When Real Mex Restaurants Inc. sells again, it’ll be for less than $100 million, considering the decade of woes at the Cypress-based casual dining chain:
• Plunging systemwide sales and slashed unit count.
• High debt load and a 2011 bankruptcy.
• Multiple senior executive changes.
Add to the menu the always-present “changing diners’ tastes” and branding 101 miscues, including, according to its website, six restaurant nameplates—El Torito, El Torito Grill, Chevy’s, Acapulco, Sinigual, Las Brisas—spread across less than 100 stores.
News reports in May said Real Mex hired Piper Jaffray Cos. (NYSE: PJC) to seek a buyer.
The company’s already smaller.
Real Mex is No. 11 on the Business Journal’s list of local restaurant chains with $263 million in 2016 systemwide sales and 92 restaurants.
That’s down from No. 2, $534 million in sales and 245 restaurants, including 50 franchises overseas, in 2006, when it sold to Sun Capital Partners in Boca Raton, Fla., for $359 million.
Real Mex didn’t respond to requests for comment.
Capital Hills
Current owners Z Capital Partners in New York and Tennenbaum Capital Partners in Santa Monica paid $129 million in 2012, when it had about 160 restaurants, including 20 franchised Chevy’s.
“I think it’s going to go pretty low” in a sale, said Jeff McNeal, president of Fessel International Inc., a food and hospitality consultant in Arcadia.
“It’s one too many capital buys,” he said, referring to the record-skipping dance of private equity firms swapping assets like a high-stakes game of Crazy Eights.
Sun Capital bought Real Mex in 2006 from New York-based Bruckmann, Rosser, Sherrill & Co.
It ceded its controlling stake in 2008 in a debt-for-equity swap with Farallon Capital Management LLC in San Francisco, then retook control in mid-2010.
Bankruptcy followed in October 2011. Real Mex parent RM Restaurant Holding Corp. had $272 million in assets, $250 million in debt, 178 locations and $478 million in systemwide sales.
Z Capital and Tennenbaum, along with J.P. Morgan Investment Management, took an 85% stake under RM Opco LLC in another debt-for-equity swap in 2012.
Musical Chairs
Real Mex was hit by the 2008 recession then the gale force of fast-casual and Americans’ cleaner eating habits.
It has cut costs, redesigned sites and upgraded menus—a redone Las Brisas in Laguna Beach debuted in July—and tried to grow revenue.
President and Chief Executive Bryan Lockwood said in August 2016 that he wanted more brands, and Real Mex hired Telsey Advisory Group LLC in New York to help.
That was two months after Z Capital bought Pink Taco, with its hip Sunset Strip flagship—Chronic Taco in the big city—celebrity parties, and founding by third-generation restaurateur Harry Morton.
Pink Taco was on the website three weeks ago when Real Mex’ for-sale sign went up.
Last week it wasn’t.
Real Mex has had three rounds of C-suite executives in three years.
Lockwood joined in 2015. Rio Gueli left a month later, after displacing Chief Executive Charly Robinson in 2014.
Chief Financial Officer Judd Tirnauer joined in 2017. Dessi Sarabosing left the post in April to be chief financial officer at Mobilitie in Newport Beach. Taco Bell alum Laurie Lawhorne preceded Sarabosing, having joined in 2014, and departed a year later.
Survival Modes
A new round of changes is likely after a sale.
“New owners put their own people in,” McNeal said.
A sale isn’t the only option, though.
Real Mex’ value includes “leases that could be converted” to other concepts and “higher-value pieces,” such as Las Brisas, that could be sold individually.
Another—expensive—round of investment could come, another bankruptcy, or a fourth set of new leaders.
“It’s tough to tell,” McNeal said. “They tried cutting expenses, tried growing revenue, and neither has panned out.”
Casual chains that have survived adopt fast-casual modes—BJ’s Restaurant Inc. in Huntington Beach cut the size of new restaurants by 12% and added app-based ordering. Its market cap has nearly doubled in a year to $1.2 billion.
Or they lean in to their casual roots—Lazy Dog Restaurant & Bar expanded craft cocktails and regularly refreshes menu items to get diners to stay longer, relax and enjoy.
Lazy Dog got more support from majority owner Brentwood Capital in Los Angeles, hired senior executives, and plans to double unit count to 50 and annual sales to $300 million.
Righting Waves
“People ride the wave of private equity buyouts as sales and traffic increase,” McNeal said.
If tidal currents last or owners time it right, initial public offerings are possible: Habit Restaurants Inc. (Nasdaq: HABT) in Irvine and El Pollo Loco Holdings Inc. (Nasdaq: LOCO) in Costa Mesa had debutante moments atop a 2014 offerings market, but the private equity exit at Del Taco Holdings Inc. (Nasdaq: TACO) in Lake Forest took a more circuitous route—purchased and made public by blank-check buyer Levy Acquisition Corp. in mid-2015.
Others? Not so much.
• Last week 59-unit pizza chain Bertucci’s sold to Earl Enterprises—owner of Planet Hollywood and Buca di Beppo—for $3 million in cash and $17 million in debt.
• The Wall Street Journal cited three restaurant bankruptcies in a week in October: Garden Fresh, Fox & Hound and Logan’s Roadhouse.
• Last year Famous Dave’s named its fourth chief executive in four years; Ruby Tuesday said it will close 100 stores.
• In 2015 Ignite Restaurant Group sold the 175-unit chain Romano’s Macaroni Grill for $8 million; it bought it two years earlier for $55 million from Golden Gate Capital.
The buyer Ignite found: PE turnaround guys Redrock Partners LLC.
