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Making sense of the Cheesecake-Fox Restaurant deal

The partners say they’re creating a new model for developing and growing restaurant concepts. Here’s why they’re giving that new approach a try.
Photograph: Shutterstock

The Cheesecake Factory and Fox Restaurant Concepts (FRC) stunned the industry with their announcement late Wednesday of a full-fledged merger. As Fox CEO and founder Sam Fox put it, “This partnership will be the first of its kind for the restaurant industry.” With that novelty comes a host of questions, including these.

Why this deal?

Both parties offered the same explanation: An idea lab is teaming up with a chain builder. FRC is essentially a concept incubator, hatching ventures that appear to have expansion potential. Cheesecake is a restaurant developer and operator, with the capital resources and know-how to grow promising brands. The arrangement is not dissimilar to the one Chili’s Grill & Bar parent Brinker International once had with concept creator Phil Romano. One party hatches a notion, and the other nurtures it into a significant chain presence. 

Why not stick with the old arrangement?

Still, that doesn’t answer the question of why the same end couldn’t be achieved under the unconventional relationship Cheesecake and FRC had already struck. Their prior deal called for FRC to refine and scale up two of its brands, North Italia and Flower Child, using capital from Cheesecake. At some point, Cheesecake would buy the concepts and apply its expertise in purchasing, finding sites and operating at scale. Why not stick with that plan and save $353 million?

Actually, at least $130 million of that figure is earmarked specifically for the portion of North Italia that Cheesecake doesn’t already own. The company would likely make another investment of that scale when it purchases the rest of Flower Child, the other FRC concept in which it holds a stake. For a moderately higher price payable in part over the next four years, the buyer gets those interests, plus the revenues and upward potential of FRC’s additional holdings. “If you think about the amount of money we may have purchased North [Italia] for, and then in two years Flower Child, the incremental amount of capital and the way that Sam and his team are willing to work with us on the way we're financing part of it now and over time, it's just a great win-win financially,” Cheesecake CFO Matt Clark told investors. “We're virtually getting another incremental revenue of $150 million that we're sort of able to pay for over time.”

How was the deal structured?

Cheesecake agreed to pay $308 million in cash at the closing for FRC and the rest of North Italia. Another $45 million will be paid over the following four years, also in cash, if the rest of FRC’s portfolio performs as expected. The buyer noted that it has already invested $88 million in North Italia and Flower Child, which brings Cheesecake’s total valuation of FRC to about $440 million. It estimates the revenues of FRC at about $250 million annually. 

Cheesecake said it will pay for the deal from a $400 million revolving line of credit and cash at hand. It anticipates closing on the deal during the third quarter. 

How will the partnership work?

FRC will function as a wholly owned, free-standing subsidiary headed by Sam Fox and based in Scottsdale, Ariz.. North Italia will be shifted from FRC’s fold to Cheesecake’s; support operations will relocate to the buyer’s headquarters in Calabasas, Calif.

FRC will function essentially as a farm league for Cheesecake. Fox and his team will continue to hatch new concepts while methodically expanding the brands already within its portfolio. Ones with the potential of becoming chains of scale will be shifted from FRC to Cheesecake.

Cheesecake also expects both parties to benefit from their joint purchasing, site selection and menu development efforts. Yet the functions will not necessarily be combined. “We want to keep their concepts very much the way they are and not Cheesecake-ize them in terms of what they are offering guests, and we want to keep ours the same,” said Cheesecake CEO David Overton.

Why is Cheesecake so excited about North Italia?

The Italian concept has grown to 20 locations in nine states and the District of Columbia, indicating it has legs. It fits with Cheesecake’s high-end positioning (the average check falls between $25 to $30) and fixation on high volumes ($7 million in annual sales per store, or roughly $1,200 per square foot). About 30% of revenues are generated by drink sales, with unit-level margins falling in the 18% to 20% range. Yet the restaurants cost less than $1 million to build. Cheesecake noted that the concept’s same-store sales for 2018 grew 5%. Plus, “we see significant whitespace from an on-trend Italian concept,” said Clark. Cheesecake believes the chain could grow to 200 locations.

What does this signal for Cheesecake’s homegrown secondary brands?

A quarter ago, Cheesecake said it had no plans for expanding Grand Lux Cafe or RockSugar Southeast Asian Kitchen, its secondary full-service ventures. It has not revealed its expansion strategy for Social Monk Asian Kitchen, the fast-casual concept that made its debut in February. Only the one store is open. 

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