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News Release Restaurant Deals Take a Hit: Activity Down 42% Chicago, April 21, 2010 − The J.H. Chapman Group, L.L.C., an investment banking firm specializing in mergers and acquisitions in the food and restaurant industries, has just released its 2009 Chain Restaurant Merger & Acquisition Census, a comprehensive guide to acquisition activity in the retail food service industry. The Census, which provides a unique perspective on important trends, was developed by Chapman Principal David L. Epstein, who analyzes and presents this annual information. "With declining sales and narrowing profits in many restaurant chains, buyers found it difficult to value attractive concepts during 2009," stated Epstein. "The lack of available acquisition financing forced valuations down, but was not the primary reason for the significant decline in activity. Buyers found it difficult to get comfortable with many companies' plans for weathering the present economic climate or to make offers based on a seller's optimistic future forecasts." Chain restaurant merger and acquisition announcements in 2009 fell to 67, down 42% from the 116 in 2008 and down 40% from the average of the last five years. Although equity funds continued to buy restaurant chains, the number of fund transactions announced was only one-half the amount in 2008. However, equity funds accounted for 29% of all announced private transactions. Franchise related transactions were also off significantly. Acquisitions within the buyer's own brand were off 45% from the previous year, yet represented about one-third of all private transactions. Examples of these include Sizzling Platter's acquisition of 16 Little Caesars, RDSL acquisition of seven Jack in the Box, and NPC International's acquisition of 51 Pizza Hut restaurants in Missouri. Transactions in which a franchisee acquired a franchisee of another brand remained at the same level as last year, but were less than 8% of the total recorded transactions. Transactions involving companies in trouble were off 62% from last year, with only eight such companies reported compared with 21 in 2008. Examples of transactions involving companies with financial difficulty included DHW Leasing converting its debt to 64% of the stock of Granite City Food & Brewery, Waffle House's acquisition of 105 unit SouthEast Waffles, and American Blue Ribbon Holdings' acquisition of Bakers Square and Village Inn. Many financially troubled restaurant chains may not have been saleable during 2009 as they have signed forbearance agreements with lenders, are still in bankruptcy or being managed for survival. Diversification has always been one of the leading reasons that restaurant chain buyers pursue the acquisition of other concepts. For 2009, 24% of all non-public transactions involved a new concept for an existing restaurant chain acquirer. Nevertheless, the most cited reason for making an acquisition in 2009 was to expand an existing franchise trading area. Equity funds, flush with cash to invest, ventured into the private placement market by investing in non-controlling interests in some restaurant chains. For example, Bruckmann, Rosser and Sherrill purchased a $25 million convertible preferred issue in Ruth's Hospitality; Pershing Square Capital acquired 1.6 million shares of Landry, aimed at influencing the going private transaction with Tilman Fertitta; Jefferies Capital purchased a 30.4% interest in Carrols Restaurant Group. Equity funds also bought new concepts, such as Kohlberg and Company's acquisition of Centerplate and Friedman, Fleischer & Lowe's acquisition of Church's. Management teams found value in acquiring the companies they managed. For example, John Kaufman and Tim Foley acquired Pat & Oscar's from Pacific Equity Partners, and Steve Overholt acquired a controlling interest in Cheeseburger in Paradise. Commenting on the 2010 outlook for M&A activity in the chain restaurant industry, Epstein noted, "We expect that the credit markets will loosen for acquisition lending, which should improve valuations and equity fund returns. Consumer and retail focused equity funds which have been on the sidelines during the last two years will find value in small, high growth restaurant concepts and large venerable chains with attractive brands. The recent sale of On the Border and the announcement of the possible sale of California Pizza Kitchen are further evidence of what we expect in 2010." Epstein welcomes questions and discussions concerning this year's Census findings. About J.H. Chapman Group, L.L.C. The J.H. Chapman Group, the food industry's leading investment banking firm, with offices in Chicago and Paris, offers a full range of financial advisory services. The Chain Restaurant Merger & Acquisition Census has been compiled annually since 1987 and lists almost 2,400 announced transactions. The firm's web site, www.jhchapman.com, contains previous Census Summary Reports.
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