* 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: