Description

Interested in a restaurant stock that trades at less than 5x ebitda, will soon report significantly above guidance SSS, has a big NOL and had a block representing 12% of the outstanding shares recently sell at a 30% premium to its then (and current) stock price to a strategic investor who subsequently filed a less than friendly 13d?

MAIN ($42 mm equity mkt cap, $80 mm enterprise value) is an undervalued, misunderstood restaurant company which has taken significant steps to improve profitability. Main operates 69 full service casual dining restaurants primarily under the TGI Friday and Bamboo Club names throughout the southwest United States. New management has embarked on a plan to expand the highly profitable TGIF concept in existing markets and has largely turned around the unprofitable Bamboo Club. The stock is trading at 5.0x reported 2004 EBITDA (excluding non-recurring items), 4.7x PF Adjusted 2004 EBITDA (adjusted mainly for unprofitable stores that have effectively been closed) and 4.5x 2005E EBITDA (based on high end of management’s very conservative guidance). MAIN trades at the lowest multiple of any restaurant stock and is even more attractive when one considers its:
- $13mm unrestricted NOL,
- very strong (6%ish)YTD SSS which far surpassed management’s guidance
- exclusive development rights to open more TGIF units in highly attractive markets.
- improving profitability of Bamboo Club

The company has 2 major concepts. The 2004 breakdown is as follows:



Brand data TGI Friday’s Bamboo Club
Brand Revenues $ 187,546 $ 26,106
Restaurant Op Prof(loss) $ 17,792 $ (1,129 )
Avg Number of Restaurants 53.0 12.3
Avg Annual Unit Vol $ 3,539 $ 2,122



TGIF
Main’s primary asset is that it is the world’s largest TGI Friday franchisee, operating 52 units across California, Arizona and Nevada. TGIF restaurants offer full service casual dining. The TGIF concept is owned by Carlson Companies, a privately held company, which has recently committed to revitalizing the TGIF concept. The TGIF franchise is highly profitable; however its profitability has historically been masked because until recently the company did not break out profitability by concept. Now investors can see how profitable TGIF is and how valuable their development rights can be. MAIN holds exclusive development rights to open at least 16 additional units in its existing markets. These markets are highly attractive because they are experiencing above average levels of population growth. MAIN has a relatively standard franchise agreement whereby it pays Carlson a % of rev, a one-time franchise fee per unit, and contributes to a national advertising campaign. Management estimates the total cost of opening a new TGI Friday’s restaurant currently ranges from $2,475,000 to $2,825,000, exclusive of annual operating expenses and assuming that they obtain the underlying real estate under a lease arrangement.

As the following table indicates, last year MAIN’s TGIF units experienced an 8% increase in restaurant level cash flow, despite having fewer locations. This improvement came from improved store operations and closing certain underperforming units. Average unit volumes were up 3.8%. Furthermore, concept EBITDA increased to 12.9% and should continue to increase as the company opens more stores in its existing markets and thus leverages sg&a, advertising, and other expenses.



TGI Friday Performance 2003 2004
Brand Revenues $ 189,135 $ 187,546
Restaurant Operating Profit $ 15,822 $ 17,792
Restaurant level EBITDA $ 22,311 $ 24,110
EBITDA as % of Revenue 11.8% 12.9%
Average Number of Restaurants 55.5 53.0
Average Annual Unit Volumes $ 3,408 $ 3,539


Management indicates that YTD thru February the TGIF units have been comping “over 6%”. One of the reasons for TGIF’s recent success is the increased support from Carlson. Carlson has publicly acknowledged that it has neglected the brand in recent years and Carlson is now committed to revitalizing the brand. We have been told by sources that Carlson is spending more money on advertising than it has in previous years. It is important to understand how this impacts MAIN. As a franchisee, MAIN’s advertising is relatively fixed (it contributes a % of rev) so this is not a situation where MAIN is boosting SSS by foolishly spending tons of money on advertising, only to have it hurt profitability.

