Wellspring Plays For Checkers –

After about 15 years in the public market, Checkers Drive-In Restaurants Inc. struck a deal with Wellspring Capital Management that will take the 1950s-style restaurant chain private for $15 per share, or $188 million-including the assumption of debt.

That price, according to Roth Capital Partners Analyst Anton Brenner, represents a multiple of 6.6x Checkers’s projected 2006 EBITDA, well below other recent restaurant industry acquisitions.

Indeed, the median multiple paid for restaurant companies in 2005 was approximately 7.9x LTM EBITDA, according Piper Jaffray’s M&A Outlook 2006.

Checkers owns, operates, and franchises quick-service restaurants under the two brand names: Checkers and Rally’s Hamburgers. The restaurants, though they do provide in-house seating, are designed around a drive-thru model to accommodate a broader spectrum of quick-serve food customers. According to the company, approximately 50% of all quick-service food business is drive-thru.

The Tampa, Fla.-based company and its franchisees own and operate 873 restaurants comprised of approximately 509 Checkers restaurants located primarily in the Southeastern U.S. and about 364 Rally’s Hamburgers restaurants mainly in the Midwest.

Carl Stanton, a Wellspring partner, said it was Checkers’s “unique double drive-thru concept with great food, and a fun, fast-paced brand image,” that got his firm interested in pursuing the acquisition. He noted that Wellspring will work with the company’s current management, “who we hope will join us as equity owners of the company, to continue the expansion of the Checkers and Rally’s concepts.”

But while Wellspring might be optimistic about the deal, some wonder what’s in it for Checkers. The day before the $15-per-share offer was announced, Checkers’s stock closed at $15.16 a piece, undermining the agreed-to offer.

“In our opinion, greater shareholder value than is being attained through the acquisition might be realized by a more aggressive growth strategy [on the part of Checkers],” Brenner said in a research note. He added that Roth Capital has been critical of Checkers’s refusal to more rapidly expand its company-operated store base despite a strong balance sheet, good sales momentum over the past two years and the potential to significantly increase penetration even in core markets.

Terms of the deal, which was brokered on the sell-side by Citigroup Corporate and Investment Banking, stipulate that if either party terminates the transaction, it will pay the other a $7 million break-up within two days of the termination, according to a proxy statement filed with the SEC.

Guggenheim Corporate Funding LLC will provide the debt financing. New York-based Wellspring is currently investing out of its $1 billion Wellspring Capital IV LP fund that it raised last year.

Generally speaking, 2005 was a busy year for private equity deals in the restaurant sector. According to Piper Jaffray’s report, buyout shops including Castle Harlan, Sun Capital Partners, Palladium Equity Partners and Roark Capital Group accounted for 78% of the transactions in the industry last year, a dramatic increase from the 33% that private equity represented in 2003.

“Restaurants seem to fall in and out of favor, and we’re probably coming to an end of the days when restaurants will have balance sheets as juicy as they are today,” said one private equity investor with experience in restaurant franchises. “But the bigger franchises with proven ability will always prove valuable for investors.”

Pending approval from a majority of Checkers shareholders, the transaction is scheduled to close sometime in the second quarter of this year. As of press time, Checkers shares, which trade on the Nasdaq under ticker symbol CHKR, were trading at $14.90, giving the agreed-to transaction an approximate premium of 0.7 percent.