Sale of Mimi’s Café may be difficult for Bob Evans

The sale of Mimi’s Café could be a challenge for Bob Evans Farms Inc. due to a number of conditions, including the chain's financial struggles and uncertainty surrounding the federal health care mandate, according to industry observers.

The 145-unit Mimi’s is also in bad need of a turnaround, which would likely scare off any public companies as strategic buyers, observers said. However, the Mimi’s concept still has potential for the right buyer who could remake what some described as an “Old World” casual-dining concept into something that will appeal to a new generation of diners.

Though it had been rumored for months that Mimi’s was on the market, Columbus, Ohio-based Bob Evans didn’t officially say it was considering the pursuit of strategic options for the Irvine, Calif.-based chain until last month. Bob Evans is working with financial advisory firm Lazard, the company said.

Now is a difficult time for Mimi’s to be on the market, said many observers. Mimi’s same-store sales were down 5.6 percent for the Oct. 26-ended second quarter, capping 22 consecutive quarters of negative comps.

Bob Evans in November lowered its guidance for the year, saying Mimi’s same-store sales would range between a decrease of 4 percent to a decrease of 1 percent. Earlier, the company had projected same-store sales would range between a decrease of 2 percent to an increase of 1 percent for the year.

Over the past four years, Mimi’s average unit volumes have fallen from $3.3 million to $2.5 million.

One analyst, Christopher O’Cull at Keybanc Capital Markets, speculated in July in a research note that a turnaround for Mimi’s would require store closures, additional capital to refurbish existing stores and the buildout of under-penetrated markets.
 
At the time, O’Cull estimated a buyer would pay around $110 million for Mimi’s, or 4.5 times earnings before interest, taxes, depreciation and amortization, or EBITDA. This week, however, O’Cull downgraded his estimate, saying a buyer would more likely pay $80 million, or four times estimated EBITDA of $20 million for fiscal 2013.

A likely buyer, said O’Cull, is a private equity firm that might be interested in the real estate for conversions. Shedding Mimi’s will be a boon for Bob Evans, he argued, which will be able to devote more resources to the successful remodel program for its namesake restaurants and growth of its packaged goods division.

Earlier this year, Stephen Anderson, senior restaurant analyst for Miller Tabak & Co. LLC, however, aimed a bit higher, estimating that Mimi’s could sell for about $222 million, or five times EBITDA estimates at the time.

Others say the chain will likely go for a deep discount, given Mimi’s needs and the looming threat of costs associated with the Patient Protection and Affordable Care Act.

Battling an uncertain climate

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Though much is unknown about the true fiscal impact of the health care mandate, the general consensus is that “the more labor intensive the operation, the higher the cost will be,” said Craig Weichmann of Meyer Metz Capital Partners LLC, a boutique investment bank that specializes in the sale or acquisition of challenged brands. “That alone could cause a potential buyer to say they might have been interested [in Mimi’s], but we need clarity,” he said.

Weichmann contends that Bob Evans overpaid for Mimi’s when it picked up the chain in 2004 for a reported $103 million, including the assumption of about $79 million in debt. “Once they got it, they didn’t know how to manage the asset,” he said.

Mimi’s, however, is still in a “fixable state,” he added, at the very least for its strong locations. “But I think there should be a good audience for that asset as is, as an ongoing brand.”

Weichmann pointed to potential buyers such as American Blue Ribbon Holdings, or ABRH, a subsidiary of Fidelity National Financial Inc., which has acquired a number of troubled casual-dining brands in recent years, including O’Charley’s, Max & Erma’s, Village Inn and Bakers Square. Most recently Fidelity acquired the J. Alexander’s chain in October.

Mimi’s “is definitely in their wheelhouse,” said Weichmann.

A spokesman for ABRH said the company could not comment. But in Fidelity’s most recent earnings call last month, executive chairman William P. Foley II said the company is still looking for upscale casual brands to bring into its restaurant portfolio, which now includes more than 700 restaurants under seven brands with a combined annual revenue of about $1.5 billion, according to securities filings.

Others watching the potential Mimi’s sale pointed to private equity firms that look for turnaround opportunities, like Sun Capital Partners (Real Mex Restaurants, Restaurants Unlimited Inc., Garden Fresh Restaurant Corp., Bar Louie, and more); or Golden Gate Capital (California Pizza Kitchen, On the Border Mexican Grill and Romano’s Macaroni Grill).

Representatives for both Sun Capital and Golden Gate also declined comment.

Wall Street analyst Conrad Lyon of B. Riley & Co. LLC in Los Angeles, agreed with many other industry observers, and said that other public restaurant companies would not likely be interested in Mimi’s. “I doubt potential strategic buyers like Denny’s or DineEquity would step up — too much time, energy and dollars to fix,” said Lyon.

Bob Evans has been working on revitalizing Mimi’s this year. In October, the company opened a new prototype design that aims to bring Mimi’s back to its roots as a French bakery-café and bistro.

Kevin Burke, managing director of advisory firm Trinity Capital, said a menu makeover is the right idea. “Mimi’s has Old World food,” he said. “It would like to be Panera [Bread], but it’s not.”

Like many of the older casual-dining brands, he noted, Mimi’s needs to figure out how to appeal to younger diners, who are not going to jump at the offer of a muffin — one of Mimi’s signature baked goods.

Burke added that Bob Evans might do better if it devotes more resources to the brand before selling. “I would try to turn the chain around first, and then market it,” he said. “For private equity to have interest, there will have to be a discounted price or a renaissance in the works.”

Contact Lisa Jennings at [email protected].
Follow her on Twitter: @livetodineout