Money Matters - June 2012

Franchising is bursting - not busting - out all over, with a flurry of activity in financing, M&A activity, and IPOs. With ongoing signs of a steady thaw in the capital markets, and private equity firms unloading cash by loading up on franchise brands (especially restaurants), we present a monthly focus on the deal-making, consolidation, and reorganization taking place in franchising in 2012. To be considered for next month, please send your news to eddyg@franchiseupdatemedia.com.

Finance

The Briad Group Forms $195 Million Bank Credit Facility
The Briad Group has entered into a new six-year, $195 million senior secured bank credit facility. The facility will provide new capital for growth to support The Briad Group and its brands, which include T.G.I. Friday's, Wendy's, and CUPS Frozen Yogurt. Bank of America Merrill Lynch and RBS Citizens are the joint lead arrangers, with Regions Bank serving as syndication agent and M&T Bank serving as documentation agent. Lending participants included Capital One Bank, Cadence Bank, Wells Fargo, Sovereign Bank, and AIG. The Briad Group recently entered into a five-year development agreement with Carlson Restaurants Worldwide to develop eight new T.G.I. Friday's in Southern California (with 71 locations, The Briad Restaurant Group is the largest T.G.I. Friday's franchisee). And in March, The Briad Group began franchising its CUPS Frozen Yogurt brand. The company has sold 10 franchise locations so far and plans to build as many as 50 company-owned stores, with a goal of 100 units within 5 years. Based in Livingston, N.J., The Briad Group also operates Corner Bakery Cafe, Marriott, Hilton and is a licensee for Zinburger Wine & Burger Bar.

Fox and Hound Restaurant Group Lands $80 Million from GE Capital
GE Capital, Franchise Finance has provided an $80 million senior credit facility to F&H Acquisition Corp., a restaurant company majority-owned by affiliates of Newcastle Capital Management and Steel Partners Holdings. The deal includes a $72.5 million term loan and a $7.5 million revolving line of credit to assist in recapitalizing the company's balance sheet. Based in Wichita, F&H Acquisition Corp. is an investment group that owns and operates Fox and Hound restaurants, Champps, and Bailey's restaurants in the U.S.

Jimmy John's Franchisee Secures $4.1 Million Credit Facility
GE Capital, Franchise Finance recently provided a $4.1 million credit facility to Hinz JJ, LLC, a Jimmy John's franchisee based in Lenexa, Kan. The facility included $2.6 million to refinance debt and a $1.5 million development line of credit. Formed in 2007, Hinz JJ owns and operates 14 Jimmy John's units throughout the Kansas City (Kansas) area. Jimmy John's Gourmet Sandwich Shops, founded in 1983, had 1,371 units in operation in 34 states and two countries as of April 1.

Home Care Assistance Chooses BoeFly To Help Franchisee Financing
Home Care Assistance has selected BoeFly to assist its franchisees in obtaining bank financing. "Using BoeFly allows our franchisees to connect with a wide network of lenders so they can efficiently address their financing needs and operate successful in-home senior care businesses," said Lily Sarafan, president of Home Care Assistance. Through BoeFly, the brand can offer franchisees access to a network of lenders by posting a single loan request on BoeFly's Internet-based loan exchange, get assistance in creating an effective loan request, and support the management of lender inquiries.

Mergers, Acquisitions, & Ipos

Benihana To Be Acquired for $296 Million
Benihana Inc. announced that it has entered into a definitive merger agreement with funds advised by Angelo, Gordon & Co.'s Private Equity Group in a transaction valued at about $296 million. Under the agreement, which has been approved by the company's board, Angelo Gordon will acquire all the outstanding shares of Benihana's common stock for $16.30 per share in cash. The transaction will result in Benihana becoming a private company. Headquartered in Miami, Benihana Inc. has 95 restaurants nationwide, including 62 Benihana restaurants, eight Haru sushi restaurants, and 25 RA Sushi restaurants. An additional 16 franchised Benihana restaurants are operating in the U.S., Latin America, and the Caribbean. Angelo, Gordon & Co. is a privately held limited partnership founded in November 1988.

Bloomin' Brands Boosts Planned IPO by 15%
Bloomin' Brands, parent of Outback Steakhouse, filed to increase the size of its planned IPO from $300 million to $345 million. Bloomin' Brands, 66 percent owned by private equity group Bain Capital, owns and operates 1,247 restaurants and has 195 restaurants operating under franchise or joint venture arrangements across 49 U.S. states and 21 countries and territories. The Tampa, Fla.-based chain also operates Carrabba's Italian Grill, Bonefish Grill, Roy's, and Fleming's Prime Steakhouse and Wine Bar. For the quarter ending March 31, the company reported a net income of $50 million on revenue of $1.1 billion.

CKE Files for $100 Million IPO
CKE Inc., which operates the Carl's Jr, and Hardee's brands, has filed to raise up to $100 million in an initial public offering. In 2010, CKE was taken private by Apollo Management in a deal valued at nearly $700 million. Apollo will reportedly maintain majority control if the IPO proceeds. CKE posted a loss of $19.3 million on revenue of $1.28 billion for its fiscal year ended Jan. 31. At that time, CKE had 3,243 franchised or company-operated restaurants in 42 states and 25 foreign countries, primarily Carl's Jr. and Hardee's.

