Bennigan's ailing, but not dead
An Atlanta-based private equity group took control of the Bennigan's franchise system, keeping it from joining the corporation in bankruptcy.
Metromedia Restaurant Group did everything it could to kill its two pub-style restaurant concepts, Bennigan's and Steak & Ale in late July. Not even bothering to make an effort to restructure, the heavily indebted company shut its offices, closed the doors of its 170 company-owned restaurants and filed numerous Chapter 7 bankruptcies to cover the 40-some legal entities under which the franchisor and its stores were organized.
Yet it still wasn't enough. Atalaya Capital Management, an Atlanta-based private equity firm, swooped in at the last minute to rescue the venerable Bennigan's franchise system from bankruptcy. And while the full chain won't reopen, many believe the events may result in a stronger company, at least financially.
Is stormy weather still in Bennigan’s future? For now it looks like the chain’s glass might be half full—but with a lot of foam still on top.
"It was like pulling this thing from the jaws of death," said William Snyder, a managing partner with CRG Partners, a consulting firm brought in to restart the Bennigan's brand.
Bennigan's had been struggling. The entire casual-dining sector has been in a slump, but Bennigan's had a heavy debt burden.
That debt became public knowledge in June when The Wall Street Journal reported Metromedia had prepared a bankruptcy filing. The franchisor immediately came out with a release denying it had prepared a filing, but acknowledging that it was negotiating with lenders.
And the company reportedly had been assuring franchisees that it was working to solve its financial problems until days before the bankruptcy. So, when news of Bennigan's closings spread across the country like wildfire, many had said in reports that they didn't see it coming.
One company did.
Atalaya has had dealings with restaurants in the past, including the Southeastern pub chain Fox and Hound. The firm had bought up debt and had a lien on the Bennigan's franchise system. It had gotten wind of an impending bankruptcy the day before the filing and, possibly sensing an opportunity, replaced the board of the Bennigan's franchise system, which was its right as the lien holder. Atalaya took over the company.
Bennigan's, Steak & Ale and parent S&A Restaurant Group were structured under dozens of different legal entities. The company shut its doors on that Tuesday and placed all of its companies in bankruptcy, resulting in numerous filings. But four entities were not placed in bankruptcy because Metromedia no longer controlled them following Atalaya's takeover.
"When they filed Bennigan's, they couldn't touch that franchise group," Snyder said. "They filed (Chapter) 7 and killed themselves. But they did not kill the franchise group."
On that Tuesday, Atalaya contacted CRG, which specializes in corporate revitalizations.
CRG's job: get the franchise system back up and running.
In a matter of days, CRG put the company back together. It found some temporary office space, got the franchise files back, set up checking accounts, entered into new supply agreements. It got accounting records back and made sure credit card processing didn't get cut off. It hired back 13 people, plus five consultants. It held conference calls to rally the system's franchisees, who still ran 150 stores.
Two weeks after Bennigan's filed for bankruptcy, the employees helped a new Bennigan's open in Cancun.
In simple terms, Bennigan's is not dead, something that seemed inevitable on the day that hundreds of employees around the country showed up for work, only to find out that there was no longer a corporate Bennigan's. Had the franchise company been allowed to go into bankruptcy and close, the result would have been "chaos," Snyder said, forcing franchisees to renegotiate supply chain deals, work out credit card and other issues by themselves.
Metromedia's decision to file Chapter 7 and abruptly shut down was unusual, albeit unprecedented – it meant that the company felt itself better off dead than alive.
The Ground Round, which had 140 units split evenly among franchisees and corporate units, took a similar step four years ago after its private equity firm debtors decided to stop investing in the chain. In that case, the franchisees banded together and bought the franchise and some of the system's higher performing stores. But the system hasn't been the same since and is down to 46 units.
In the Bennigan's case, Atalaya and CRG's efforts to restart the company meant that, after an initial scare and some problems, franchisees felt only a few rumbles from the Metromedia earthquake. Bennigan's remains a viable franchise system. The franchise and its restaurant owners avoided the legal entanglements of a corporate bankruptcy.
Many of those franchisees may also have the opportunity to buy up some of the top-performing company stores. Roughly half the 170 company-owned units had decent financials, Snyder said, with some of them earning $6 million a year in revenue and $1 million in cash flow. That effectively weeds the system of its poorer performing locations.
Franchisees' own locations likely took a hit when the bankruptcy was first announced, but Craig Tractenberg, a franchise attorney who worked on the Ground Round case, said unit sales usually pick up after the smoke blows over. Sometimes, he said, franchisees near company locations can see increases in business.
But will the system be better off than it was? In some senses, it will. Atalaya, the new owner, now has a 150-unit system that earns $10 million to $11 million a year in franchise sales, and won't be burdened by the debt that Metromedia was.
Yet the system is now a smaller one. Assuming franchisees buy up half the corporate stores, that still means Bennigan's will be three-quarters of its past size. That's less revenue to put into the chain's ad or marketing fund and it also means Bennigan's won't have the presence in some markets that it once had.
In addition, Bennigan's has to make to make a quick switch from a brand with a large number of corporate stores into a simple franchise system.
To make this work, both the new owners and the franchisees will need to be on board, willing to make the investments to make the necessary changes to the brand, said Dennis Lombardi, a restaurant consultant with WD Partners. And those changes are needed – customer surveys showed that Bennigan's was one of the weakest casual dining brands out there, he said.
Making those improvements won't be easy, Lombardi added, given the poor state of the casual dining sector.
"The brand does need to be rejuvenated," he said. "It does need to build consumer attribute ratings and get more competitive. And it's a tough time to do that." Is stormy weather still in Bennigan's future? For now it looks like the chain's glass might be half full – but with a lot of foam still on top.