Taking stockTaking stock

l BY lisa jennings

When Logan’s Roadhouse earlier this month filed for a $200 million initial public offering, some wondered if the long dark winter for restaurant IPOs was over.


No restaurant companies have attempted an initial public offering since 2008, when the economy accelerated its slide into the Great Recession. Since then, the volatile stock market and global financial crises have kept investors wary of IPOs, which are seen as riskier bets — particularly those in the economically vulnerable restaurant industry.


Though the industry appears on the road to recovery, most observers of the IPO market say the outlook for going public remains challenging, making the path of private mergers and acquisitions more attractive for now.


Still, while most agree the IPO climate isn’t ideal, it is getting better, and speculation remains about possible public offerings for companies like Dave & Buster’s, Dunkin’ Donuts and Noodles & Company. 


“Things have improved dramatically in the past year,” said Mark Saltzgaber, an industry consultant. “Stocks have performed well, and markets are generally receptive to IPOs — though things have been choppy in the last few weeks. Would Logan’s Roadhouse have filed for IPO a year ago? No.”


Logan’s Roadhouse was seen as an attractive IPO candidate in part because of the 211-unit casual-dining chain’s scale. Officials with LRI Holdings Inc., Logan’s Nashville, Tenn.-based parent, said the chain has outperformed many of its peers in casual dining and that they believe moderately priced roadhouse concepts remain underpenetrated.


Logan’s Roadhouse is an affiliate of private-equity firms Bruckmann, Rosser, Sherrill & Co., Black Canyon Capital LLC and Canyon Capital Advisors LLC, which together bought the chain in 2006 for $486 million from the parent company of the Cracker Barrel Old Country Store chain, which was then called CBRL Group Inc.


Following the pending IPO, the three private-equity groups will retain a controlling interest in LRI, the company said.


In its initial filings with the U.S. Securities and Exchange Commission, LRI did not disclose how many common shares would be offered or provide a per-share price range. It also did not set a time frame for the offering. The company said it would trade on the NASDAQ exchange under the LGNS ticker symbol.


David Epstein, a principal of investment bank J.H. Chapman Group LLC, said he was surprised to hear of the Logan’s Roadhouse IPO given how restaurant companies are being valued and the aversion to risk among investors.


For the IPO climate to improve, Epstein said, restaurant companies would need to demonstrate more predictability of earnings and decent multiples.


Rather than going public, recent trends indicate an upsurge in deals among private-equity investors, he said.


In recent weeks, several restaurant companies have completed or announced deals, including CKE Restaurants Inc., parent to the Carl’s Jr. and Hardee’s chains, Papa Murphy’s, Wingstop, Captain D’s, Del Taco and Rubio’s. There is also speculation of deals involving California Pizza Kitchen, Red Robin Gourmet Burgers and Bob Evans Farms.


Saltzgaber said private-equity players are currently paying attractive prices for restaurant companies.


“It used to be going public was the Holy Grail, you would get the highest valuation,” he said.


In today’s climate, however, the markets are volatile and liquidity is not certain, so a sale is likely to offer better results.


“Private equity is alive and well, and most folks, if they can get 100-percent liquidity at an attractive price, will take it and go,” he said. “Besides, being public is a pain in the butt.”


Epstein said the only public offering by a restaurant company in 2009 was a secondary offering by Ruby Tuesday.


In 2008, there were five restaurant public offerings announced, though most were secondary offerings and some were later withdrawn because of deteriorating market conditions, he noted.


Among those withdrawn was an IPO considered by the former private-equity parent of Dave & Buster’s Inc., Wellspring Capital Management LLC. Wellspring this year agreed to sell the casual-dining chain to Oak Hill Capital Partners for $570 million. The deal closed earlier this month.


In May, Tyler Wolfram, a partner in Oak Hill, told Reuters news service that the private-equity firm sees the 56-unit Dallas-based chain as a very strong candidate for an IPO.


“Dave & Buster’s is a unique combination of being a category-defining retailer with scale, a proven brand and attractive unit-level economics, yet the concept has sufficient runway to double or triple its number of stores in the U.S. alone,” Wolfram told Reuters.


For 2009, Dave & Buster’s reported revenues of $520.8 million, down 2.4 percent from the prior year. 


Observers also said they see Dunkin’ Donuts as a likely IPO candidate, given its more than 9,000 locations and $5.6 billion in global sales last year.


Unlike Logan’s Roadhouse and Dave & Buster’s, which operate in the hard-hit casual-dining sector, Dunkin’ Donuts, a quick-service chain, has more appeal to cash-strapped consumers, Epstein noted.


When asked whether Dunkin’ Donuts might be considering a public offering, McCall Bodi Gosselin, a spokeswoman for Canton, Mass.-based parent Dunkin’ Brands Inc., said: “Dunkin’ Donuts is run as if it were public. We are financially disciplined with a focus on driving comps, profits — both ours and our franchisees’ — and building long-term value.”


Dan Fogarty, vice president of marketing for 240-unit Broomfield, Colo.-based Noodles & Company, also offered a vague response.


“We’re comfortably set with capital to fund our growth for some time, and our performance has kept our investors quite happy,” he wrote in an e-mail. “But strategically, we’re always looking at various long-term scenarios, as any successful company would.”


Kevin Burke, managing director of investment banking firm Trinity Capital LLC, said, “Some IPOs can get done, but it’s a testimony to the underwriters and the individual company.”


Companies valued at $500 million or less are not likely to see success going public today, as analysts and banking companies are not likely to follow them.


“I just think it’s very difficult to get people interested in equity that size nowadays,” he said.


Molly Gise contributed to this 
report.



Contact Lisa Jennings at [email protected]