Main plans to develop a minimum of 16 TGIF units through 2009, which is when the development agreement expires. These new units will allow the company to leverage its sg&a since the company will be opening new units only in its existing markets. The following outlines Main’s TGIF expansion plans.

Southern California AZ,NV,NM

Exiting units 31 17
Min. to be developed 10 6
Total units 41 23


MAIN plans to open three to four new units in 2005, all in its strong Southern California and AZ markets. The openings are back end loaded and are not factored into the company’s 2005 guidance.


To illustrate how attractive MAIN’s TGIF market is, we have provided demographic data to show the growth in its markets. The only consistent data we could find is from the U.S. census bureau and state agencies. The information is admittedly a bit dated. However, our other data points indicate that the figures provided below actually underestimate the relative and absolute growth in MAIN’s markets. However, in order to provide an apples to apples comparison we provide the following information

(population in 000s)
Region 2005E 2010E CAGR Growth (000's)
USA 295,507 308,936 0.9% 13,429

So. Calif 21,075 22,318 1.2% 1,242
Arizona 5,554 6,145 2.0% 591
Nevada 2,441 2,797 2.8% 356





BAMBOO CLUB
The company’s second brand is its Bamboo Club, Asian themed, full service restaurants with entrees retailing for $9-$19. The company owns the Bamboo Club concept and has 11 stores, mostly in AZ and FL. While Bamboo Club has a reputation for serving good food, the concept has not been a success as the units have suffered from insufficient marketing support (as a result of MAIN’s leverage and some poor site selection). In April 2004, when the new CEO took over, he took dramatic steps to turnaround Bamboo Club. For example, the company has closed 2 units that lost a total of $0.9 mm of EBITDA last year. The Aventura, FL store was closed on February 24, 2005, and Newport, KY will be closed on May 31, 2005. Also the company will not open additional Bamboo Clubs.

In 2005, the company will also benefit from the maturation of the 4 youngest Bamboo units. The company has learned that it takes approximately 24 months for a Bamboo Club unit to achieve profitability. The company’s 4 youngest units lost a combined $0.3mm in EBITDA last year and will be open for an average of 20 months by mid-year 2005. Management believes these units will be “at least breakeven” this year.


0Bamboo Club-2004 Brand Over 2 Under 2 Underperforming
Totals Years Years Units (closed '05)

Revenues $26,106 $17,242 $6,517 $2,347
Rest. Oper Profit $(1,129) $ 814 $(934) $(1,009)
Rest. level EBITDA $ 610 $ 1,783 $(309) $(914)
EBITDA % of Rev. 2.4% 10.3% (4.1)% (38.9)%
Avg # of Rest. 12.3 7.0 3.3 2.0
Avg Annual Unit Vol.$2,122 $ 2,463 $1,975 $1,174



Main has looked at a “go dark” scenario whereby it would close all Bamboo units. However, the company elected not to do so because they believe the concept has turned the corner and will be profitable this year.

MAIN also operates four Redfish Seafood units and a single franchised Alice Cooper’stown unit. They have very little impact on MAIN’s P&L, so I will not spend any more time discussing them.

SSS Analysis

During the March 2, 2005 call to discuss CY 2004 results, the company guided to Q1 SSS of 2-4%; however, they also indicated that YTD (Jan and Feb) SSS have been north of 6%. Our subsequent conversations with management have indicated that the March month was incredibly strong as well, so we believe Q1 SSS will be significantly above management’s guidance. The strong SSS is also impressive considering the 5% figure it is comping against.


2004 2005
March June Sept Dec FY2004 YTD Feb
SSS by Q 5.0% -1.6% 1.3% 4.2% 2.4% 6%



EBITDA RECONCILIATION

The following reconciles reported 2004 figures to our PF Adjusted EBITDA figure which we believe is a more appropriate measure of the company’s actual profitability.

