Lane Cardwell

Deal, Interrupted

I am in Las Vegas, halfway through the two-day Restaurant Finance & Development Conference. This conference bills itself as the Restaurant Dealmaker’s Event. Now in its 19^th year, this conference brings together a large audience of people connected by two factors: restaurants and deals. The restaurant industry, maybe more than most industries, runs on deals. Not the kind of deals where you can buy-one-get-one-free, but deals that involve large sums of money. And here is the rub…there is no money.

I got on an elevator in the hotel wearing my name badge. A woman already on the elevator looked at the name of the conference, Restaurant Finance, and said; “Now that’s a laugh. What can you possibly be meeting about?” Hurt feelings aside, I didn’t realize that our troubles were that well known.

The attendees are restaurant CEOs, CFOs and assorted financial types, real estate and construction heads, franchise sales staffs, investment bankers, mortgage bankers, and all of the people associated with our industry who help source, analyze, and put deals together. Like I said, this is a deal intensive industry. Deals to buy or lease real estate, deals to build and equip restaurants, deals to raise the money to pay for the new restaurants, deals to sell or buy restaurant companies, deals to sell franchise territory to new franchisees, deals for the franchisees to raise money to open restaurants to fulfill their development commitments, deals to take private companies public, and deals to take public companies private. It is a feeding frenzy with only one thing missing: the food.

If you are involved with the restaurant industry, you need to stay aware of what goes on at conferences like these. Even if your area of responsibility is not finance, franchising or corporate development, you are affected greatly by what is discussed, and what is learned. When your CEO or CFO return to the company on Wednesday, they will be more painfully aware of what is possible, and what is not possible, in growing and financing the business. Business plans for next year will be formulated based upon the pulse of the economy and the outlook ahead. Expansion plans for most companies are looking anemic.

Outside of the conference rooms where presentations are being made, there is a constant flow of people huddled around small tables, or people standing in small groups discussing deals. If they aren’t working on a deal, they want to hear about someone else’s deal. After all, everything that you learn can help you when it’s your turn.

Two years ago, during the height of the mergers and acquisitions boom by private equity firms and other restaurant companies, the mood at the conference was frantic. Everyone was afraid of missing out. 96 restaurant companies were bought and sold in 2006 and 2007. 41 restaurant transactions were done by this time last year. This year it is down to 18, many of them were small by historical standards. And the pace is still slowing.

John Hamburger, a fateful name, is the president of the company that puts on this conference.  John has been around restaurants, and restaurant finance, for over 27 years. He has seen the cycles come and go, the same mistakes repeated, and has been a constant source of education to many in the industry with his Restaurant Finance Monitor publication. In his October 13, 2008 issue he discusses the realities of what is happening to us in the industry with the credit crisis.

“We are in the midst of a nationwide margin call, one that is forcing American individuals and businesses to de-leverage (reduce debt) their balance sheets el pronto or face ruin. Many of the assets acquired by Wall Street banks, investors, and even “Ma and Pa Main Street” during the past five years were bought on cheap, short-term credit. That is gone.

Those who rely on the capital markets for funding are in trouble right now. The global liquidity that everyone talked about has been replaced by a global illiquidity. The lending pendulum has violently swung to the “no lending” axis, especially in the capital markets. Put simply, when the music suddenly stops in the musical chair version of easy credit, everyone scrambles to grab one of the few remaining chairs. The chairs, however, are reserved for those with cash.”

The restaurant industry has not been a good investment in the past two years from a stock standpoint. In 2007, a group of 48 public restaurant companies saw their stock price drop 30%. Only seven companies out of 48 saw gains in their stock price during 2007. None were full-service companies.

During 2008 these 48 companies have seen their stock prices fall an additional 54% (24% in October alone). Only two had positive gains (Panera and Buffalo Wild Wings). This group of 48 companies is now worth 38% of its value from two years ago. Several are selling at significant discounts to what it would cost to replace the restaurants.

Mr. Hamburger does manage to put a pretty face on the future for the restaurant industry:

“Eventually, sales and margins will improve and a new generation of restaurants will come along and excite investors once again. But for the foreseeable future, the restaurant industry is going to have to slug it out and focus on improving existing operations.

For investors with cash and access to credit, the next few years will be a great time to buy distressed assets at bargain prices. There will be plenty of inventory and plenty of time to do so.”

So there you have it. I am looking forward to tomorrow’s session titled “Tips for renegotiating restaurant real estate leases, realizing value and restructuring liabilities”. It kind of sums up the year. Unfortunately, it looks like things will be tough well into 2009. And for the majority of the attendees of this very fine conference, it will remain Deal, Interrupted.

Posted by Lane Cardwell on November 11, 2008 | Comments (1)