Reporter's Notebook

Why did Ruth's sell Mitchell's for so little?

When Ruth's Hospitality Group on Monday announced plans to sell Mitchell's Fish Market to Landry's Inc. for $10 million, it became the latest company to discover the pain of buying something just before the onset of a crippling recession.

At $10 million, the sale price was considerably lower than the $92 million for which Ruth's paid for 19 Mitchell's and three Cameron's Steakhouse locations back in February of 2008. Since then, Ruth's closed one Mitchell's unit, but for the most part the company sold was the same company bought, just a few years older.

The deal was surprising as few had heard the chain was up for sale, and Ruth's had not announced it was looking to sell the concept. The sale also came amid historically high prices being paid for restaurant concepts.

But a deeper look into the deal shows that Ruth's actually got a relatively fair price for Mitchell's. While firm numbers aren't available, various analyst estimates put EBITDA for the Mitchell's division at just over $1 million a year. That means the earnings multiple Landry's paid for Mitchell's was in the high single digits—much more in line with the going rate for restaurant chains. 

"I think it's smart," said Allan Hickok, a prominent industry consultant. Indeed, Wall Street analysts generally praised the move, saying that it gives Ruth's the ability to concentrate on its core concept, Ruth's Chris Steakhouse. Investors liked it, too, as the stock rose 4.5 percent on the day the deal was announced.

While Ruth's executives said that the Mitchell's chain is profitable, it wasn't quite worth operating the brand. That more than $1 million in EBITDA cost Ruth's nearly $69 million to earn last year, according to SEC documents. "That's a tremendous amount of work for not much return," Hickok said.

A single Mitchell's unit ranged in size from 6,000 square feet to 11,000 square feet but made $66,900 a week in the most recent quarter. By contrast, Ruth's Chris is roughly the same size but made $85,000 a week in the period. 

Mitchell's will work better as part of Landry's, which already owns several seafood chains and is known for disciplined cost management under its chairman and CEO, Tilman Fertitta. 

Mitchell's problems under Ruth's trace back to its pre-recession sale. Numerous restaurant companies and private equity groups bought chains from 2006 to 2008 at high prices, only to watch sales fall through the floor when consumers cut spending. When Ruth's bought Mitchell's, executives indicated the brand would add $98 million in sales a year. It only added $75.5 million the first year. 

And Mitchell's hasn't quite recovered. Sales have been flat or down in three of the past four years. And 2014 has been ugly. Traffic was down 9.1 percent in the first quarter, 3.1 percent in the second and 6.2 percent in the third quarter. Consumers just don't eat that much seafood, and Mitchell's is up against a market in which Red Lobster and Joe's Crab Shack are marketing their brands heavily.

At some point, restaurant owners have to cut their losses and move on, and this may well be the case with Ruth's and Mitchell's. In addition, it was a different management team that made the initial deal in the first place. Craig Miller, the CEO of Ruth's at the time of its acquisition of Mitchell's, was ousted in April 2008. Just two months after the deal closed. 

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