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Turnaround Firms Gobbling Up Distressed Restaurant Chains Even Faster

When brand-name restaurant chains are losing money, private-equity firms begin to salivate. The down economy has laid a feast for these acquisition players, which have bid recently on eateries from upscale Benihana (BNHN) to pizza take-and-bake chain Papa Murphy's. If the acquisition price is right and investors can improve performance at these eateries, investors could reap big profits reselling when the economy turns and restaurant sales improve. Of course, it's often hard to tell whether investment firms are buying right, as PE firms hate to say publicly what they've paid. Papa Murphy's sale this week by Charlesbank Capital Partners to busy consumer-retail acquirer Thomas H. Lee Partners had an undisclosed price tag, for instance. But it's likely at a good value -- Lee is also in the process of acquiring CKE Restaurants (CKR), owner of the Carl's Jr. and Hardee's burger chains at a relatively cheap $928 million.

Golden Gate Capital is another player with a shrewd eye for distressed restaurant chains with potential, taking Mexican-themed On The Border off the hands of Chili's parent Brinker International (EAT) this week for an undisclosed sum. But it was likely at a good price, as it's Golden Gate's second round with Brinker, and the first was a 2008 deal to buy 220-unit Romano's Macaroni Grill for a fire-sale $131.5 million. That's less than $600,000 for each of Romano's large-scale eateries, which were ringing up an average of $3.2 million per unit annually at the time.

Macaroni has since introduced a new healthy-Mediterranean themed menu that the company says has led to an increase in its customer traffic. Let's hope Golden Gate can pull off a similar turnaround at On The Border, which has recently seen sinking sales.

What investor firms need to do most right now is not lose their heads and overpay. That may be happening with RDG Capital, which this week upped its bid for money-losing Benihana to $8 a share from $7, and indicated it might go higher than that 28 percent premium over the share price at the time. RDG manager Russell Glass, a disciple of legendary corporate raider Carl Icahn, ought to know better. That's not the way to get a deal, and high-end restaurant chains will see business come back slower than more value-priced ones, so Benihana probably has a longer road to recovery than the fast feeders.

There's nothing terribly wrong with most of these chains. Some minor operational tinkering and a resurgent economy would add up to a big turnaround for many.

Pizza photo via Flickr user scottfeldstein; Benihana photo via Flickr user miamism