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One Year Later . . . Was The Sale Of OSI One Year Later . . . Will Boom Come Back For Buyers?

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By MICHAEL SASSO

The Tampa Tribune

Published: August 15, 2008

TAMPA - When Outback Steakhouse's parent company went private in a $3.2 billion sale a year ago, the move was intended to help reignite the restaurant chain.

As the economy slows, has the flame gone out on the company's strategy?

Recent signs suggest that Tampa-based OSI Restaurant Partners is struggling more today than it was before it went private in June 2007.

Last year, it posted what may have been its first annual loss, and it followed up with a loss in its first quarter of 2008. Meanwhile, OSI has been unable to sell off some of its smaller chains.

And its publicly traded bonds are selling well below "distressed debt" levels.
Industry analysts aren't yet willing to write off OSI or its buyers, private equity firms Bain Capital Partners of Boston and Catterton Partners of Greenwich, Conn. And OSI itself says it's making progress revitalizing Outback Steakhouse, partly by launching short-term specials, such as a new $9.99 sirloin steak, and redecorating its restaurants.

Still, some restaurant industry experts suggest Bain Capital and Catterton Partners overpaid for the company last year when they bought it for $3.2 billion.

"I don't think they thought they were paying too much at the time," said Alan Higbee, a lawyer at the Shutts & Bowen law firm who often represents restaurant companies. "Did they pay too much in hindsight? It sure looks like it."

Firms Hope To Rekindle Success

OSI and its eight restaurant brands turned into a private company from a publicly traded one in June 2007. Among other reasons, OSI executives hoped to give the company a chance to turn around its slumping sales without having to meet Wall Street expectations every quarter or comply with burdensome public accounting rules.

However, the year since OSI went private appears to have been anything but easy. This week, representatives of Bain Capital and Catterton Partners did not respond to interview requests.

Acknowledging that the industry is challenged, OSI Executive Vice President Joe Kadow said in an e-mail, "In the year since the going-private transaction, we have made substantial progress in the direction we discussed prior to and immediately following the transaction: the revitalization of the Outback Steakhouse brand, the evaluation of our portfolio of brands, and an increased focus on our core brands - Outback (domestic and international), Carrabba's Italian Grill, Bonefish Grill and Fleming's Prime Steakhouse and Wine Bar."

Among the challenges facing OSI and its owners:

•Inability to sell restaurants. Last fall, Tampa Bay Buccaneers legend Lee Roy Selmon and his business partners announced they were going to buy a majority stake in the small Lee Roy Selmon's chain, which features Southern cooking, from OSI. However, that deal never went through, at least partly because Selmon and his partners couldn't line up financing.

A June filing with the Securities and Exchange Commission also noted that OSI put its upscale Roy's chain up for sale but shelved the plan because of poor market conditions.

•Declining sales. Among OSI's four big brands - Outback, Carrabba's Italian Grill, Bonefish Grill and Fleming's Prime Steakhouse & Wine Bar - only Carrabba's saw its sales rise in the first quarter of this year, according to the June SEC filing.

Sales at stores open for at least 18 months - called same-store sales in the industry - at Outback Steakhouse fell by 2.6 percent when compared with the previous year. And sales at its high-end Fleming's Prime Steakhouse & Wine Bar chain fell by 6.8 percent. That's noteworthy because Fleming's had been a superstar in the past, posting same-store sales increases of 10 percent or more in some quarters.

Same-store sales at Bonefish Grill fell 3.9 percent compared with last year; sales at Carrabba's rose 0.7 percent.

With slow sales at its restaurants, OSI had a loss of $9.7 million in the quarter ended March 31, where it had earned a $27.6 million profit in the first quarter of 2007. That loss was on top of its annual loss of about $22.6 million in 2007. SEC documents dating back to 1993, two years after OSI went public, show the company had never before posted an annual loss.

•Falling bond values. In leveraged buyouts such as OSI's, the loans and bonds that are issued to pay for the deal typically must be repaid out of the acquired company's cash flow. To help finance the deal, OSI issued $550 million in bonds. This week, those bonds were trading at 57 cents on the dollar.

In April, Standard & Poor's credit analyst Ana Lai gave OSI a corporate credit rating of B-, which is considered below investment grade. The company's high debt level contributed to its poor rating, although the company has enough access to cash and credit to pay the bills, Lai said this week.

Even as its sales fall, OSI must make payments on nearly $1.9 billion in debt on its balance sheet. With the new debt on its books, OSI's interest expenses ballooned to $105 million last year from $14.8 million in 2006, SEC filings show.

"We of course anticipated that interest would increase due to the increase in debt, and factored this into our long range business plans when we took the company private," Kadow said in his e-mail.

No one has more invested in OSI's turnaround than Bain Capital and Catterton Partners. Combined, they put up $1 billion to buy the company, with the rest of the purchase price coming from loans and bonds. OSI's founders also contributed some of their stock to the newly private company.

The private equity firms may be scrambling to turn around OSI to protect their investment, which may already have sunk in value. At least two Bain Capital officials, Jason Saghir and Mark Verdi, appear to be spending significant time at OSI's Tampa headquarters. Each man has a phone line at OSI's office, but neither returned calls this week.

Restaurant Values Have Dipped

When Bain and Catterton bought OSI last year, banks and other lenders were much more eager to lend money, which caused prices for restaurant companies to shoot up, said Dennis Lombardi, a restaurant industry consultant with WD Partners in Columbus, Ohio.

Several years ago, the going rate for a restaurant company was five to seven times its cash flow. But in the past couple of years that rose to seven to nine times cash flow as private equity firms snapped up companies nationwide.

"Have restaurant values decreased due to the environment? The answer is absolutely yes," Lombardi said.

To right the ship, the company's Outback brand especially appears to be making major changes.

Shortly before OSI's acquisition, the company announced it would debut some lighter, more healthful items at Outback to appeal more to women, who had found Outback's masculine atmosphere and menu off-putting. But new menu items debuting this summer seem anything but light: a Bloomin' Burger with onion petals from Outback's signature Bloomin' Onion; a BBQ Mixed Grill with ribs, chicken and shrimp; and a Chargrilled Ribeye steak.

Kadow, the company executive, said the new items were introduced to give customers more choices at different portion sizes, especially focused on providing value.

Lombardi, the restaurant consultant, said the troubles facing OSI don't mean either the restaurant or the two investment firms made a bad deal. Between Outback, Carrabba's and Bonefish Grill, OSI has a strong lineup, he said.

"If you can work yourself through the present economic times, they still have good brands," Lombardi said.

Reporter Michael Sasso can be reached at msasso@tampatrib.com or (813) 259-7865.

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