to save a restaurant business from complete liquidation in the midst of a pandemic,” Le Pain Quotidien said in court papers.
The successful sales could bode well for other bankrupt eateries. Sustainable Restaurant Holdings Inc., the Bain Capital-backed operator of Bamboo Sushi and QuickFish has set a July 8 deadline for bids. Several potential buyers are circling Chuck E. Cheese, the kid-focused pizza chain backed by Apollo Global Management Inc.
The chairman of Earl Enterprises said he was interested in additional acquisitions and has been looking into at least six companies.
“Don’t be surprised if we buy more,” Mr. Earl said.

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