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Nautic Passes Skyline Chili –

Continuing the slew of PE-backed exits and acquisitions in the restaurant industry, Skyline Chili Inc., a restaurant chain owned for more than seven years by Nautic Partners LLC, was sold in a secondary transaction late last month to Prudential Capital Partners, the private equity arm of Prudential Financial. Specific terms of the transaction were not disclosed.

Providence, R.I.-based Nautic Partners originally acquired Skyline Chili in 1998 via a taking-private transaction that included about $24 million in cash and approximately $5.7 million in assumed debt. End to end, the deal represents a 25% IRR and a 3.1x return on Nautic’s $10 million equity investment, said Fraser Preston, a vice president at Nautic Partners.

Based in Cincinnati, Skyline Chili is a regional chain of 135 franchised and company-owned restaurants that specialize in Cincinnati-style chili, which-unlike traditional chili-is more like a topping, and thus is often used for pouring over hot dogs or onto spaghetti, in addition to eating it as a standalone dish. Aside from operating restaurants in Ohio, Indiana, Kentucky, Michigan, and Florida, Skyline Chili also sells branded products, such as chilies, dips and cheeses from grocery stores and online.

The sponsor-to-sponsor sale of Skyline comes on the heels of another secondary restaurant transaction in which Centre Partners sold Garden Fresh Restaurant Corp., a chain of buffet-style, dine-in establishments, to Sun Capital Partners for $198 million. In that case, Centre held onto Garden Fresh for little more than 18 months.

Preston characterized Nautic’s investment in Skyline as “a smooth ride in spite of massive challenges.” He went on to describe the past five years as a “perfect storm in the restaurant space” do to an up-tick of competition within the “quick-casual dining” niche, the economic fallout of 2002-2003, and rising commodity prices for essential ingredients like beef and cheese. Preston credited Skyline’s management as being the impetus behind the company’s current success.

“The company is performing extremely well, and its growth prospects are still excellent,” Preston said. “In a lot of ways it was difficult to make the decision to sell the company, but it’s a Fund III investment and we are at the tail-end of investing Fund V.”

Preston would not disclose the specifics regarding Skyline’s revenue or EBITDA. He did note, however, that the company’s sales are split evenly between its restaurant and grocery products and that it remains “a good free-cash-flow business.”

To add value to Skyline, Nautic sought geographic expansion into both new and existing regions, while increasing the chain’s overall location base from 102 restaurants in 1998 to 135 today. Throughout its ownership period, Nautic recapitalized Skyline twice, allowing the firm to take out dividends totaling 1.5x its original investment, Preston said.

“[Skyline], in the last 12 to 24 months, has been very successful in growing its franchisee base, and that will continue to grow the company as they come online,” he said.

For leverage, Prudential Capital tapped Provident Bank to provide a tranche of senior financing for the acquisition. Provident Bank served as Skyline’s senior lender throughout Nautic Partners’ ownership period, as well.