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Why Ignite sold Macaroni Grill for so little

Why Ignite sold Macaroni Grill for so little

The downfall of Romano’s Macaroni Grill has been spectacular. Once one of the hottest restaurant brands in the country, the Italian chain’s value has fallen by more than 95 percent in less than seven years.

In August 2008, Brinker International had a deal with Golden Gate Capital to sell 80 percent of the business for $131.5 million.

That gave the chain a value of about $164 million. But then the bottom fell out of the economy, and on financing, and the price for that 80 percent quickly plunged to $88 million, giving the company a value of $110 million.

Things didn’t go very well after that. By 2013, Golden Gate sold the chain to Ignite Restaurant Group for $55 million. At the time, the chain had 210 units, and Ignite executives suggested the acquisition gave them “three, high-quality restaurant brands” and that the deal was too good to pass up.

And yet, a year and a half later, Ignite gave up and sold the chain to Redrock Partners for a mere $8 million — a price akin to dumping your unwanted junk on Craigslist.

That’s an incredibly cheap price for a chain with 167 units and a well-known brand name. For comparison’s sake, it’s about the same as the current market capitalization per unit at fast-casual burger chain Shake Shack.

It’s also less than the $10 million that Bloomin’ Brands received for the 29-unit Roy’s Restaurant, a chain that was also struggling, but one with a much less well known brand name.

On a per-unit basis, Ignite’s sale price on Macaroni Grill comes out to be about $48,000 per unit — cheaper than the cost of a Lexus SUV.

At this rate, Mac Grill’s next seller will have to pay someone to take the chain.

And yet Ignite probably didn’t have a choice. The brand was losing sales and hemorrhaging cash and the results were bringing down the value of Ignite and diverting attention away from its other brands.

Mac Grill’s same-store sales have been plunging for some time, including an 8.5 percent decline in the third quarter of 2014. It likely continued to fall in the fourth quarter, though Ignite has yet to report.

“Quite frankly, I think we were a bit arrogant,” Ignite CEO Ray Blanchette said during a 2013 earnings call, as my colleague Ron Ruggless noted yesterday in his story on the Mac Grill sale. “And that's the piece that's a little embarrassing.”

Mac Grill had an operating loss of nearly $11 million in the first three months of 2014. In the first nine months, the entire company had a net loss of just over $5 million. In essence, Mac Grill was bringing the entire company down.

Indeed, Mac Grill has cost the company about $78 million, including the decline in the chain’s value along with its operating losses through the third quarter.

And that doesn’t include the decline in value at Ignite since the acquisition. Ignite’s stock was trading at just under $15 a share when the company bought Mac Grill in February 2013, which gave Ignite a market cap of about $380 million at the time.

The stock price would go up to as high as $21 a share following the deal, but has since plunged to about $7 a share, giving the company a market cap off less than $190 million. In other words: Mac Grill’s struggles have helped slice Ignite’s value in half.

But that’s not all Mac Grill’s doing. Joe’s Crab Shack has been struggling, too. Joe’s same-store sales fell 4.4 percent in the third quarter, when its operating income fell to $7.5 million from $17 million in the prior year. 

It’s difficult enough to turn around one chain, let alone two, and Ignite likely had to just cut its losses and concentrate all of its attention on its flagship brand.

Had Ignite been a private company, it might have been able to take the time to shore up Mac Grill’s performance to recover at least some of that $55 million sale price as well as those operating losses. But Ignite is a public company, with quarterly reports and shareholders anxious to see their stock values improve. It wasn’t blessed with the luxury of time, making a deal a necessity. Even at $8 million.

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