Investors find opportunities in public casual dining chains

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Bottom line

Dave & Buster’s announced Monday that it has received a $ 100 million lifeline from Jefferies, an investment that plummeted the company’s stocks but may still help the food and entertainment chain survive the financial storm caused by the coronavirus.

On Friday, BJ’s Restaurants received $ 70 million from Ron Shaich’s mutual fund Act III Holdings and T. Rowe Price.

Previously, The Cheesecake Factory received a $ 200 million investment from Roark Capital.

Restaurant companies need cash and turn to investors to get it.

Investors seem ready to take advantage of the favorable terms they are getting from the companies to place bets. And of course it’s not that you now have many options for investing your money.

Full-service chains in particular need cash because the dine-in business has collapsed by at least 40% in the last six weeks.

It’s, uh, difficult to make a profit when you’re making 60% or less of your sales, and these companies have been trying hard to find funds that can get them through the coronavirus crisis no matter how long it lasts.

The companies have found some willing bidders in the form of private equity firms who are looking for investments and eager to see the potential returns on such deals.

For example, according to Bloomberg, around 20 investment firms were lining up for the cheesecake deal before Roark got ahead. Roark, if you recall, recently completed a $ 1.4 billion investment and has a lot of cash to do business with.

Private investment in public companies can be costly for the companies taking the money. Roark, for example, receives preferred stock and a dividend of 9.5% and can convert its shares into common stock when they reach $ 22.23 per share. It now has the equivalent of 22.5% cheesecake.

While not exactly rare, such fundraising strategies are relatively rare. For one, private equity firms like Roark generally prefer controlled investments or, if they are making an uncontrolled investment, those funds would prefer to invest in growth companies.

Second, these investments are costly to the companies receiving the funds and can annoy existing investors whose stocks are diluted and who do not receive the same treatment. Hence, they usually only happen when the company needs the money and the investor gets a deal that they think will pay off.

For example, it’s much more common for companies to simply raise funds from public investors, as Darden Restaurants did last month when it launched a $ 400 million stock offering, or Shake Shack when it launched a $ 150 million share. Raised dollars.

Still, companies in distress sometimes turn to private investors to help them through a crisis.

In 2017, Noodles & Co., in need of cash due to declining sales and restaurant closings and costs related to a data breach, needed a $ 18.5 million capital injection from former owner L Catterton and then another 31, $ 5 million from Mill Road Capital. Both companies remain major shareholders in the company.

The funds provided Noodles with the cash it needed to stabilize its operations, focus more on takeout, and make menu changes that make the brand more accessible to carb-conscious consumers.

In this case, a potential interest of private investors in these public companies can drive down prices for the restaurant companies. That makes them potentially cheaper for companies.

The restaurants can also take comfort in the fact that they are interested in private investors at all. Ultimately, companies don’t make a deal unless they have at least some confidence in the brand and its management.

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