BRS to acquire Il Fornaio, Eyes Sale of Au Bon Pain

November 27, 2000

Nation’s Restaurant News, November 27, 2000 — As Bruckmann, Rosser, Sherrill & Co. this month agreed to buy upscale Italian dinner-house operator Il Fornaio for about $93 million, sources close to BRS said it is poised to sell the Au Bon Pain chain to Compass Group North America.

Confirmation of the Au Bon Pain sale could not be obtained officially by presstime either from BRS or Charlotte, N.C.-based Compass, an arm of the British hospitality giant Granada Compass PLC. BRS, a Connecticut-based investment firm, also holds controlling stakes in the California Pizza Kitchen, El Torito and Acapulco dinner-house chains.

A sale of the 280-unit Au Bon Pain bakery-cafe chain would not be BRS’ first such deal with Compass Group. BRS sold its stake in New York-based Restaurant Associates to Compass in 1998.

Bruckmann, Rosser offered $14 a share for Il Fornaio (America) Corp., said Michael Mindel, vice president of marketing for the Corte Madera, Calif.-based operator of 24 restaurants and a wholesale Italian bakery division.

BRS’ cash offer translates to roughly $93 million for the company, according to Il Fornaio’s chief financial officer, Peter Hausback. Mindel said the deal should close by early 2001, pending shareholder and regulatory approval.

Il Fornaio’s executives, who own about 16 percent of the company’s stock, and its employees, who own another 33 percent, “would receive a significant premium over where we’ve been trading,” Mindel said. The company’s stock price recently has been hovering in the $10 range.

The latest proposed acquisition by BRS follows on the heels of its $114.7-million July purchase of Irvine, Calif.-based El Torito, through BRS’ Acapulco Restaurants Inc. division, which is based in Long Beach, Calif. BRS acquired Au Bon Pain in May 1999.

California Pizza Kitchen, a Los Angeles company previously acquired from PepsiCo Inc., was taken public by BRS in August with a nearly $80-million initial public offering.

Bruckmann, Rosser’s first foodservice investment was in 1996 when it teamed with Furman Selz LLC to back the corporate managers of Restaurant Associates in their estimated $100-million reacquisition of RA from Kyotaru Co. Ltd. of Japan.

Compass Group acquired RA from Bruckmann, Rosser in 1998, but BRS retained RA’s former Acapulco arm.

BRS’ pending acquisition of Il Fornaio, which went public in 1997, would be the latest example of a recent trend among restaurant companies that have sought to reverse their public ownership after finding unwelcome valuations on Wall Street. Uno Corp., Buffets Inc., Quizno’s, Taco Bueno and Taco Cabana are among the companies and chains that have recently sold or announced a sale to private owners.

According to Rod Guinn, managing director for FleetBoston Financial’s Restaurant Banking Group, the Il Fornaio acquisition “is not the last one we’ll see” in the near future. “The usual suspects should include companies where the performance has not been an issue, but at some point over the last two, three or four years, the stock took a pounding, either because performance was an issue or the company decided fairly early in the last economic cycle to cut back growth,” he said.

“Many of these companies went public at a time when it was acceptable to go public with a $100-million market capitalization,” Guinn said. But at that level, he suggested, investment fund managers could not trade the shares, and analysts, therefore, would not cover it, creating what he called “an orphan stock.”

Guinn said the only restaurant stocks that are able to stay in the public market with that level of capitalization “have a growth story to a $200 million market cap in the near term.”

At a Nation’s Restaurant News-hosted financial forum in Atlanta in September, Il Fornaio chairman and chief executive Larry Mindel described virtually the same scenario — Il Fornaio now has a market capitalization of approximately $55 million — that Guinn detailed this month. Hinting at his growing frustration with the investment community, Mindel stated that although Il Fornaio went public only three years ago, “it feels like 30 [years].”

He said Il Fornaio, which exceeded $100 million in combined revenues for the first time in fiscal 1999, “fell off the radar screen” for analysts. “Hopefully, the day will come where the investment banking community will decide that the restaurant industry is a great industry and the fundamentals have been good. Our same-store sales have been up for 18 straight quarters.”

But when Il Fornaio reported that fact during a recent telephone conference with analysts, “Everybody kind of yawned,” he said.

For the first nine months of 2000, Il Fornaio saw revenues jump 23.3 percent, to $89.6 million, compared with $72.7 million for the same period in 1999. Net income for that period also rose 17.3 percent, to $2.7 million, compared with $2.3 million in the same prior-year span. Through the first three quarters of this year, same-store sales increased 2.6 percent year-over-year.

“The marketplace doesn’t value restaurant brands and cash flow from restaurant brands as they do other industries,” said David Epstein, principal of the Rosemount, Ill.-based investment banking firm J.H. Chapman Group LLC. “I think there are probably 20 companies on the public market discussing the going-private notion,” he said.

Epstein said he felt the money was still available for private financing, but he added: “The options are still with the lenders, both securitized and portfolio lenders. [The money] is more expensive, and the criteria are tougher, but it’s still out there. I’d rather do that than give up equity.”

He said he had added Vicorp, Max & Erma’s Restaurants and Schlotzsky’s to his list of public companies “that are undervalued, where something could take place, either a buy opportunity for equity or a buy opportunity for management to take private.”

In 1999, with its stock price languishing, Il Fornaio began re-evaluating its potential as a public company, hiring Evercore Partners to research its strategic alternatives. Ultimately, Evercore negotiated the deal with Bruckmann, Rosser, Sherrill, sources at Il Fornaio said. According to Michael Mindel, “Being a very small, illiquid public company was not maximizing anybody’s share value.”

Mindel said he expected Il Fornaio’s management team to remain intact after the pending acquisition by BRS, which intends to keep the chain’s headquarters in Corte Madera, he added.

Industry veteran Larry Mindel rose to foodservice prominence in the 1980s as founder of San Francisco-based Spectrum Foods and its various upscale Italian restaurants. After that company was sold, he took over the separately owned U.S. offshoot of Italy’s Il Fornaio bakery chain and built the first Il Fornaio restaurant in 1987.

In the past three years, Il Fornaio has tweaked its authentically styled Italian dinner-house concept, adding a “risottoria” variant in Seattle and a Northern Italian-theme concept named Canaletto at the Venetian resort in Las Vegas. The company also has two quick-service Il Fornaio Caffe del Mundo units, developed in a joint venture at San Francisco International Airport.

“I think the niche Il Fornaio is in has a lot of expansion capabilities from a brand and an operating standpoint. They cut themselves both ways, as a dinner house and as a bakery,” J.H. Chapman’s Epstein said.


Paul Kaminski – Bruckmann, Rosser, Sherrill & Co., 212-521-3700