When the late Hiroaki "Rocky" Aoki opened his first Benihana Inc. restaurant in New York in 1964, it was so successful, the Japanese native attempted to replicate its success nationwide. For more than four decades, until Aoki's death in 2008 at 69, Benihana, with its tabletop cooking as performance art theme, was something of a star in the casual-dining industry.
That star has since dimmed. Since the mid-'90s, Benihana has suffered through family lawsuits over control of the chain, declining sales and restructurings. If Aoki were still alive today, he would be relieved to see that Benihana, now based in Miami, appears to be a more unified company. And that is not just because the chain is better known for its knife-twirling chefs than its food.
Benihana recently put itself on the auction block for the second time in less than a year, on March 13, once again hiring Jefferies & Co. to look for buyers. Jefferies also ran Benihana's first auction, lasting from September 2010 to May 2011, but that was called off so the company could focus on fixing its cumbersome and friction-inducing dual-stock structure. Now, with its shareholder issues behind it, the chain is trying to leverage its turnaround efforts and an active restaurant M&A market in seeking buyers.
When asked about the rejuvinated sales process, neither Benihana nor Jefferies would comment.
What happened to Benihana is common in casual dining, as age and underinvestment catch up with once-hot franchises. During an economic downturn, Benihana saw increased competition, rising food prices, outdated stores and menus torch its sales, which forced the chain to seek a buyer in 2010.
But Benihana's two share classes threw off potential buyers and produced what the company believed were undervalued bids during the initial sales process. Between its lagging sales and its confusing stock classes, buyers did not think Benihana was worth a premium. The company had held onto its two-stock system mainly because, Benihana of Tokyo Inc., once its largest shareholder, adamantly opposed switching to a single class. In fact, Benihana moved to two classes in the first place because the parent company and Benihana of Tokyo, which was initially created by Aoki as a trust for his wife and children, had gone public at different times. Benihana of Tokyo is currently controlled by Aoki's widow, Keiko Ono.
According to a source familiar with both of Benihana's sales processes, in its first sale attempt, the chain received interest from a number of private equity firms including Castle Harlan Inc., Golden Gate Capital and J.H. Whitney & Co. LLC, which had all previously invested in restaurants. Bruckmann, Rosser, Sherrill & Co. LLC; Angelo, Gordon & Co.; and Madison Dearborn Partners LLC submitted formal bids, but they valued Benihana at only around $222 million, or about 6 times $37 million Ebitda, according to the source. Rumors that Benihana received a $123 million bid from RDG Capital LLC proved false.
Despite that level of interest, the bids were disappointing. "Because of the uncertainty, they did receive less aggressive bids," says the source.
After canceling the relatively weak auction process, Benihana went to work to eliminate its two-stock structure. The chain reclassified its Class A preferred shares into Class B common shares in November. Benihana of Tokyo opposed the move because it saw its 26.8% of voting control diluted to 12%. On the other hand, the stock reclassification helped New York hedge fund Coliseum Capital Management LLC, which saw its stake increase from 10.3% to 14.6%. In 2010, Benihana merged with its wholly owned BHI Mergersub Inc., resulting in a 12.5 million share increase in Class A stock. Benihana of Tokyo did not add to its voting power through the share increase.
"The company determined it was best to eliminate the two classes of stock," says Hughes Hubbard & Reed LLP deputy chair Kenneth Lefkowitz. He advised Benihana on its first sales process as well as its current one, but declined to provide details.
While it was working on narrowing its two stocks down to one, Benihana went to work beefing up operations. It hired CRG Partners Group LLC in November 2009 to take on the kind of restructuring plan familiar to struggling restaurants: upgrading menus, renovating old stores and retraining restaurant managers and chefs. It even temporarily hired a Japanese executive chef for advice. During the process, the chain slashed overhead, boosted prices in line with food inflation and put more emphasis on marketing efforts. Benihana completed a $30 million secondary stock offering in 2010 in a move that helped pay down debt. The chain currently operates about 95 restaurants, having closed more than 20 for their underperformance since its restructuring process began in 2009.
