Having Words With: David S. LobelHaving Words With: David S. Lobel

Last year, Sentinel Capital Partners acquired Atlanta-based Huddle House Inc., franchisor of the 400-unit family-dining chain. The investment returned the New York-based private equity firm to a space it had eschewed during the worst of the economic slowdown. And now David S. Lobel, Sentinel’s founder and managing partner, is hungry for more.

Sentinel was an active player in the restaurant industry before moving to the sidelines. Realized investments include:

• Border Foods, a Golden Valley, Minn.-based Taco Bell franchise operation created in a $33 million deal in 1997. Border grew from 75 to more than 170 restaurants before Sentinel sold it in 2000.

• Falcon Holdings, a once-struggling Church’s Chicken franchise group based in Chicago, which was sold to management in 2005.

• Funding the acquisition of 123 Pizza Hut restaurants by Southern California Pizza, based in Mission Viejo, Calif., which added another 98 before Sentinel sold it in 2012.

• Buffets Inc. of Eagan, Minn., which Sentinel took private in 2000 with Caxton-Iseman Capital in a $655 million deal. Sentinel exited in 2004.

• A controlling interest in Orlando, Fla.-based Tony Roma’s, sold in 2006.

Why is the restaurant space appealing now?

The recession created tremendous unemployment and a vaporization of home equity value; the combination of these two factors made consumers far less well-off than they were previously. The restaurant business suffered and, since then, the recovery has been anemic. If we had bought in 2009-2010, there would have been a good chance we would have treaded water for a year or two, so we were careful and ended up staying on the sidelines.

When we bought in 2012, we felt we could see the recovery taking hold. We are now very much interested in the restaurant business because we think the worst is behind us and that better days are ahead. Next year will be better than this year and last year. I think we can finally say this with some confidence.

For the three franchise companies among Sentinel’s realized investments, you exited by selling to management. Why?

In each case, we took an entire market and partnered with an executive team with a lot of energy and a lot of focus on their market. We were able to improve performance on almost every single metric. Then, we were able to move on to chapter two. In the case of Taco Bell, we took on other brands. In the case of Pizza Hut, we bought a second market.

We sold to management in the end because franchisors do not like a lot of turnover in ownership. For them, it’s disruptive. They want to see long-term commitment. Private equity firms are usually on a five- to seven-year horizon. So we are prepared to sell to management to create this continuity. Sellers can look at us as a 10- to 15-year deal.

What have you done with Huddle House?

We’ve done a lot with management. We brought in a new CEO — former Arby’s executive Michael Abt. The former executive who was in charge when we bought it was a transitional CEO. Michael has brought a lot of energy. We’re now trying to recruit new franchisees, and we’re working on improving performance with a new prototype that we’ve developed. We’re working on getting our franchisees to commit to the capital spending to build this new prototype because when this happens, we’re seeing an enormous lift — double-digit comp-store increases.

Was this a turnaround situation?

No. This was a highly profitable business when we bought it. And we bought at an interesting time. It had its own set of challenges coming out of the recession, but since then, there has been a lot of momentum, and we saw that as sustainable. In the near term, franchisees will have an opportunity to grow their comp sales.

Huddle House is a concept found more in rural communities in the Southeast. They’re often the only player in town. It’s a very nice, predictable, steady business.

Contact Lisa Jennings at [email protected].
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