Apparently 2005 is shaping up to be the year of the steakhouse in private equity. Castle Harlan unloaded its investment in Charlie Brown’s earlier this year through a secondary sale to Trimaran Capital Partners, and in April, Madison Dearborn Partners followed suit with an exit, filing to float Ruth’s Chris Steak House in an IPO.
With two straight years of growth and appealing prospects going forward (high beef prices aside), it would seem to be a now-or-never window for Madison Dearborn. The firm brought the company in 1999, reportedly investing $47 million of equity from its third fund into the $190 million acquisition.
Through the IPO, Ruth’s Chris intends to raise $235 million. The proceeds of the offering will go toward the redemption of the company’s outstanding senior preferred stock (all of which is held by Wachovia Investors), the redemption of its outstanding series B junior cumulative preferred stock (of which Madison Dearborn controls an 88% stake), and to repay a portion of its outstanding indebtedness under the company’s senior credit facility.
Banc of America and Wachovia Securities are the joint bookrunners for the offering and Goldman, Sachs & Co., RBC Capital Markets, CIBC World Markets Corp., SG Cowen and Piper Jaffray & Co. have been tapped as co-managers. The timing and the exact terms of the offering have not yet been determined, although the filing indicated the company is being floated on the Nasdaq and will trade under ticker symbol “RUTH.”
Throughout its six-year investment, Madison Dearborn has seen some highs and lows, but like other high-end steakhouses, Ruth’s Chris has held steadfast. The company has been aided by the now teetering Atkins diet trend but ongoing mad-cow scares and escalating beef prices have made the environment challenging at times. Ruth’s Chris also had to endure the death of Ruth Fertel, the founder of the steakhouse, and an extended management change following the resignation of CEO William Hyde.
But the company rebounded strongly from a slump in the 2001 and 2002 timeframe. Most recently, in the 2004 fiscal year, the steakhouse generated operating income of $23.3 million, on $192.2 million in total revenues, representing jumps of 51% and 15%, respectively, year over year. And for the first quarter of this year, Ruth’s Chris has logged $56.6 million in revenues, and recorded a 12% increase in same-store sales during the period.
Looking ahead, the company said in its prospectus that it intends to continue expanding its restaurant base. There are already 89 company-owned and franchised Ruth’s Chris restaurants in operation, and the company believes there is room for an additional 100 to 150 restaurants in both the large and smaller U.S. markets.
There was no mention in the filing as to how much the IPO will dilute Madison Dearborn’s stake, although the filing did indicate that the firm would receive roughly $65.4 million in net proceeds in connection to the redemption of Ruth’s Chris’ junior preferred stock.
The restaurant industry has been a popular destination for private equity firms recently, and according to figures from the National Restaurant Association (NRA), the sector should continue to grow in the coming years. The NRA anticipates that that industry will grow almost 5% in 2005, and the consulting firm Technomic, meanwhile, has forecast 6% annual growth from the high-end steakhouse segment from 2003 to 2008.
In just the first quarter of this year, there were eight restaurant transactions completed by buyout firms, including the purchases of Chevy’s, Uno Restaurant Holdings and Papa Gino’s among others.