BUYOUTS-MidOcean struggles with Sbarro restaurant chain

Thu Mar 24, 2011 1:18pm EDT

* Italian restaurant chain crippled by recession

* Stomach ache for MidOcean Partners and its third fund

* Missed February interest payment

* Questions about viability

By Bernard Vaughan

NEW YORK, March 24 (Reuters-Buyouts) - Cautious consumers and rising prices for flour and cheese stymied Sbarro Inc, the Italian food chain, during the recession and it has been struggling to recover ever since.

In perhaps its most dire assessment yet of Sbarro, Moody's Investors Service on March 11 said its ratings outlook is "negative," reflecting "the uncertainty with regard to Sbarro's ability to remain a going concern."

Moody's also revised the company's probability of default rating to "Ca/LD" after it failed to make a February interest payment on its 10.375 percent senior notes due 2015, for which the grace period ended on March 3.

The Sbarro family started their company as a salumeria, or Italian grocery store, in Brooklyn in 1956 soon after immigrating to the United States from Naples, Italy.

Today, the Melville, New York-based company sells pizza, pastas and other Italian food through more than 1,000 restaurants in 30 countries; its ubiquitous green, white and red banner is a familiar sight in malls, rest stops and airports. The company's annual revenues are approximately $333 million, according to Moody's.

MidOcean Partners, whose founders spun out of Deutsche Bank (DBKGn.DE) early last decade, bought Sbarro in January 2007, at the height of the then-booming economy, for approximately $450 million, using at least $208 million in debt financing.

At a time when huge buyouts were drawing scrutiny, the deal seemed in many ways to exhibit the best private equity had to offer. Here was a sophisticated investment firm that could guide a family-owned business to the next level of growth.

But MidOcean's timing was poor, to put it mildly.

It was only a few months later that the credit markets chilled and the Great Recession took hold. Consumers stopped eating out as much and the prices for flour and cheese -- two critical ingredients for pizza -- spiked, making it more expensive for Sbarro to do business.

Bad timing has also plagued Sbarro's expansion plans. In 2010, it announced plans to open 1,250 restaurants over a 20-year period in Japan, now reeling in the aftermath of the earthquake and tsunami. The company also has plans to open locations in Brazil.

The Sbarro deal hasn't been the only problem investment in MidOcean Partners III, which closed at more than $1.25 billion in 2007. Last year Penton Media Inc, the print and online publisher of National Hog Farmer, Modern Baking, and other trade publications, went through a pre-packaged Chapter 11 process. And United Kingdom fitness chain LA Fitness was operating at a loss as of May 2010, when the company launched a three-year turnaround plan.

As of September 30, 2010, Fund III had generated a -20.6 percent internal rate of return, according to the California Public Employees' Retirement System. (CalPERS invested through Sacramento Private Equity Partners, a fund family managed by Oak Hill Investment Management).

In November 2009, MidOcean, which does not specialize in buying troubled companies, hired turnaround specialist Steve Miller, who helped to revive businesses such as Delphi Corp, Bethlehem Steel and Federal-Mogul Corp, as its chairman.

MidOcean executives declined comment. Executives at Sbarro did not return calls seeking comment. (Buyouts magazine is a Thomson Reuters publication. Editor: david.toll@thomsonreuters.com. www.buyoutsnews.com)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.