Friendly's Goes Bankrupt, And Closes Stores

By Jonathan Maze, October 5, 2011

This isn't a good time to be a Sun Capital Partners company. Friendly Ice Cream Corporation this morning became the third Sun-owned restaurant to file for bankruptcy in a month—and the second one this week, following Real Mex's filing yesterday—and said it already has a stalking horse bidder in a proposed sale. The bidder? You guessed it: Sun Capital.

Friendly's said this morning that it filed for bankruptcy and is closing 63 underperforming restaurants along the East Coast, leaving the burgers and ice cream concept with 424 restaurants—it had more than 800 in the 1980s. The company received $70 million in financing to carry it through bankruptcy.

Sun bought Friendly's in 2007 amid a proxy fight with the company's co-founder, S. Priestly Blake, and then-Western Sizzlin' Chairman Sardar Biglari. The company said that its financial problems were driven largely by the challenges of the economic downturn combined with increased commodity costs and above-market rents. But we would note that Friendly's problems are largely of its own making.

Friendly's has consistently ranked low in customer surveys and has been on a gradual downward slope for years. The existing recession is punishing concepts consumers don't like, or those consumers don't consider a good value. Thus, families are visiting other restaurants instead. Same-store sales at company stores fell 4.5 percent in the first eight months of this year, on top of a 3.7-percent decline last year. Yet we've seen worse.

Commodity costs are also a problem—butter prices have increased by 57.5 percent in the past two years, the company said in bankruptcy documents, and the price of milk is up 22.2 percent. Those higher costs have eaten into the company's profits. But other chains are having the same problems.

Its biggest issue, by far, is debt. Friendly's has $297 million in debt, most of that in the form of PIK, or "payment-in-kind" notes taken out in early 2008. But that's not even all of it. Just two months after Sun bought Friendly's, it completed a sale-leaseback of its corporate headquarters and 160 of its restaurants, burdening them with leases. Not surprisingly, in the first eight months of the year, the company's restaurant operations—which should be a big source of earnings—generated only $1.5 million of earnings before income taxes, depreciation and amortization on $213.9 million in revenue. That's a razor-thin margin of 0.7 percent.

We also find interesting the sale process. An affiliate of Sun Capital is the proposed stalking horse bidder for the company, which is the second time that a Sun-owned entity is trying to buy another Sun-owned restaurant out of bankruptcy. The Sun-owned Captain D's is trying to buy Grandy's, which is part of SSI Group, 45 percent of which is owned by Sun. SSI, which also owns Souper Salad, went bankrupt last month. Real Mex may also be sold, though it as yet has no bidder.

It's possible that neither Sun entity will end up with their respective chains, given that an auction can and often does bring forward numerous bidders.

"We have embarked on an aggressive campaign to enhance restaurant operations, improve the guest experience, strengthen our team and expand the company's successful retail ice cream business," Harsha Agadi, Friendly's chairman and CEO, said in a statement.