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Upstart mentality pushes Grill Concepts to find equity partners and debt financing for growth

Upstart mentality pushes Grill Concepts to find equity partners and debt financing for growth

LOS ANGELES Grill Concepts Inc., which operates The Grill on the Alley and the Daily Grill brands, has been seeking capital—and receiving it—like an up-and-comer. —Despite its near-25-year history as a fine-dining institution,

Starting in 2005 with the planned transition of leadership from the concept’s founder, Bob Spivak, to the current chief executive, Philip Gay, Grill Concepts began to act like a growth concept, gathering debt financing and eventual equity partners to help fuel growth. —Despite its near-25-year history as a fine-dining institution,

Despite being publicly traded since 1995, Grill Concepts had never really tapped the markets for access to capital, Gay said. —Despite its near-25-year history as a fine-dining institution,

“All companies get to a juncture where they have to decide what they want to be when they grow up,” he said. “Our potential is significant, I’m a growth guy, and I knew that we could grow it.” —Despite its near-25-year history as a fine-dining institution,

There are currently 23 Daily Grills, including 12 corporate-owned units, two joint ventures, eight managed locations and one licensed restaurant. There also are five Grill on the Alley units, including two corporate and three joint-venture operations. The company boasts about $102 million in systemwide sales. Gay projects that Grill Concepts has the potential to open 150 Daily Grill locations and about 100 The Grill on the Alley units. —Despite its near-25-year history as a fine-dining institution,

In late 2005, looking for growth capital but not wanting to give up too much equity, Gay secured an $8 million credit facility from Diamond Creek Investment Partners LLC in Ladera Ranch, Calif. —Despite its near-25-year history as a fine-dining institution,

“Our capitalization was about $15 million, and if I raised money through equity, we would have given away too much control,” he said. —Despite its near-25-year history as a fine-dining institution,

Thomas Harrison, a managing director at Diamond Creek Capital, shared Gay’s vision of Grill Concepts’ potential. —Despite its near-25-year history as a fine-dining institution,

“It is a very well-managed company,” he said. “The company is always upfront.… More importantly, they deliver on what they say they will do. The comps are industry-leading, and we’re impressed with the leadership.” —Despite its near-25-year history as a fine-dining institution,

The flexibility of the debt facility allowed Grill Concepts to sign additional leases on new properties and then start looking at institutional investors for additional capital, Gay said. —Despite its near-25-year history as a fine-dining institution,

At the same time, however, Gay said it was imperative that the company remained focused not just on building capital, but also on building its infrastructure. —Despite its near-25-year history as a fine-dining institution,

Grill Concepts put together an experienced executive team, made certain that in addition to building new restaurants the older locations were maintained, and continued to create an innovative, chef-driven menu, Gay said. —Despite its near-25-year history as a fine-dining institution,

“Money was just one of the things we needed,” he said. “Once the infrastructure was all set up, capital really started to come.” —Despite its near-25-year history as a fine-dining institution,

To garner greater financial flexibility and to shore up its balance sheet, Grill Concepts converted all 500 shares of its preferred stock to common stock and paid out in cash all accumulated dividends. It also closed on a private placement of 2 million shares of its common stock and warrants to purchase up to 735,000 shares. Gross proceeds totaled $14.1 million. —Despite its near-25-year history as a fine-dining institution,

The bankers were Oppenheimer & Co. and Roth Capital Partners LLC. Investors included Magnetar Capital, a Chicago-based fund founded by well-known trader Alec Litowitz, who also was the former head of risk arbitrage at Citadel, one of the country’s largest hedge funds. Additional investors include subsidiaries of the Milken Family Foundation, which was founded by Michael Milken, a former Wall Street tycoon and junk bond trader who has focused on philanthropy since serving time in prison on finance-related charges. A half dozen other investors participated in the private placement, according to securities filings. —Despite its near-25-year history as a fine-dining institution,

Grill Concepts used the net proceeds of about $13 million both to pay down its debt of about $6.8 million and to fund further restaurant expansion. The company then also garnered a new credit facility, again through Diamond Creek, that totaled up to $12 million and matures in 2011. —Despite its near-25-year history as a fine-dining institution,

Last Sept. 30, the company boasted working capital of $4.4 million and a cash balance of $7.3 million, compared with negative working capital of $3.6 million and a cash balance of $3 million as of Dec. 31, 2006. Its total capitalization is about $30.8 million and its funded long-term debt to capitalization is 1 percent, compared with 27 percent prior to making these latest financial moves. —Despite its near-25-year history as a fine-dining institution,

Its plans for the years ahead include opening between four and six locations per year. The average size of a Grill on the Alley is about 8,000 square feet and average annual revenues are about $6 million, the company said. With a total cash investment of between $1.75 million and $2.75 million per restaurant, Grill Concepts says the cash return on investment totals between 30 percent and 45 percent. For the Daily Grills, restaurants are about 7,000 square feet and book revenues of as much as $5 million. With a total cash investment of as much as $2.5 million, cash returns are between 30 percent and 40 percent as well, the company reports. —Despite its near-25-year history as a fine-dining institution,

Gay said that maneuvering between the company’s financial needs and continuing to focus on the day-to-day operations of a restaurant business was not exactly easy. —Despite its near-25-year history as a fine-dining institution,

“It’s like anything else in life,” he said. “It’s about balance.” —Despite its near-25-year history as a fine-dining institution,

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