Private Equity Sinks Teeth Into Casual Dining Deals

Private equity money is pouring into value chain restaurants as consumer spending on dining out is at an all-time high.

Private equity executives are more apt to dine at Daniel or Per Se than T.G.I. Friday's or P.F. Chang's. But lately they have been feasting on acquisitions of traditionally middle-market, suburban, value chain restaurants and so-called quick service restaurants (QSRs), like Chipotle and Chop't, as consumer spending on food consumed outside of the home has reached record highs.

U.S. consumers now spend a record-high 85.4 cents on food and beverages consumed outside of the home for every dollar they spend at the supermarket, according to a May research note by Andrew Wilkinson of Miller Tabak. This signals that, despite payroll tax increases, U.S. consumers are more willing to spend their disposable income dining out at restaurants. In other words, instead of baking a cake at home, families are now celebrating birthdays at Chili's — literally.

Shares of Brinker, the parent company of Chili's and other chains, started the year at around $30 and have steadily climbed to about $40 over the last five months. Shares of Darden, which owns chains like Red Lobster and Olive Garden, have followed a similarly consistent trajectory, going from around $44 in January to more than $52 in recent days.

The value restaurant chain and franchise sector has typically been ridiculed for performing weakly in poor economic times. However, the relative success of these chains lately, coupled with the increase in consumer spending on dining out, suggests that investment thesis might be past its expiration date.

"There definitely was a dark period where dining out was replaced by food prepared in the home, but we are seeing a change in that," said Daniel Bonoff, partner at New York–based private equity firm Goode Partners, whose portfolio includes Rosa Mexicano and Chuy's restaurants. "We believe the restaurant sector is a great place to be making money right now. There's also been sort of a Darwinian survival of the fittest where really new concepts are emerging on the scene and growing really rapidly."

New concepts getting noticed by private equity firms include more ethnic food chains and value restaurants. Centerbridge and Angelo Gordon last year bought P.F. Chang's and Benihana, respectively.

For his part, Bonoff says Chuy's has turned out to be one of Goode Partners' best investments. It took the Tex-Mex chain, which has locations throughout the South and is reminiscent of the national brand Chevy's, public last summer at $13 a share. Just this week its stock reached more than $32.50. The chain has the secret sauce that private equity wants in restaurant deals right now: quick service with an ethnic component.

Bonoff said the most desired chain plays in the private equity market are "places that are trying to be the next Chipotle."

"Mediterranean, Asian — a lot of that serves the purpose of getting high-quality, healthier foods than your greasy burger, but also doing it in an efficient way," Bonoff said. "It's not just people eating out there for dinner, but you can get a lunch day part as well."

The hot market is creating fierce competition for deals among "strategic acquirers," companies like Brinker and Darden. On Wednesday, for instance, Houston-based private hospitality company Landry's Restaurants bought the steak and seafood chain Mastro's.

Some have actually started to call a bubble given how rich deals are being valued at and how fast they are happening.

"Restaurant investing is one of the most cyclical segments in private equity, and in the time frame where the world is very dark, there were very few firms actively looking in the restaurant sector," Bonoff said. "Now it's happened very quickly. Money has flown in. Some might say this is a sign of a bubble in restaurants across the board."

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