All-you-can-eat Dividend Recaps Sink Major US Restaurant Chain
The collapse and bankruptcy of Buffets, Inc. - the largest chain of buffet-style restaurants in the US which at one time employed over 36,000 workers - provides an object lesson in how private equity owners can get their cash out quickly through dividend recapitalizations, suffocate a business to the point of bankruptcy under accumulated debt… and still turn a profit.
Two private equity funds - CI Capital LLC and Sentinel Capital Partners - took Buffets private in 2000.
At the time, CI Capital on their website described the deal in these terms:
Buffets, Inc. currently operates approximately 393 restaurants throughout the U.S. of which 236 operate under the name Old Country Buffet and 131 under the name HomeTown Buffet. The company has 27,000 employees nationwide, sales of approximately $930 million and serves approximately 154 million meals per annum. The buyout of Buffets was named “Public-to-Private Deal of the Year” by Buyouts newsletter. In October, 2000, Caxton-Iseman acquired and took private Buffets, Inc. (Nasdaq: BOCB) for $645 million.
In June, 2002 we completed the refinancing of Buffets Holdings, Inc., the parent company of buffet-style restaurant chain Buffets, Inc. In connection with the recapitalization, the Company made a $150 million distribution, on $130 million of original equity invested in the Company.
According to a July 7, 2008 article in the internet publication The Deal, Frederick Iseman, president and managing partner of Caxton-Iseman, explained at the time, the debt markets "came to understand that we are not in business to invest $130 million and take out $142 million after 20 months but rather to invest in building future revenues and profits as the basis for a large future capital gain."
The USD 525 million recap was arranged by Credit Suisse Group. The Deal describes what came next, two years later:
Encouraged by robust credit markets, Buffets launched a second leveraged recap in January 2004, allowing the sponsors to collect another $75 million in dividends, according to Sentinel's Web site. CI Capital, which holds 77% of the common, took the lion's share.
Buffets private equity owners decided to expand when an initial attempt to sell the company failed in 2005. Despite heavy leverage, Buffets bought out Ryans, a rival chain, in 2006, creating a nationwide chain of restaurants with over 36,000 employees. The acquisition was partially funded by the USD 566 million sale/leaseback of 275 Ryans and 7 Buffets restaurants to Fortress Investment, where Al Gore served as an adviser.
And then? According to a Moody's source quoted by The Deal, "The costs associated with the acquisition, with both higher rent expenses and higher leverage, resulted in a liquidity crunch." With revenues down, like many another leveraged private equity portfolio company, the pe-owners couldn't make the payments on their high-interest unsecured loans, and the company filed for bankruptcy.
But the real lesson is this: even assuming that the owners extract not a penny of equity from the bankruptcy proceedings, the two funds have earned a 1.7 multiple on their initial investment - not bad for destroying an enterprise which at one time provided a workplace for 36,000 people.