Restaurant Buyer Hopes Hot Economy Is on Menu

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Restaurant Buyer Hopes Hot Economy Is on Menu
An Acapulco outlet

Tennenbaum Capital Partners LLC and a group of other investors will try to spice up the performance of the El Torito, Acapulco and Chevy’s Fresh Mex restaurant chains when they acquire the parent company out of bankruptcy next month.

RM Opco LLC, a partnership led by Santa Monica’s Tennenbaum, was the winning bidder in an auction for Cypress chain operator Real Mex Restaurants Inc. The sale, approved in court Feb. 10, is expected to close by mid-March.

Real Mex was hit hard by the recession, as many of its customers migrated to cheaper fast-casual restaurants such as Chipotle Mexican Grill. The company closed unprofitable locations and updated menus, but customers didn’t return fast enough for Real Mex to keep up with high rents and debt. The company can now continue those efforts with a less leveraged balance sheet and renegotiated leases for many locations.

“The new ownership group has confidence in the management team and strategies under way or else they wouldn’t be buying the company,” said Real Mex spokesman Rick Van Warner.

Nick Setyan, a restaurant analyst with Wedbush Securities Inc. in downtown Los Angeles, said it’s not surprising the buyers are staying the course. The new owners likely believe an improving economy coupled with ongoing improvements will bring customers back.

“They’re probably counting on a cyclical upturn being a tailwind for them. And I’m sure some current strategies are addressing the issues they had,” Setyan said. “There’s not too much else these (investors) can bring to the table that current management wasn’t already doing.”

Tennenbaum is joined in RM Opco by JP Morgan Investment Management Inc. in New York and Z Capital Partners LLC in Lake Forest, Ill. They’ll own a controlling stake in Real Mex, which operates 141 company-owned restaurants and 20 franchised locations. There are more than 30 El Torito, Acapulco and Chevy’s locations in Los Angeles County.

Big debts

Real Mex’s debt was a key driver of the company’s losses. Through 2010 and the first half of last year, the company was spending about $7 million on interest each quarter. Without debt payments, the company would have been profitable, but instead lost $24 million in 2010 and $10 million through the first six months of last year.

The company reported in bankruptcy filings that it was on pace to default by last October and was unable to agree to a restructuring plan with its creditors, including Tennenbaum and the other investors now set to own the company. Tennenbaum held $50.2 million in notes Real Mex issued in 2009, making it the company’s biggest note holder.

The deal approved this month calls for Tennenbaum, JP Morgan and Z Capital to pay $46 million in cash and give up claims to $80 million in debt for an 85 percent stake in the company, with the rest going to remaining note holders.

The sale will cut the company’s debt, though Van Warner said he could not say by how much because the sale is not complete.

Tennenbaum reports it has $5 billion in assets under management, with $100 million invested in companies in the restaurant industry, but it does not list food service or restaurants as one of its investment specialties.

Tennenbaum did not return calls for comment.

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