Outback parent to go private in $3.2B deal; founders of OSI Restaurant Partners participating in $40-per-share buyout

Nation's Restaurant News, Nov 13, 2006 by Sarah E. Lockyer

TAMPA, FLA. -- OSI Restaurant Partners Inc., in accepting a $3.2 billion offer to become the latest foodservice company to undergo a going-private buyout, provides yet another sign that some industry heavyweights prefer ownership by private-equity partners over public shareholders.

OSI, operator or franchisor of 1,385 restaurants including the 947-unit Outback Steakhouse brand, said Nov. 6 it had agreed to be acquired for $40 per share by a private-equity group that includes restaurant veterans Bain Capital Partners LLC of Boston and Greenwich, Conn.-based Catterton Partners. OSI co-founders Chris T. Sullivan, Robert D. Basham and J. Timothy Gannon also are participating in the deal.

Bain, which formerly had made major investments in Burger King and Domino's, led the group of private-equity buyers that acquired Dunkin' Brands last year for about $2.43 billion.

Catterton's current investments include RF. Chang's China Bistro Inc.; chef Jean-Georges Vongerichten's fledgling Spice Market chain; the First Watch breakfast-lunch chain; and the Cheddars casual-dining chain.

The involvement of OSI's founders in the transaction does not signify their return to direct managerial responsibility for the Tampa-based company, which is run by chief executive Bill Allen, OSI spokesman Michael Fox indicated.

"The founders won't be taking on any day-to-day control," Fox said. "They have been very active and incredibly supportive, and that will continue."

Andrew Balson, Bain's managing director, said the buyers "look forward to working with" Allen, Sullivan and others in OSI's leadership ranks. However, the buyers did not disclose how much of a stake would be held by OSI's co-founders when the deal is consummated.

Going private would end a relationship with Wall Street that had grown increasingly strained in recent months as OSI struggled to revive its flagship Outback brand, which had posted seven consecutive months of negative same-store sales through August, the latest month for which data were available.

As at many foodservice companies, investors' pressure on OSI had intensified as shareholders looked for value-building initiatives like stock buybacks, real estate sales or the spinoffs of developing or secondary brands, which in OSI's case include the Carrabba's Italian Grill, Bonefish Grill, Fleming's Prime Steakhouse & Wine Bar, Roy's, Lee Roy Selmon's and Cheeseburger in Paradise chains, as well as OSI's newest concept, the upscale Blue Coral Seafood & Spirits.

Most recently, Pirate Capital LLC, an activist hedge fund based in Norwalk, Conn., had acquired a 5.3-percent stake in OSI and unsuccessfully pressed it to divest the Carrabba's, Bonefish and Fleming's chains and to halt expansion of Outback. Pirate, which criticized the returns on investment OSI had obtained from noncore chains, sold its entire stake in the company this summer.

The Bain-Catterton buyout appears to signify an end to those kinds of pressures to revamp OSI's portfolio.

"After a significant amount of time and effort spent on the shareholder value initiative, we believe that this transaction is the best alternative," chief executive Allen said in a statement. "As a private company, OSI will have greater flexibility to focus on our long-term business improvement initiatives."

The buyout is a byproduct of a current business environment affected by aggressive, flush-with-cash private investment firms and the less-than-friendly equities markets, according to Malcolm Knapp, president of market research and consulting firm Malcolm M. Knapp Inc.

"It's a strategic decision that they are better off doing brand restructuring as a private company rather than as a public one," said Knapp, who also is a Nation's Restaurant News columnist.

Other recent going-private transactions include the $8.3 billion buyout of contract foodservice giant Aramark Corp., CBRL Group Inc.'s agreement to sell its Logan's Roadhouse chain, and Lone Star Steak House & Saloon Inc.'s pending deal to be acquired for more than $600 million.

The OSI transaction, which is expected to close in April, still is subject to shareholders' approval and other closing conditions, but the company noted that the deal is not subject to proof of financing. OSI said it would conduct a 50-day "market test" in which other offers would be solicited by a special committee of OSI directors.

A bidding war for the company remains a possibility, albeit a slim one, according to several securities analysts. John Ivankoe, a foodservice stock analyst at JP Morgan Chase & Co. in New York, said the $40-per-share price could be "viewed with contention" among stakeholders, as OSI had traded as high as $46.62 in February, and its current purchase price could have been negatively affected by depressed financial results linked to weak same-store sales, pressured margins and high corporate costs for developing brands.

OSI management began attempting to reverse its poor performance in late 2005 with the "Outback revitalization plan." That roadmap for the flagship chain included a value-menu rollout to about 250 of the steakhouses, mostly in the Midwest, in an effort to boost traffic counts. New advertising, restaurant remodelings and expanded menu variety also were initiated in bids to spark sales.