Take This Steak House IPO With A Grain Of Salt

Sorry, Bill, but what intrigued me most the other day on The O'Reilly Factor was an advertisement. It was that one for Ruth's Chris Steak House, the chain of restaurants whose trademark sizzle came across on cable TV most temptingly. If only I could've hit a button on my remote and had a hot filet served right then.

With 87 locations that go by its inscrutable name, Ruth's Chris Steak House now is preparing to sell not just supremely hot steaks but also stock. Executives at the Metairie (La.) company are keeping quiet ahead of the initial public offering, and key elements of the deal -- price, number of shares up for sale -- have yet to be set. Just the same, Ruth's Securities & Exchange Commission filing holds many clues to how this IPO will play out.

THE DEAL IS COMING 40 YEARS after the company's late founder, Ruth Fertel, bought her first restaurant in New Orleans. In 1999, a group led by Madison Dearborn Partners, an $8 billion Chicago private-equity firm, took over the chain. Results since have proved wobbly. Operating profit -- $19.7 million in 2000 on revenue of $162 million -- the next year sank below $15 million, on $154 million in revenue. After bumping along near those levels, business in 2004 firmed notably, with $23.3 million in operating profit on sales of $192.2 million. Sales should jump again this year as units open in Biloxi, Miss.; Boston; Charlotte, N.C.; Sacramento, Calif.; and Virginia Beach, Va.

Ruth's is hoping each year to add from 8 to 12 new restaurants, some of them via franchising. Naturally, there's no guarantee that the new units will prosper. Late last year, operating losses forced Ruth's to close two restaurants, one in Sugar Land, Tex., and another in New York City near the U.N. Such mistakes may be expected in any business, but Ruth's can't easily afford them. Its balance sheet is burdened by long-term debt and preferred stock that must be redeemed. Net worth at yearend stood at a negative $51.5 million. Part of the IPO proceeds are set to go straight to the selling equity holders, led by Madison Dearborn. Another part stands to go to Ruth's itself, which then will turn around and repay creditors, including Madison Dearborn, Banc of America Securities (BAC ), and Wachovia Investors. Affiliates of the latter two are the deal's leading underwriters.

Because no price has yet been set for shares in Ruth's, it's impossible to say whether they will prove as tempting as Ruth's steaks. But some guideposts to how the company might fairly be valued do exist. For starters, there are comparisons with competitors. Smith & Wollensky Restaurant Group last year had sales of $123 million. Its enterprise value -- that is, stock market value plus net debt -- now comes to $82 million, or 0.7 times last year's sales, according to Capital IQ, a division of Standard & Poor's (MHP ). Another rival, Morton's Restaurant Group, is no longer public. But when it went private in 2002, the buyout valued Morton's at not quite 0.8 times trailing sales. Then there is Ruth's itself. Madison Dearborn bought Ruth's in 1999 when the economy -- and demand for fancy steak dinners -- were ablaze, valuing it at $182 million in cash and assumed debt. That works out to more than 1.1 times 2000 sales.

At last report, Ruth's net debt came to $117 million. Figuring generously that the chain still is worth 1.1 times sales suggests an equity value of, say, $95 million. It's a good bet the sellers want to get much more. If Ruth's tempts you, wait for the sizzle to fizzle.

By Robert Barker

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