2004 reported EBITDA $14.1
plus: non- recurring charges 1.4
Adjusted EBITDA $15.5

Plus: 2 closed Bamboos units 0.9
Plus: maturing 4 Bamboos units 0.3
PF Adjusted EBITDA $16.7


For 2005, management has guided to EBITDA of $15-$17mm, which as you can see implies virtually no growth over the PF Adjusted EBITDA we derived. Management is guiding to 2005 full year SSS of 2-3% and SSS for Q1 of 2%-4%, which as we discussed above we expect they will far exceed. Management estimates that it generates approximately over 40% EBIT flow thru for each $1 of SSS. To be conservative, we have assumed 35%, which implies that if the company does 4% SSS for the full year (we believe that to be too low), it will generate approximately $3.2mm of incremental ebitda over last year. The company will incur additional incremental Sarbanes Oxley expenses this year, but these costs will be largely offset by cost savings from a restructuring announced last year. So, we believe that 2005 ebitda (excluding stores closed during the year) could be $20mm (16.7+3.2), which implies a 4x ebitda multiple.



MANAGEMENT

MAIN is led by Chairman John Antioco who owns about 23% of the company. Antioco has been Chairman and CEO of Blockbuster since 1997, and was previously President and CEO of Taco Bell. Also on the board is Sergio Zyman, the former Chief Marketing Officer of Coca-Cola. The former CEO of MAIN who pursued the Bamboo Club concept was replaced in 2004. New management has not only turned around Bamboo, but is also committed to being more shareholder friendly and providing more information which will reveal the true value of the company’s assets, particularly TGIF.

Management also recognizes that it is foolish for a company of this size to remain public given the costs of Sarbanes-Oxley. I suspect the company will either go private or merge with another restaurant company. The company has looked at several m&a opportunities, but nothing has come to fruition.


NOL

MAIN has $13mm of NOLS which it can use without restrictions. The value of this NOL is obviously not reflected in the EBITDA multiple valuation.





COMPARABLES
Below is a list of some comparable restaurants (source: Bloomberg). While admittedly MAIN should trade at a discount to them due to its smaller size and leverage, I think MAIN’s discount is excessive, especially when one factors in the NOL, strong SSS, strong operating leverage, attractive growth prospects and takeout potential.

Stock ev/ltm ebitda
APPB 9.5X
CHUX 7.3X
DRI 7.9X
EAT 7.2X
RI 7.5X


MAIN 4.7X (using pf adj. ebitda)




RECENT BLOCK TRADE

After the market closed on Friday April 22, the company’s former CEO (Mr. Brown) revealed in an SEC statement that he sold his 12% position for $3.12/share. This represented a 30% premium to the then and current stock price. The purchaser, it was revealed late Friday April 29 was Bradford Honigfeld who owns several Wendy’s and TGI Fridays. Honigfeld’s 13D was not especially friendly and also revealed that he purchased Brown’s 1.2mm options with a $3.12 exercise price. It’s unclear what Honigfeld’s intentions are (the 13d gives some hints), but I doubt he plans to be passive considering he bought such a large position (13% including open market purchases) at a 30ish% premium in a relatively illiquid stock and does not even have a board seat.






Recent Private Equity investment


To further complicate this story, on April 28, 2005 (after Brown’s stock sale was announced, but before Honigfeld filed his 13D), the company sold 2,325,581 shares of its common stock at $2.15 per share along with 581,395 warrants to purchase shares at $3.01 per share to Dallas-based CIC Partners, a private equity fund. The proceeds before expenses were approximately $5.0 million and the company will use the proceeds to accelerate new TGIF openings. CIC is lead by Michael Rawlings who previously served as president of Pizza Hut from 1997 to 2003.

So, PF the offering, the company’s major holders (excluding options/warrants which are out of the $) are:

Antioco 23%
zyman 3%
honigfeld 13%
cic 14%

Catalyst

Strong operating results – Results to be announced May 3
Sale of company – inspired by Honigfeld