Financing

Sun Capital is leaving the restaurant business

The private equity group is reportedly selling its remaining restaurant chains. RB’s The Bottom Line examines its track record.
Sun Capital

The Bottom Line

,Friendly’s is expected to be sold out of bankruptcy by the end of the year. In the process, it will take the private equity group Sun Capital further out the restaurant industry’s door.

According to the Wall Street Journal, the investment firm is expected to enter 2021 with just one restaurant chain, Smokey Bones, still in its fold. That, too, will be sold eventually. And that will leave the industry without what had once been one of its biggest investors.

And one of its worst, at least when judged by its restaurant chains’ performance. Sun Capital’s restaurant companies have ended up in bankruptcy seven times. That does not include workouts and bargain sales undertaken by some of its other holdings. Most of its concepts have shrunk during its ownership.

To be sure, in the world of private equity, success is judged differently, based on whether the investor makes a return. In a perfect world, the investor buys a company for one amount, puts money into that concept, watches it grow, collects some dividends along the way and then sells it for a much higher amount down the line.

But investors can make money whether they do that or not. They can borrow most of the purchase price, take on debt to expand aggressively or pay themselves a dividend. They can pay off debt by selling assets such as real estate or restaurants. They can borrow from their own subsidiaries, essentially becoming their own holding’s debtor.

Frequently, the aggressive use of debt and willingness to unload assets can leave operators hamstrung, unable to make the investments necessary to build a customer base or at least maintain it.

Some of Sun’s restaurants did quite well under its ownership—Captain D’s, for instance, grew unit volumes and unit count while Sun owned the company; Bruegger’s was a strong overall investment that was cheered when it was sold in 2011.

And some of its bankruptcy filings came in the aftermath of the financial crisis and a broad shift in consumer demands, such as Real Mex Restaurants and Friendly’s first go-round with bankruptcy court.

The firm also specialized in mid-sized concepts with mixed track records that were riskier bets. A few were infamous victims of previous owners’ over-expansion or poor management, notably Bruegger’s, Fazoli’s and Boston Market.

Sun often bought these chains with a liberal use of debt and often unloaded assets while it owned them. Garden Fresh, the now-defunct owner of Souplantation and Sweet Tomatoes, had $175 million in debt when it declared bankruptcy the first time in 2016, 11 years after Sun bought the chain.

Boston Market, sold earlier this year, shrunk by 25% over the past decade. It went through an out-of-court restructuring last year and closed a number of locations.

Johnny Rockets, which is being sold to Fat Brands for $25 million, has remained generally steady during the past five years—thanks entirely to strong international growth. U.S. unit count has fallen 29% over that time.

Smokey Bones’ unit count declined 16% between Sun’s 2008 acquisition of the chain and the beginning of 2020, though to be fair it is difficult to operate a barbecue concept and many of its competitors have fared worse.

Friendly’s unit count declined by nearly 70% since Sun took the company private in a $337 million deal in 2007. Friendly’s is being sold out of bankruptcy court for less than $2 million while its Sun-affiliated lender waived $88 million in debt. Sun also unloaded Friendly’s valuable ice cream business, not to mention its brand name, in a 2016 deal with Dean Foods.

Even growth chains have struggled. Bar Louie has grew unit count by more than 150% under Sun’s ownership going into this year, but based on its January bankruptcy filing it grew too fast.

That growth “was partially funded through new debt, but also utilized cash flow from operations,” Bar Louie said in a bankruptcy filing. That “over time restricted liquidity otherwise needed for store refreshes and equipment maintenance and modernization, resulting in an inconsistent delivery of the brand promise across the system.”

Bar Louie closed 30% of its units when it declared bankruptcy in January.

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