Talking Deal Prices With Steve Gelsi: Red Lobster multiple may be cheaper than Chuck E Cheese

  • Apollo Global paid about 7.5x EBITDA for Chuck E Cheese
  • Golden Gate paying about 9x for Red Lobster
  • Cost is less when breaking out sale-leaseback deal

With pressure by its public shareholders to create value, Red Lobster owner Darden Restaurants Inc said Golden Gate Capital’s $2.1 billion purchase price for Red Lobster came in at about 9x EBITDA in a sale process handled by Goldman Sachs Group. The multiple weighed in at the upper end of Wall Street estimates for the deal, according to sources.

At first blush, Red Lobster’s 9x EBITDA purchase price seems much richer than the roughly 7.5x EBITDA that Apollo Global Management paid for CEC Entertainment, the parent of the Chuck E Cheese restaurant chain, in a $1.3 billion deal, including debt, that closed in February.

But maybe not.

Golden Gate not only lined up financing for the Red Lobster deal from Deutsche Bank AG, Jefferies & Co and GE Capital. It also pulled off a separate $1.5 billion sale-leaseback deal with American Realty Capital Properties Inc for Red Lobster’s real estate portfolio.  

When breaking out the value of the sale-leaseback deal, Golden Gate is paying only about 3x EBITDA to 4x EBITDA for Red Lobster, according to Lynne Collier, an equity analyst at Sterne, Agee & Leach. That’s a pretty small multiple for the operating company and brand of Red Lobster, which reported an 8.8 percent drop in same-store sales in the three months ended Feb 23.

Golden Gate declined to discuss the purchase price multiples or any other financial details of the deal. But a source familiar with the firm said Golden Gate’s experience in carve-outs helped it win the auction. One recent example was the firm’s deal for Payless ShoeSource from Collective Brands. Golden Gate’s track record in food retailing includes ownership of California Pizza Kitchen and On the Boarder Mexican Grill & Cantina. Golden Gate sold Romano’s Macaroni Grill last year to Ignite Restaurant Group for about $55 million.

Also on the restaurant deal front, Sentinel Capital Parters, owner of Checkers Drive-In Restaurants Inc and a franchise operator of Church’s Chicken and Pizza Hut outlets, teamed up with TriArtisan Capital Partners to buy TGI Fridays from hospitality and travel company Carlson for about $850 million in a deal announced on May 20.

Buyouts was not able to track down an EBITDA purchase price multiple for TGI Fridays, but paying less than 0.8x managed 2013 revenue of $1.1 billion for the restaurant chain doesn’t seem like a very rich multiple.

While Red Lobster, TGI Fridays and other mature restaurant names have been losing out to faster-growing upstarts such as Chipotle Mexican Grill, Jimmy John’s or Buffalo Wild Wings, buyout shops continue to wade in for deals.

In the case of Red Lobster, the bidding may have gotten a bit frothy, but Golden Gate managed to engineer a lower multiple. And TGI Fridays may have been cheap because the business has been shrinking, with a 2.3 percent drop in sales last year.

While GPs complain about a lack of targets, at least restaurant chains appear to be cooking up a few deals for the sponsored M&A marketplace. Expect more to come at a wide variety of menu options.