Restaurant Finance Monitorr

R RESTAURANT FINANCE MONITOR Volume 31, Number 4 • Restaurant Finance Monitor, 2808 Anthony Lane South, Minneapolis, MN 55418 • ISSN #1061-382X April 17, 2020 OUTLOOK It’s a Covid-19 World After All The predictions are in. Social distancing is the norm. Food A study of the economic impact of the Spanish flu just will be consumed at home instead of restaurants. Pizza and released by Federal Reserve economists, Sergio Correia, drive-thru and delivery are kingmakers. Casual dining and Stephan Luck, and Emil Verner, cite the negative impact fine-dining and crowded dining rooms are relics. Workers on the economy brought on by social distancing techniques like it so much at home that office buildings are obsolete. to flatten the mortality curve. Schools, vaudeville theaters No one will travel again. Movie theaters and sports, forget and churches were ordered closed, and authorities required about them for now. You will always have a middle seat masks and the isolation of individuals with positive flu tests. between you and the next passenger. Masters reruns are Correia, Luck and Verner found the pandemic lead to just fine. a sharp fall in economic activity over the next few years The trouble with predictions, as the Nobel Prize winning from both supply and demand-side effects. Where social economist, Daniel Kahneman, said, “are that the penalties distancing techniques were implemented more aggressively, for incorrect predictions are negligible, and a year later interestingly enough, the economists found no additional people won’t remember them.” adverse effect on local economic outcomes. I have listened to many predictions in the past month about If one fears the coronavirus resurging in the fall and next the restaurant business, from the smart crowd on one hand, spring as it did with the Spanish flu, non-pizza, non- and from others who are obviously stressed out at home drive-thru and delivery inefficient restaurant owners, will with two much time on their hands. The coronavirus has find themselves in the same boat they are in today. Social caused a panic. The Drudge Report headline sticks in my distancing and crowded dining rooms are like placing two mind with a prediction that 150 million Americans would north poles of a magnet near each other. get the virus and 15 million people would die from it. Panic. Already, restaurant lobbyists are anticipating a delay in a return to normal and have begun lobbying Congressional Panic arises from uncertainty, especially ones that involve members and the Administration to not only increase loss of life. The mandated shutdown of businesses, the mass Paycheck Protection Plan benefits, but stretch them to layoffs and the disruption of so many people forced to work December. at home, has also created a financial panic. The U. S. economy will eventually experience a rebound The restaurant industry exists within a highly connected that much is for sure, but it may not come as soon as we consumer economy and is dependent on the level of personal in the restaurant business want. Previous economic panics income and consumer spending, both of which are measured in American history, such as the Panic of 1893 or 1907, expertly today. However, the last pandemic that hit the are useful in estimating the timing of improved economic United States was the Spanish flu of 1918 and 1919, when activity. In both financial panics, banks, investments firms economic measurement tools weren’t as sophisticated. One and thousands of businesses failed, and it took four-to-five thing they did well was measure deaths. The Spanish flu years for the economy to regain its pre-panic strength. killed as many 40 million people world-wide and close to What all of this means is that restaurant owners should 700,000 people in the United States. not expect a V-shaped recovery, but rather a gradual return The Spanish flu consisted of two waves, the first in the spring to normalcy over the next 12-24 months. Customers will of 1918, and then again in the fall of 1918 and spring of 1919. come back to restaurant dining rooms only when they In a 2003 economic paper, economists Elizabeth Brainerd feel comfortable doing so, and not a minute too soon. A and Mark Siegler, found that consumption fell and savings recessionary economy also means value will be the primary increased, something you can understand watching today’s desire of the consumer. coronavirus business shutdowns and home confinement. So many aspects of the restaurant business will be changed The business cycle peaked in August 1918 and reached a by the coronavirus. Here are some of my predictions: trough in March 1919, when the second wave dissipated. Continued on the back page © 2020 RestaurantPage Finance1 Monitor FINANCE SOURCES Arlington Capital Closes Wagamama Joint Venture Auspex Capital Completes Transactions for Burger King and Taco Bell Franchisees nvestment banking firmArlington Capital Advisors