This post is part of the On the Margin blog.
As my colleague Ron Ruggless wrote on Wednesday, a federal bankruptcy judge split the baby in an unusual battle between Landry’s Inc. and Kelly Investment Group over the right to get the inside track in an auction for Joe’s Crab Shack owner Ignite Restaurant Group Inc.
In short, both parties will get the right to at least a share of the $1.5 million breakup fee if they don’t win the auction, which is expected to take place next month.
But the story behind the decision, and how Ignite ended up with not one, but two stalking horse bidders, reveals some of the negotiating tactics of one of the restaurant industry’s most aggressive buyers, Tilman Fertitta.
Fertitta, the so-called “Billion Dollar Buyer” has built a Houston-based juggernaut in Landry’s by acquiring restaurant chains at low value, then cutting costs while concentrating on operations. Today, Landry’s operates so many brands that it’s hard to keep track of them.
Fertitta amassed much of his empire in the shadow of the recession, when restaurant chains were cheap, buyers were few and bankruptcies were common. He bought Oceanaire and Claim Jumper out of bankruptcy auctions in 2010. The following year, he acquired Morton’s Restaurant Group and McCormick & Schmick’s, when the high-end chains were trading at low valuations.
Fertitta’s aggressiveness can be controversial, such as his acquisition of Landry’s in 2010, which came only after he settled a lawsuit filed by shareholders, and which The New York Times dubbed “a deal from hell.”
That aggressiveness apparently came to play in the Ignite sale. The owner of Joe’s Crab Shack had been seeking a buyer all year. But buyers did not want the company outside of a bankruptcy process because it had $133 million in debt and operates leased locations.
Landry’s emerged as a bidder in a bankruptcy process, and bid $60 million for Ignite in May, according to bankruptcy documents. Landry’s owned Joe’s Crab Shack until 2006, when it sold the chain to the private-equity group J.H. Whitney Capital Partners.
According to filings, Landry’s contacted Ignite on June 2, two days before the planned filing, and said that Ignite’s financial performance was “unexpectedly deteriorating.”
Landry’s then said it was “unsure at this point whether they even wanted to enter into a proposed agreement” to buy Ignite, according to a filing.
Later that evening, a Landry’s representative “called Piper Jaffray and said that Landry’s had determined that it did not really want to buy” Ignite, but would do so “only as a favor to Piper Jaffray,” according to the filing from Ignite.
Piper Jaffray is the financial advisor that has been working to find a buyer for Ignite.
Landry’s then lowered its purchase offer to $50 million — $10 million less than the initial agreement.
Ignite said in its filing that Landry’s apparently believed it was the only bidder and “wanted to force [Ignite] into a last-minute lower purchase price.”
Meanwhile, Kelly had agreed to pay $50 million for Ignite, and the company’s board selected that bid before filing for bankruptcy. Before doing so, however, Piper called Fertitta one last time to get the bid back to $60 million.
“The day I sold Joe’s Crab Shack was one of the happiest days of my life,” the filing quotes Fertitta as saying. “Good luck.”
Alas, Fertitta soon changed his mind. Ignite filed for bankruptcy on June 6. Landry’s made its $55 million offer the next day and promised to put $10 million down to prove it. Landry’s appeared at a hearing the day after the filing, armed with a $10 million check to confirm its desire to buy Ignite. It would later improve its offer, eliminating the required breakup fee.
Ultimately, Landry’s would win a position as something of a co-stalking horse bidder. It will submit the first bid, at $55 million, and if it doesn’t get Ignite, it will get a $1.5 million breakup fee — as will Kelly. If another buyer wins the company, then Kelly and Landry’s will share the breakup fee.
Jonathan Tibus, Ignite’s CEO, told me this week that he expects other bidders to enter the fray.
One company not expected to bid is American Blue Ribbon Holdings. Tibus told me that O’Charley’s owner has never been a bidder for Ignite, and had passed on the opportunity to bid, contrary to earlier reports.
Still, the presence of at least two bidders sets up potential for a more robust bidding process than the one Landry’s expected a couple of weeks ago — and a higher price for Ignite.
Jonathan Maze, Nation’s Restaurant News senior finance editor, does not directly own stock or interest in a restaurant company.
Contact Jonathan Maze at [email protected]
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