Einstein Noah Boosts 1Q Net, Considers Sale or Merger
Einstein Noah Restaurant Group, parent of Einstein Bros. Bagels, Noah's New York Bagels, and Manhattan Bagel, has announced it will explore strategic alternatives that include a possible merger or sale. Nearly two thirds (64 percent) of Einstein Noah's common stock is owned by Greenlight Capital LLC and affiliates, giving Greenlight the votes to decide the franchisor's future. For first quarter 2012 (ending April 3), Einstein Noah reported net income of $3.2 million, compared with $1.2 million for first quarter 2011. Einstein Noah, based in Lakewood, Colo., reported a total 777 locations for its three brands at the end of the quarter, 447 company-owned. The company, which opened five units in the first quarter, expects 60 to 80 openings for the year (8 to 12 company stores, 12 to 14 franchised units, and 40 to 54 licensed units).

Refranchising

Jack in the Box Refranchises 37 in Seattle Area
Jack in the Box Inc. has announced two refranchising transactions involving 37 restaurants in Greater Seattle. AJP Enterprises acquired 26 restaurants, and Northwest Food Management Group acquired 11. Together, the two sales were valued at about $20 million. Including these 37 locations, Jack in the Box expects to sell 80 to 120 restaurants in fiscal 2012 as part of an ongoing initiative to decrease its percentage of franchised units. Jack in the Box, based in San Diego, has more than 2,200 restaurants in 20 states. Additionally, through a wholly owned subsidiary, the company operates and franchises Qdoba Mexican Grill, which has more than 600 restaurants in 42 states and the District of Columbia.

Yum Selling U.S. Taco Bell, Pizza Hut, and KFC Units To Franchisees
Yum Brands Inc., parent of KFC, Pizza Hut, and Taco Bell, is selling hundreds of its U.S. restaurants to franchisees, according to news reports, as it turns its expansionary plans to China, India, and other developing economies. Yum already earns the majority of its profits from overseas operations. "We tend to reduce our ownership of highly penetrated, low-growth, or lower-performing businesses, and we increase our ownership in lower-developed, higher-growth businesses where we think we can get better returns," said CFO Rick Carucci in an investor presentation. In the U.S., Yum reportedly plans to reduce its ownership of Taco Bell restaurants from 22% to 16%, its Pizza Hut stake from 7% to 5%, and its KFC stake from 9% to 5%. According to the reports, five years ago less than a third of Yum's company-owned stores were in emerging markets, a figure that has reached about 60%, and one that Yum expects to reach 70% by 2014.

DineEquity Sells 72 Applebee's in Two Deals
DineEquity, Inc., parent of Applebee's Neighborhood Grill & Bar and IHOP Restaurants, has announced two large asset purchase agreements for company-owned Applebee's units. In late May, American Franchise Capital, LLC agreed to acquire 33 Applebee's, mostly in Missouri and Indiana. The sale is expected to generate net proceeds after taxes of about $26 million, reduce DineEquity's sale-leaseback related financing obligations by about $22 million, and save about $1.3 million in annualized G&A costs. The sale is expected to close in the third quarter. American Franchise Capital was formed by William Georgas and Trevor Ganshaw. Georgas previously was co-managing owner of The Georgas Group, a restaurant franchise company that included 47 Applebee's.

Earlier in the month, DineEquity announced an asset purchase agreement with Potomac Family Dining Group, LLC for the sale of 39 company-operated Applebee's in Virginia. This deal is expected to generate net proceeds after taxes of about $25 million, reduce DineEquity's sale-leaseback related financing obligations by about $40 million, and save about $1.6 million in annualized G&A costs. The company anticipates closing the transaction in the third quarter of 2012. Potomac Family Dining was established by investment banking veteran Timothy George in 2010 to acquire 30 Applebee's in Washington, D.C., and surrounding areas. DineEquity, with more than 3,500 restaurants in 18 countries, has sold nearly 350 company-operated Applebee's units since acquiring the brand in November 2007.

For Sale

Houlihan's Up for Grabs?
According to published reports, Houlihan's Restaurants, Inc. is being shopped in a deal that could approach $100 million. Private equity firm Goldner Hawn Johnson Morrison, which acquired Houlihan's in 2006, reportedly has hired Piper Jaffray to advise on the sale. According to its website, Houlihan's, based in Leawood, Kan., operates 46 corporate and 55 franchised restaurants under the Houlihan's, Devon, and J. Gilbert's brand names.

Taco Bueno on the Market (Again)
According to Reuters and other industry news sources, Taco Bueno is being shopped by private equity firm Palladium Equity Partners, which acquired the brand's parent company in 2005. North Point Advisors has reportedly been hired to advise on the sale of the company, which could be valued at up to $175 million. Palladium also has shopped the company twice before, unsuccessfully, according to sources. Palladium acquired Taco Bueno's parent company in 2005 from Jacobson Partners, another private equity firm. Before that, Taco Bueno was owned by CKE Restaurants, which bought it in 1996 and sold it to Jacobsen in 2001. The first Taco Bueno opened in Abilene, Texas, in 1967, and opened its first franchised unit in 2005. The regional brand has 162 company-owned restaurants and 25 franchise stores in 8 states, mostly in Texas and Oklahoma.