recently served as exclusive financial advisor to The “Despite very challenging market conditions brought on Restaurant Group plc (TRG) in its joint venture partnership by the Covid-19 pandemic, we have been able to complete with Conversion Venture Capital (CVC2) as financial both M&A and debt placement transactions for valued partners and Robert Cornog Jr. and Richard Flaherty as clients,” said Chris Kelleher, managing director of Auspex operating partners for the development of TRG’s wagamama Capital. The boutique financial advisory firm recently U.S. business. closed the following: TRG, which owns 650 restaurants across the U.K. and • Sell-side M&A advisory: Burger King franchisee O&M worldwide, is the operator of 200 wagamama restaurants, Restaurant Group, Inc., an Oklahoma City, Ok.-based a brand, the company says, “that takes its inspiration from company owned and operated by franchisee David Ostrowe, the best flavors of Japan, China and Korea to create unique has sold 13 Burger King restaurants, including the real estate recipes that have a modern and nourishing twist…” The underlying four of the locations to Switchgrass-VI, LLC. brand has garnered attention as celebrities and patrons Switchgrass is a subsidiary of Switchgrass Holdings, LLC, alike have sung its praises across social media. Most of the which is the largest Burger King franchisee in Oklahoma. units are located in the U.K., but about 25% are worldwide, including five split between Boston and New York City. • Debt placement advisory: Franchisee Janice Sutherland’s companies, J.A. Sutherland, Inc. and JAS Properties, An earlier deal with another fund a few years ago started LLC (collectively “JAS”), recently obtained a total of $26.5 the U.S. expansion, but it ultimately stalled because the million of new loan commitments, including a $19.5 million locations the fund was locking into were “on Main and senior secured term loan, a $6.0 million development line of Main,” explained John Goldasich, managing director with credit and a $1.0 million revolving line of credit. The loans Arlington, who was the lead investment banker on the recent were used to refinance existing debt, purchase generators, joint venture. “They thought they needed to make a splash provide capital for remodels of the restaurants and provide here, and the rents were too high. But this brand was built seasonal working capital. The financing was completed by in the U.K. neighborhood by neighborhood.” Fifth Third Bank. JAS, which is based in Red Bluff, Calif., owns and operates 24 Taco Bell restaurants in Northern Goldasich says there was great interest from different California and Southern Oregon. constituencies on this latest outreach, from private equity to larger, existing franchisees here in the U.S. “TRG wanted For more information about Auspex Capital, contact Chris to make sure they were placing the brand in the hands of Kelleher, managing director, at 562-424-2455 or ckelleher@ capable and credible operators.” When CVC2 presented auspexcapital.com. Cornog and Flaherty to TRG, it helped seal the deal. Cornog and Flaherty are industry veterans in the restaurant sector, Trinity Capital Provides Sell-Side Advisory to BK most recently as senior leaders with Punch Bowl Social. Franchisee “We have a growth strategy and we remain committed to Trinity Capital, a division of Citizens Capital Markets, it,” Cornag said. “It may be delayed because of Covid-19, recently served as the exclusive financial advisor to Jan but ultimately we are not changing our projections.” He Co., Inc, a Burger King franchisee in Rhode Island, sees expanding to 50 restaurants over the next few years. Massachusetts and Connecticut on the sale of 47 restaurants With a base of operations in the Northeast, “I think we’ll to JSC Acquisitions LLC. The Trinity team orchestrated move down the seaboard and develop a regional strategy.” the sale process along with guiding Jan Co. through due And it could be that some of those locations will be in diligence, purchase and sale agreement negotiations and secondary markets. the franchisor approval process. Northern Bank provided debt financing for the transaction. After 50 locations, further growth “will depend on how the brand grows and evolves, and how the consumer grows and The Jan Co. has “been in it for 50 years, and they are a evolves,” said Cornag. “It wouldn’t be unreasonable to say great developer,” said Kevin Burke, managing partner there could be 150 locations in the U.S.” with Trinity Capital. “The brand is iconic and strong, and Jan Co. was a solid franchisee in a great market. Everybody For him, he’s excited to work on a brand like Punchbowl saw the fundamentals of the deal were intact and that this Social again, and team up with Flaherty a second time. franchisee will do well” going forward with the acquired “We’re introducing this menu and approach—engaging locations.

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