In the years since the financial crisis and recession, restaurants have been battered as rising food prices and fewer diners forced well-known chains from Friendly Ice Cream Corp. to Sbarro Inc. into bankruptcy. And while dealmaking in the sector has been on the rebound -- fueled by private equity firms taking advantage of undervalued stocks -- the going has been tough.
But that hasn't stopped two insurance companies -- specifically, two title insurance companies -- from investing in the restaurant industry. Jacksonville, Fla.-based Fidelity National Financial Inc., which already owns 700 restaurants, recently announced plans to buy two steak house chains in Nashville. And in January, Toronto-based Fairfax Financial Holdings Ltd. complete d its purchase of Canadian casual-dining chain operator Prime Restaurants Inc. for C$70 million ($69 million). To win Prime, Fairfax outbid its intended buyer, Cara Operations Ltd., during a go-shop process.
Industry watchers are quick to point out that there are no real synergies between insurers and restaurant chains. Instead, they say, these insurers are simply looking to take advantage of a buyer's market.
That's not easy. "It's a tough, tough market still," says Pepper Hamilton LLP partner Steven London. "[Insurance companies] could be looking at good valuations from a buy-side perspective. I think it's a pure financial play."
And a play that Fidelity National chairman William Foley, 68, knows well. A lawyer by training, Foley has built Fidelity National into the largest title insurance company in the U.S., mostly through M&A. But he also spent most of the '90s running CKE Restaurants Inc., an acquisitive restaurant chain based in Carpinteria, Calif. Fidelity National invested in CKE in 1993, assuming CKE's $23 million in debt in exchange for 3.8 million shares, or a 25% stake. Foley was looking to diversify Fidelity's business and saw CKE as a turnaround play.
"[Foley] was initially looking to take over the company, CKE, in a hostile transaction, which then became a very cooperative and friendly deal with the founder and principal owner of CKE, Carl Karcher," says Adam Birnbaum, a managing director at New York boutique Grandwood Capital LLC. "He basically rolled up smaller hamburger chains, and now he's pursuing a similar strategy with casual-dining companies."
Foley served as chief executive of CKE from 1995 to 2000 and remained as chairman until 2005. The restaurant chain, which owns Carl's Jr. and Hardee's, was taken private by Apollo Global Management LLC in 2010 for about $1 billion, after it beat out private equity rival Thomas H. Lee Partners LP during a go-shop period.
"CKE did very well until they acquired Hardee's, which was a much tougher turnaround than Carl's Jr. had been," says Paul Huffman, the president of Commodore Advisory Partners LLC, a restaurant-focused boutique in Nashville. "They also acquired a number of different chains, most all of which were sold, spun off or converted. They didn't fit well and were a distraction to the core business, particularly after the Hardee's deal."
National Fidelity formed Denver-based American Blue Ribbon Holdings LLC, a restaurant acquisition vehicle, in March 2009 after it acquired Vicorp Restaurants Inc. for $55 million out of bankruptcy in a transaction that included the Village Inn and Bakers Square brands. In 2010, American Blue Ribbon struck again, buying Max & Erma's Inc. out of bankruptcy for about $28 million.
American Blue Ribbon is led by CEO Hazem Ouf, who previously headed Sun Capital Partners Inc.-backed SSI Group Holding Corp., the operator of the Souper Salad and Grandy's brands.
"Hazem Ouf is a very good CEO," says CIT Group Inc.'s restaurant industry director, Robert Bielinski. "He has shown he can move the needle on restaurant acquisitions."
This year, American Blue Ribbon has so far announced deals for two Nashville steak house chains. The first came at the end of May when the division completed its $221 million acquisition of O'Charley's Inc. About a month later, on June 25, it agreed to buy J. Alexander's Corp. for about $72 million in cash and stock, or about $12 a share. On July 31, Fidelity raised its bid for the chain to $13 per share, or $78 million in cash, after the target said it received two formal bids during its go-shop period, which ended on July 22.
"Fidelity is a very special case," says Huffman. "Most insurance companies do not diversify into direct acquisitions of unrelated businesses. This restaurant investment really began as a distressed bond investment for Vicorp, which became control through bankruptcy. Given Vicorp's underutilized platform, using it as a consolidation platform made sense."
Vicorp and Max & Erma's may be turnaround situations, Bielinski says, but J. Alexander's isn't. "J. Alexander's is a departure from that traditional strategy of [American Blue Ribbon]," he says. "I don't think J. Alexander's is a turnaround situation at all. I think it's simply a scale play."
For all of that, RBC Capital Markets LLC analyst Mark Dwelle says title insurance remains Fidelity National's main revenue driver. "We would note that these restaurant holdings, while interesting, are simply an investment vehicle for Fidelity National and that its $4.2 billion market cap is driven by its leading market share in the title insurance business," Dwelle wrote in a June 25 research note, the same day the J. Alexander's deal was announced. Fidelity National also owns stakes in other noninsurers, including auto parts maker Remy International Inc., human resources services provider Ceridian Corp. and financial services software company ServiceLink.
After the J. Alexander's transaction closes, expected in the fourth quarter, American Blue Ribbon will have more than 700 restaurants accounting for about $1.5 billion in revenue in its portfolio. But Fidelity National still has plenty of cash to burn ($728 million as of March 31) and is expected to continue to look for bargain meals. A Fidelity National spokesman says the company will remain opportunistic with acquisitions but declines to provide details.
One restaurant banker points to Maryville, Tenn.-based casual-dining chain Ruby Tuesday Inc. as a possible target. The reason: Ruby Tuesday, O'Charley's and J. Alexander's are all based in or around Nashville, where American Blue Ribbon also has an office. Maybe they can discuss something over a steak.