CEO Richard Stockinger, who has headed the company since 2009, oversaw the turnaround. Before taking over Benihana, Stockinger spent five years as president at Patina Restaurant Group LLC. "Rick Stockinger has done a tremendous job," says Duff & Phelps Corp. restaurant group head Josh Benn. "He focused on operational execution and re-embraced the consumer."
The changes were all positive for Benihana. Its revenue grew from $305.6 million in 2009 to $327.6 million in 2011, and its stock improved by about 28% from the shelving of its first auction on May 13, 2011, to April 3, 2012. With a single stock class, improved sales and the tailwinds of improved restaurant M&A, Benihana should become tastier to buyers this time, say industry sources.
"They are doing better than a lot of other restaurant chains in a year-over-year period," says David Bagley, a principal at restructuring consultant MorrisAnderson. "It appears to be that they are doing the right things."
Some industry sources worry that with its stronger stock and sales figures, Benihana might become overly optimistic about its valuation and repeat what California Pizza Kitchen Inc. did during its own lengthy auction -- drag the process out due to a valuation gap. CPK was sold to Golden Gate in May 2011 for $470 million in cash, or $18.50 per share, less than the $25 per share it once sought during its nearly yearlong auction.
To be fair, CPK did not have the shareholder issues that Benihana has faced. Either way, most industry sources believe Benihana will get a deal done. "It may take some haggling given the current valuation, but I think many funds could see potential," adds another analyst. "The shares did run up on Benihana, but I don't think it's overly expensive."
"Now that the structural impediments are out of the way, I think a deal is more likely," says one industry banker.
Sources expect Castle Harlan to be in the running once again, along with a handful of strategics such as Darden Restaurants Inc., Brinker International Inc. and Landry's Inc., and predict Benihana to fetch up to 8 times its estimated $40 million 2011 Ebitda, or roughly $320 million.
Darden acquired Eddie V's Prime Seafood and the Wildfish Seafood Grille from Eddie V's Restaurants Inc. for $59 million in cash last October and has remained on the hunt for additional deals ever since.
Landry's has been the most active restaurant acquirer over the past year and is expected to remain so, since it still has funds available under its current credit facility. In the 2011 fourth quarter alone, the Houston chain, led by Tilman Fertitta, purchased steakhouse chain Morton's Restaurant Group Inc. for $117 million and McCormick & Schmick's Seafood Restaurants Inc. for $131.6 million.
David Epstein, a principal at investment bank J.H. Chapman Group LLC in Chicago, believes that a private equity firm is more likely to buy Benihana than a strategic.
"I think it's a perfect equity fund transaction," says Epstein. He adds that a PE firm can continue to help turn around the chain while increasing its store base in international markets. "It's a better environment today for a company like this."
Aoki has been credited for being one of the first to introduce Japanese cuisine to the U.S. He first came to the U.S. with the Japanese Olympic wrestling team and ended up with a scholarship to Springfield College in Massachusetts; he later transferred to C.W. Post College, now part of Long Island University, in Brookville, N.Y., where he got kicked out for fighting. To help fund his first restaurant, Aoki, whose parents once owned a coffee shop in Japan, rented an ice cream truck in Harlem while studying restaurant management at New York City Technical College at night. He used $10,000 earned from selling ice cream to open his first Benihana restaurant, which originally had only four tables.
Through the '60s and most of the '70s, Aoki expanded. By the end of 1979 he was generating seven-digit sales figures from the chain. He was a larger-than-life figure, spending his time hot-air ballooning, speedboat racing and participating in long-distance auto rallies.
In 1998, however, he was forced to resign as chairman after he was convicted on an insider-trading charge that cost him a $500,000 fine.
Before he resigned, Aoki left majority control of the company to his children through Benihana of Tokyo. He later changed his mind and reworked his will to leave control to his wife. The Aoki heirs, upset with the move, fought back, and in 2005, Aoki sued them for attempting to take over the chain. At the time of his death, many of these legal issues remained unresolved.
Hopefully, all that's now behind the company. With its finances in order and restaurant M&A robust, Benihana should be seating plenty of buyers. Now for the show.