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Benihana Seen Luring Richest Restaurant Deal Since ‘07: Real M&A

Benihana Inc. needs to persuade potential acquirers that revived profits and sales at its Japanese-themed eateries are enough to justify the most expensive U.S. restaurant takeover in almost five years.

The Miami-based chain, known for shrimp-flipping chefs who cook at customers’ tables, said last week it will work with Jefferies & Co. to explore a possible sale for the second time in two years. After the stock more than doubled since its earlier attempt, the company is now trading at about 45 times earnings, higher than 94 percent of its peers, according to data compiled by Bloomberg. That would also make Benihana the industry’s priciest takeover greater than $200 million since before the last U.S. recession, the data show.

Leveraged buyout firms will still be interested in Benihana, according to Greenwood Capital, because the company is cheaper than 94 percent of its peers relative to the cash it generates and its operating margins leave room for improvement under new management. The eatery already returned to profit in fiscal 2011 and will increase net income by more than 50 percent next year, Roth Capital Partners LLC estimates, as the U.S. economy extends its recovery from the longest contraction since the Great Depression.

“The world does look decidedly different and better” than two years ago, Michael Holland, chairman and founder of New York-based Holland & Co., which oversees more than $4 billion, said in a phone interview. “When you have a company with comparative margins that are some of the lowest in an industry, there’s always an opportunity for improvement, which is something that private equity would always be salivating to try to do.”

‘Red Flower’

Anntal Silver, a spokeswoman for Benihana, declined to comment on the company’s strategic alternatives.

Benihana, which means “red flower” in Japanese, got its start in 1964 when Japanese immigrant Rocky Hiroaki Aoki opened a four-table restaurant in midtown Manhattan, according to the company’s website. The company, which has since added the RA Sushi and Haru chains, now owns and operates 96 restaurants in the U.S., of which 63 are Benihanas. Another 16 Benihanas are operated as franchises in the U.S., Latin America and the Caribbean.

The company had two years of net losses during the recession before returning to profitability in its fiscal 2011, ended last March. Benihana’s shares, which topped $24 in 2007, plunged to $1.50 a year later during the depths of the financial crisis. They closed yesterday at $12.52, giving the company a market capitalization of about $224 million.

Exploring Alternatives

Last week’s announcement that Benihana will consider “strategic alternatives” comes less than a year after it terminated a similar process. The company disclosed in July 2010 it was exploring a potential sale under pressure from investors who questioned the chain’s strategy. Instead, Benihana’s board said in May 2011 that it would pursue “long-term opportunities” and proposed eliminating a dual-class stock structure and a so-called poison pill designed to prevent hostile takeovers.

Benihana’s share price has more than doubled since it last tried to sell itself. Valued at 45 times earnings, Benihana would be the most expensive U.S. restaurant takeover greater than $200 million since Sun Capital Partners Inc.’s buyout of Friendly Ice Cream Corp. in 2007 at an earnings multiple of 155, according to data compiled by Bloomberg.

Cash Value

For private-equity firms, earnings multiples aren’t as important as a company’s ability to generate cash consistently, Walter Todd, who oversees about $950 million as chief investment officer at Greenwood Capital in Greenwood, South Carolina, said in a telephone interview. As of yesterday’s closing price, Benihana traded at 7.8 times its cash from operations after deducting capital expenses, a lower multiple than 94 percent of U.S. restaurant chains with a market capitalization greater than $200 million, the data show.

“Private equity really cares more about price to free cash flow,” Todd said. “At the end of the day, it’s maybe not as expensive for private equity as it would seem because of that cash flow.”

Leveraged buyout firms may also be attracted by the opportunity to increase profitability, Holland said. The company’s operating margin of 1.9 percent in the last 12 months trailed every other similar-sized U.S. restaurant firm except for Nashville, Tennessee-based O’Charley’s Inc., according to data compiled by Bloomberg. The industry average is 10 percent, a level Benihana hasn’t reached on an annual basis in more than a decade.

Sales Momentum

Buyers may also be lured by Benihana’s comparable-store sales, or sales at units open more than one year, which rose 7 percent in the period ended Jan. 1 for the eighth straight quarterly increase. The gauge is considered an indicator of growth because it includes only older locations.

“With sales momentum remaining quite strong, we also anticipate that profit margins should benefit,” Anton Brenner, an analyst at Newport Beach, California-based Roth Capital Partners, wrote in a Feb. 8 note.

The buyout of Morton’s Restaurant Group Inc. last month may have been what prompted Benihana’s management to seek a deal now, Todd said.

Texas billionaire and restaurateur Tilman J. Fertitta took the Chicago-based high-end steakhouse chain private for about $180 million including net debt, data compiled by Bloomberg show. At $6.90 a share, it was a 30 percent premium to its average over the 20 days before the deal was announced in December, the data show.

Morton’s Precedent

“You’ve got the precedence of the Morton’s deal,” Todd said. “Benihana probably looks at the landscape and sees the deals that have been done, which maybe prompts them to look at selling the company.”

Last year, shareholders voted to simplify the company’s capital structure by reclassifying each share of Class A common stock into one share of common stock. The proposal to eliminate the dual-class structure previously failed amid opposition from the family of founder Aoki, which holds shares through RHA Testamentary Trust.

The reclassification gives Benihana “flexibility to pursue strategic opportunities,” CEO Richard Stockinger said in a statement on Nov. 21.

Still, the Benihana brand may not have the same appeal to customers as it once had, said Michael Mullaney, who helps manage $9.5 billion at Fiduciary Trust in Boston. The rich multiple may not be justified as competition intensifies with the ShopHouse Southeast Asian Kitchen concept from Denver-based Chipotle Mexican Grill Inc. and Scottsdale, Arizona-based P.F. Chang’s China Bistro Inc., he said.

Restaurant Multiples

Buyers have paid a median of 7.7 times earnings before interest, taxes, depreciation and amortization in takeovers of U.S. restaurants worth at least $200 million, data compiled by Bloomberg show. Benihana already trades at 8.2 times Ebitda.

The stock also traded yesterday at 0.61 times its trailing 12-month revenue, its highest price-to-sales multiple since March 2008, the data show.

“If we were an investment banking firm, we would not be interested in looking at Benihana as far as taking it private, sprucing it up and selling it again,” Mullaney said in a phone interview. “It looks like it’s just too tired a concept with too many competitors right now and they are expensive. It wouldn’t add up for us.”

Still, marketing and quality-improvement efforts made since 2009, including rolling out a new Benihana menu, are now paying off with higher sales and improving profit margins. The company’s operating margin probably increased to 2.8 percent of sales in the year ending March 31, up from 0.6 percent in fiscal 2011, Brenner wrote in his Feb. 8 note.

“It’s an extraordinary turnaround,” Malcolm Knapp, a New York-based consultant and founder of Malcolm M. Knapp Inc. who has monitored the restaurant industry since 1970, said in a telephone interview. “There is still work to do, but it’s fundamentally fixed.”

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