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Sbarro Inc. files for Ch. 11

Company to restructure after being hard hit by recession

Italian quick-service operator Sbarro Inc., along with its domestic subsidiaries, filed for Chapter 11 bankruptcy protection on Monday with a plan to eliminate almost half of its debt.

According to the filing made in U.S. Bankruptcy Court for the Southern District of New York, the move, if approved by the court, would allow Sbarro to cut its $486.6 million in debt by $195 million by converting existing second-lien debt and senior notes to equity.

The company also is seeking approval for a $35 million debtor-in-possession financing agreement with its first-lien lenders to maintain operations.

MidOcean Partners III LP, a private-equity firm that owns the majority stake in Sbarro, has agreed to backstop a $30 million rights offering to repay the debtor-in-possession loan and provide additional equity capital and liquidity.

“We believe this plan represents the best opportunity for Sbarro to clear a path for future growth by restructuring its debt in an effective and timely manner,” Nicholas McGrane, Sbarro’s interim president and chief executive, said in a statement.

Sbarro was hit hard in 2007 and 2008 by rising commodity prices for cheese and flour, a challenge that was followed by the recession. In late 2008 and most of 2009, the company suffered from unprecedented declines in traffic at shopping malls, where many of its restaurants are located, according to court documents.

“Price increases and cost-cutting measures taken to combat commodity inflation and maintain earnings during this difficult period contributed to challenges with the brand, and performance lagged the rebound in mall traffic beginning in early 2010,” the company said in its bankruptcy filing.

Sbarro joins a growing number of restaurant chains that have sought bankruptcy reorganization over the past year, including Charlie Brown’s Steakhouse parent CH Holding Corp., JB’s Family Restaurants Inc., Claim Jumper Restaurants LLC and Uno Holdings Corp.

Known for its pizza by the slice, Sbarro operates and franchises under multiple brands, including Sbarro, Mama Sbarro’s Pizzeria and Carmela’s Restaurant Pizzeria. The average check is about $8.18.

Sbarro was founded 55 years ago by Italian immigrants, who opened their first restaurant in Brooklyn, N.Y. After growing to 83 company-owned and 53 franchise locations, the company went public in 1985. However, the Sbarro family took the operation private again in 1999.

In 2007, MidOcean Partners and affiliates acquired Sbarro in a reportedly more than $400 million buyout.

After struggling throughout the recession, Sbarro launched a turnaround effort in 2010 with changes in executive staff, including the installment of McGrane, a MidOcean managing partner, as chief executive, replacing Peter Beaudrault.

Performance improved, the company said in court filings, but not enough to be in compliance with financial covenants. Sbarro breached its covenant at the end of fiscal 2010 and began paying default interest.

Around the same time, the company hired Rothschild Inc. as its financial adviser to develop a five-year-strategic plan for re-investment in the business.

Sbarro said in court documents that it forecasts adjusted earnings of $30 million in 2011, down from earnings of from $38 million in 2010.

For the nine months ended Sept. 26, Sbarro reported a net loss of $29.3 million, compared with a loss of $36.7 million for the same nine months of 2009. Revenues for the nine-month period were $239.1 million, compared with $245.2 million for the same time a year ago.

Same-store sales for the nine-month period fell 3.1 percent at U.S. corporate stores and 3.4 percent at franchised locations, marking improvements from drops of 5.0 percent and 5.4 percent at domestic company and franchised restaurants, respectively, in the same 2009 period.

International franchisees saw their same-store sales grow 4.8 percent in the period, compared with a 16.7-percent decline a year earlier.

Sbarro said it closed 79 locations during 2010, but a spokesman said existing units would be unaffected by the reorganization.

At the end of March, the company operated 475 locations and franchised 555 units, with another 18 joint ventures, in 42 countries. The Melville, N.Y.-based company has about 5,170 employees.

“We look forward to emerging from this process as quickly as possible with a capital structure that will firmly position us for continued long-term success,” McGrane said in a statement. “We greatly appreciate the ongoing support of our existing stakeholders, customers, suppliers, landlords and franchisees. Their continued backing has been, and will continue to be, an integral factor in our success.”

Contact Lisa Jennings at [email protected].


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