Randall Fojtasek, a partner at Brazos Private Equity Finance Partners or Brazos Partners, has to come up with the decision of whether an additional investment in Cheddar's restaurant chain is worth it. The additional investment would fund a real estate subsidiary that would own the estate on which Cheddar's built its stores, rather than its traditional approach of sale and leaseback. Fojtasek has to come up with pricing for the new stock, how to structure the deal to limit his own dilution, and how to deal with personality issues involved.
G. Felda Hardymon, Josh Lerner, Ann Leamon
Harvard Business School (806069-PDF-ENG)
Feb 9, 2006 (Revision: Jun 11, 2007)
Case questions answered:
Case study questions answered in the first solution:
- Is Cheddar an attractive investment for Brazos Partners?
- Did Brazos pay the right value in the initial investment?
- If more stock is allowed to be sold to management, what should that be priced at?
Case study questions answered in the second solution:
- What is Brazos’ investment strategy? Does it seem well suited for its position as a first-time fund? How do you assess the merits of the “GTT transaction”? How has the current recessionary climate affected Brazos’ investment strategy in both favorable and unfavorable ways?
- Is Cheddar’s Inc. an attractive investment? Did Brazos underpay, overpay, or get it just right in their initial investment? What are your major concerns with the proposed deal? Should Brazos allow the company to sell the managers some stock? Is the real estate subsidiary a good idea? If the managers buy more stock, what is the appropriate price?
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Brazos Partners and Cheddar's Inc. Case Answers
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Is Cheddar an attractive investment for Brazos Partners?
The LBO of Cheddar was an attractive investment for Brazos Partners. It was in the casual dining industry, which was growing at a CAGR of ~6% for the past few years. It has always been highly profitable, without even a single outlet making a loss since the beginning of operations.
Even the new Fish Daddy trial store had been profitable since the very first month of operations. This growth was sustained growth, supported by favorable demographics, namely, more working women, the cost advantage of eating out vs. eating in, and the aging of baby boomers.
The Cheddar management team was well qualified to reap the advantages of the demand outgrowing the supply of casual dining places.
Extremely responsible and experienced management was committed to growing the business as it had been primarily a family-owned business, with friends putting in their contributions.
The franchise could grow at a much faster rate and generate a steady cash flow for Cheddar. It had an average EBITDAR of $1,027k, which was much higher than its next competitor, Chili’s, at $723k.
This EBITDAR margin was quite stable in the fast dining industry. Hence, the cash flows were reliable.
It was a perfect fit for Brazos Partners as the company was a family-managed business with good cash flows and responsible management who knew what they were doing in well-defined niches of their industry.
The business, even though profitable, had a lot of opportunities to grow once it got adequate capital, as the restaurant business was a capital-intensive one.
The operations of the company were good, but there was still a large scope for improvements on the financial front and in terms of the overall approach to the business.
With an investment horizon of 5 years, it was one of the best propositions in the mid-market for Brazos Partners.
However, the PE fund added value to the acquired companies by…
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