A 42,583.3-percent increase at Noodles

The growth engines held steady for the 2013 Second 100 companies, with wheeling and dealing continuing to play a big part in movement among the list’s members.

As a whole, the group booked greater Latest-Year growth in U.S. foodservice revenue than their Top 100 counterparts, with a 10.7-percent rise to $19.7 billion after growing 9.1 percent in the Preceding Year. The 2013 Top 100 companies, meanwhile, posted Latest-Year growth in aggregate revenue of 8.1 percent to $130.2 billion after achieving revenue growth of 9.5 percent a year earlier.

Seventy-three Second 100 companies booked higher revenues in the Latest Year, compared with 72 a year earlier, although the median rate of growth slowed slightly to 3.7 percent in the Latest Year from 4.3 percent in the Preceding Year.

Each of the top five Second 100 companies in terms of revenue growth won that designation through transactions that catapulted them up the rankings. Among them, private equity firm Freeman Spogli & Co. captured the top spot in terms of growth with a 5,522.2-percent increase in U.S. foodservice revenue, reflecting the firm’s first full year of ownership of the First Watch full-service breakfast-and-lunch chain it acquired from another private equity firm, Catterton Partners, in December 2011. And Sbarro Holdings Inc. claimed the No. 2 spot with a 1,134.3-percent jump in U.S. foodservice revenue after gaining control of Sbarro Inc. following its bankruptcy reorganization.

Freeman’s huge revenue growth helped to push average growth among Second 100 companies in Latest-Year U.S. revenue to 74.2 percent. But that average paled next to the Preceding Year’s extraordinary 485.2-percent average growth rate, which was driven largely by a 42,583.3-percent increase at Noodles & Company tied to its first full year of ownership of the namesake fast-casual chain it purchased from previous owners, including Catterton Partners, on the last day of the Prior-Year fiscal period.

Data

• Company U.S. Foodservice Revenue
• Growth in Company U.S. Foodservice Revenue

“Private equity is likely to become more active in buying restaurant companies,” said Steve Rockwell, a restaurant finance veteran with Results Thru Strategy, in a column for Nation’s Restaurant News earlier this year. “Here’s why: Private equity has significant cash available to invest, interest rates are historically low, [and] investors increasingly are recognizing the restaurant industry’s attractive investment characteristics.”

Among those characteristics, he said, are well-defined and unique restaurant brand identities, the evolutionary — versus revolutionary — nature of the forces that impact restaurant companies, the relative ease of recapturing lost customers compared to other industries, and consumers’ unyielding desire to dine out.

PitchBook Data Inc., a firm specializing in private equity and venture capital research, agreed that such activity will accelerate.

In a report issued earlier this year, PitchBook noted that “while the number of investments [across all industries] continued to outpace exits by a ratio of about 2-to-1, 2012 marked the third consecutive year that both exit volume and capital exited have increased.”   

Several factors are driving that activity, including the need among private equity firms to realize their investments. According to PitchBook, the typical holding time has grown from about three to five years to a record high of 5.4 years — and firms are eager to keep that figure from expanding.

In addition, companies remain attractive to investors, with valuations holding steady since 2009 at about eight times EBITDA, a so-called “middle-ground” multiple, according to PitchBook.

And finally, the stigma of financial acquirers, like private equity firms, buying from other financial acquirers has lessened, causing a surge in the number of secondary buyouts, PitchBook said. While it was once thought that little value could be created from such a transaction, a maturing private equity industry means firms have become more specialized, many learning how to create value at different stages of a holding’s development.  

Secondary buyouts are common among the Second 100 companies. For instance, Oak Hill Capital Partners registered an 88.2-percent increase in Preceding-Year U.S. food and beverage revenue, reflecting its first full year owning Dave & Buster’s, which it acquired in its Prior Year on June 1, 2010, from Wellspring Capital Management LLC for $570 million. And Bruckmann, Rosser, Sherrill & Co. disappeared from the 2013 list of Second 100 companies after selling the Il Fornaio and Corner Bakery Cafe chains to Roark Capital Group in June 2011.  

Companies also got in on the buying spree, with Groupe Le Duff S.A. posting a 95.3-percent jump in Preceding-Year revenue based largely on its purchase of the Bruegger’s Bagel Bakery chain from Sun Capital Partners in March 2011. In addition, Darden Restaurants Inc., a Top 100 company, bought in August 2012 the Yard House casual-dining chain from TSG Consumer Partners LLC for $585 million — a deal PitchBook flagged as the biggest restaurant-related corporate acquisition in 2012. TSG’s Latest-Year revenue of $213.6 million represents estimated pre-divestiture sales for Yard House.

Fiesta Restaurant Group Inc., the No. 101-ranked Second 100 company, with Latest-Year revenue of $333.2 million, is a Second 100 newcomer. It was created early in its Latest Year when Carrols Restaurant Group Inc. spun off to shareholders the Pollo Tropical Chicken on the Grill and Taco Cabana chains it owned in addition to the franchised Burger King restaurants it still operates.

And several companies disappeared from the 2013 list, including McCormick & Schmick’s Seafood Restaurants Inc. and Morton’s Restaurant Group Inc., both of which were acquired in early 2012 by Fertitta Entertainment Inc.’s Landry’s Inc. division; J. Alexander’s Corp., which was purchased by Fidelity National Financial Inc. in late 2012; and Falfurrias Capital Partners, which sold Bojangles’ Famous Chicken ‘n Biscuits to Advent International Corp. in August 2011.

By the numbers

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