Arecent round of corporate deal making has industry observers speculating that merger and acquisition activity is rising and will flood the market starting next month.
A merger between Stir Crazy Fresh Asian Grill and Flat Top Grill, a pending deal between Steak n Shake Co. and Western Sizzlin Corp., as well as Good Times Restaurants Inc.’s decision to evaluate going-private options, have illustrated that buyers and sellers have adjusted to the new business climate, including lower valuations and tighter lending terms, observers say. In addition, institutional investors have started to put their capital to work after months on the sidelines.
“It is going to be a feeding frenzy after Labor Day,” said Jason Myler at BB&T Capital Markets Restaurant Investment Banking Group in Boston. “There are a significant number of deals being marketed; more than normal…there are a lot of books sitting on the corners of people’s desks.”
Myler added: “It has been recognized that we have pulled away from the abyss. While we may have another leg down this year, we are not headed to the ‘Big D,’ so the lending environment has gotten marginally better.”
For smaller chains, the ability to access capital will help them take advantage of the growth opportunities flooding the market as larger, national chains continue to close locations.
Among those concepts readying for growth are Stir Crazy Fresh Asian Grill, a 14-unit Asian casual-dining chain, and Flat Top Grill, a 14-unit Asian fast-casual chain, which merged earlier this month under a new parent, Flat Out Crazy LLC, owned by the Walnut Group private-equity firm.
Terms of the deal between Stir Crazy’s parent, Cincinnati-based the Walnut Group, and Flat Top’s parent, Oak Park, Ill.-based Happy Valley Corp., were not disclosed.
Frederic H. Mayerson, chairman and chief executive of the Walnut Group and founder of ChiChi’s Mexican restaurants, will serve as chairman and chief executive of Flat Out Crazy. Greg Carey will serve as president and chief operating officer of the company, responsible for both brands.
“The economy is tough, and these are two great concepts trying to stay ahead of the curve,” Carey said. “It’s easier to be together. We’ll be a $60 million-plus restaurant company, and at that volume we’ll gain flexibility. It just makes sense.”
Flat Out Crazy said both Stir Crazy and Flat Top Grill would remain separate and individual growth vehicles under one management team at the Chicago-based headquarters of Stir Crazy.
Carey, who spent Five years at P.F. Chang’s China Bistro Inc. starting in 1998 and later was an early developer of the Pei Wei Asian Diner concept and then chief operating officer of The Buckhead Life Restaurant Group, said the Asian full-service and fast-casual segments are underserved and ripe for growth. Flat Out Crazy expects to expand both Stir Crazy and Flat Top Grill to a national level, aiming to hit 100 aggregate locations within five years. Two Stir Crazy restaurants are set to open this fall, including one in Tampa, Fla., and the other in Overland Park, Kan.
Carey said Flat Out Crazy would be able to take advantage of the glut of real estate sites available today, especially as the restaurant company holds two complementary brands serving different dining-out occasions. For restaurant companies that have the financing, real estate availabilities have never been better, as many restaurants have been forced to close in the face of weak consumer spending and many landlords are looking for tenants able to ride out the recession.
“This is the lowest low I’ve ever seen,” Carey said, referring to the economy and its effect on the restaurant industry. “But the upside is, if you have the where-withal, it is an extraordinary time to grow. We are primed and ready to go.”
Both Stir Crazy and Flat Top Grill are corporate-operated chains with no franchising plans. The full-service Stir Crazy’s average unit volume is about $3.6 million, while fast-casual Flat Top Grill’s average unit volume falls between $1.5 million and $1.8 million.
The deal between Indianapolis-based Steak n Shake Co. and Western Sizzlin Corp., awaits shareholders approval. The net transaction value payable to Western Sizzlin shareholders is about $23 million, the company said. The letter of intent calls for Western Sizzlin to distribute to its stockholders all of its Steak n Shake shares, which total a 5.4-percent stake. At the merger’s closing, each share of Western’s common stock would be converted into the right to receive an amount equal to $8.11 in the principal amount of debentures, or unsecured debt, issued by Steak n Shake. It is anticipated that Steak n Shake’s debt will hold a term of five years and a 14-percent interest rate and will be prepayable without penalty after one year from the date of issuance.
Both Steak n Shake and Roanoke, Va.-based Western Sizzlin are run by investor, chairman and chief executive Sardar Biglari, who swept into the restaurant industry in 2006 with investments at such companies as Friendly Ice Cream and Applebee’s.
Officials at Steak n Shake did not return to calls seeking comment on the pending deal.
The hiring of the financial advisory firm Mastodon Ventures by Good Times Restaurants could set the stage for a buyout of the publicly traded parent of the 52-unit Good Times Burger and Frozen Custard chain.
Good Times has seen its net loss widen in recent months, and its same-store sales for the first nine months of its fiscal 2009 fell 13.8 percent from the same year-ago period.
“[Hiring Mastodon] means all different things,” said Boyd Hoback, president and chief executive of Good Times. “The cost benefit of being public is much more than being privately held. The costs are difficult to justify.”
A request for comment from Mastodon Ventures was not returned by press time.
The announcement noted that the market for shares of Good Times stock is relatively inactive. Its shares, which trade on the Nasdaq Small Cap exchange, have fluctuated between 75 cents and $3.50 per share during the past 52 weeks.— [email protected]