For struggling restaurants, it’s buy or die

As sales continue to weaken, restaurant chains hope mergers will keep them afloat, says RB’s The Bottom Line.
Photograph by Jonathan Maze

The Bottom Line

Earlier this month, Real Mex Restaurants, the owner of El Torito, Chevys Fresh Mex and Acapulco, filed for its second bankruptcy in less than a decade and has a buyer willing to pay $47 million.

The Real Mex story is a classic story of a zombie restaurant chain: It was shrinking (less than half the size it was before the previous filing), had way too much debt (well over $200 million) and was unable to manage that debt in a period of weakening sales and higher costs.

But there’s also this element: Real Mex, apparently, had made a bid last year to buy Garden Fresh Restaurant Corp., which owns Souplantation and Sweet Tomatoes. It lost its bid to a pair of private-equity groups.

Essentially, Real Mex couldn’t find another concept to buy and ended up filing for bankruptcy protection, with no choice but to reduce its debt service to improve profitability.

We are in an era of weakening unit economics and an oversupply of restaurant chains. That has made a steady dose of bankruptcy filings a matter of course. Indeed, the Real Mex filing was one of two this month, including the more recent filing by Noon Mediterranean.

That has created a new generation of “zombie chains,” or chains that are shrinking and have little hope of growth, but which survive thanks to a succession of buyers willing to take the chains of the cash that restaurants are so good at generating.

But a more interesting phenomenon in modern times is that these struggling chains are looking for other struggling chains in the hopes of keeping their financials secure a bit longer.  

“I think we’re in an environment where you acquire or you get acquired,” Nishant Machado, CEO of Romano’s Macaroni Grill, told me back in June. “We want to be the acquirer.”

Mac Grill was a surprising bidder for Bravo Brio Restaurant Group, which instead went to the private-equity firm GP Investments. Bravo Brio, the owner of Bravo Cucina Italiana and Brio Tuscan Grille, had mounting financial problems before the sale.

And Mac Grill itself had just emerged from bankruptcy protection.

High Bluff Capital Partners, a private-equity firm, acquired the shrinking Quiznos chain and then quickly bought Taco Del Mar. High Bluff’s Gerry Lopez saw a strategy in making such plays for shrinking concepts.

“Our firm thinks there are a number of opportunities in the food and beverage industry, certainly the restaurant industry, to pick up brands that have very solid, well-established, long-tenured relationships with customers and that for whatever reason have fallen on hard times,” Lopez said.

As it is, strategic buyers are gobbling up restaurant chains at a rate not seen in years. Darden Restaurants bought Cheddar’s Scratch Kitchen last year, Arby’s bought Buffalo Wild Wings, Del Frisco’s bought Barteca Restaurant Group, someone made a bid for Fogo de Chao before it was taken private, and Fat Brands keeps buying up chains.

But the operating environment is such that operators of struggling concepts are putting their hope in acquisitions to improve their overall profitability.

Essentially, operating multiple concepts can enable a company to share certain services and reduce general and administrative spending, for instance.

What appears to be stopping companies such as Real Mex and Mac Grill from making these deals is their own finances. Bravo Brio was concerned about Mac Grill’s financial wherewithal and turned down its offer, which was actually better than the offer it received from GP Investments.

And Real Mex has well over $200 million in secured debt and a history of its own challenges that could scare some potential sellers.

In the cases of companies such as FoodFirst Global Restaurants, the company created with GP’s purchase of Bravo Brio, as well as High Bluff’s Quiznos-Taco Del Mar combination, the buyers are private-equity firms that see something in buying struggling chains at a low price.

But in all of these cases, the buyers understand that consumers will always eat, and many of these concepts will continue to lure their loyal customers for years. The brands are well-known and have value, and the chains generate cash, which makes them fundamentally valuable.

As long as the owners can shore up the chains’ finances, they can keep them afloat so they can collect that cash.

And it’s easier, apparently, to profit off of those restaurants when they are operated alongside other chains.

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