Expansion expected for Back Yard Burgers after buyout

Nation's Restaurant News,  June 25, 2007  by Catherine R. Cobb

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MEMPHIS, TENN. -- With foodservice veteran Steve Lynn in the driver's seat and an infusion of cash following the pending consummation of a $38 million buyout, 180-unit Back Yard Burgers Inc. is looking to expand its backyard-grilling experience within and beyond the Southeast region it calls home.

Under the terms of the buyout, which still requires shareholder approval and is expected to close in the third quarter, Lynn's group, BBAC LLC, would buy publicly traded Back Yard Burgers for $6.50 a share, which it said was a 29-percent premium over the stock's closing price on June 8, the last trading day before the deal was announced. The group, which had already amassed an 8.7-percent stake in the company before making its initial offer in April 2006, also indicated that it would repay Back Yard's debt, which is reflected in the deal's $38 million valuation. Back Yard Burgers said its officers and directors already had pledged to vote their 27 percent of the company's shares outstanding in favor of the buyout.

The buyers include BBAC LLC and its wholly owned subsidiary, BBAC Merger Sub. BBAC LLC is an investment partnership managed by Cherokee Advisors LLC, an Atlanta-based firm. Its principal investors include Reid M. Zeising of Cherokee Advisors, Nashville, Tenn.-based Pharos Capital Group LLC, and Lynn, former chairman and chief executive of both Shoney's Inc. and Sonic Corp.

Given Lynn's push to grow Sonic through franchising during his tenure there in the 1980s and 1990s, people close to the deal and outside observers said they anticipate he will spearhead a similar growth strategy at Back Yard Burgers, which currently has units in 20 states, primarily in the Southeast. In recent months, the quick-service chain has opened only a handful of stores, which feature made-to-order, charbroiled Black Angus hamburgers.

"They have not yet laid out a strategic plan, so I don't know exactly what they plan to do, but with Steve Lynn at the helm I cannot imagine them not expanding," said Lattimore M. Michael, longtime chairman and CEO of Back Yard Burgers, who founded the chain 20 years ago. "I think the brand will be taken to a much higher level."

Another source close to the deal who requested anonymity said the private-equity buyers found the company attractive because it has a solid growth story with lots of potential.

"That is what we look for: underlying growth stories with good management that can take it to the next level," he said.

While preliminary discussions have taken place about expansion, nothing has yet been laid out, he added. He noted that the new management team's initial focus would likely be on strengthening BackYard Burgers' presence in the Southeast.

"After that market is laid out, we can grow in the Southwest," he said, noting, however, that it is still early and the deal hasn't yet dosed.

If all goes as planned, he added, "we think we can grow the business two-three-four-five-fold. We don't see a cap on what growth we can achieve. We have a lot of optimism. ... This team [with Lynn at the helm] has already grown a company on a national basis, and we felt he had the competency to do it again. The primary growth vehicle will be the franchisee."

The buyer's board of managers includes J. Michael McCarthy, a former executive vice president and chief financial officer of the Waffle House chain, and Pharos managing partner D. Robert Crants III.

Observers point to Sonic as proof that Lynn knows what he is doing. When he joined the Oklahoma City-based quick-service chain in 1983, the system had dwindled from 900 to 600 steres with average annual sales of about $272,000, and the then 110 company-owned stores had lost $1.5 million. Through enhanced marketing and advertising programs and improved relations with franchisees, Lynn changed Sonic's course. Today, the chain has about 3,000 stores posting average unit volumes of $1 million.

Lynn attempted the same sort of turnaround at Nashville, Tenn.-based Shoney's in 1995, but left after a proxy fight pitted his management team against Raymond Schoenbaum, son of Shoney's cofounder Alex Schoenbaum.

Malcolm Knapp, president of Malcolm M. Knapp Inc., a New York-based foodservice consulting firm, and a contributer to Nation's Restaurant News, said that he does not think Lynn realized the full depth of the problems at the family-dining chain when he got there.

"Lynn is a good, smart guy and knows how to bring people together," Knapp said. "If the business model isn't broken [at Back Yard Burgers], then he can bring the people together because he is great at motivating people. If the business model is broken, then he will be able to find the right people to get the business to rights."

Back Yard Burgers has struggled under the microscope of Wall Street and its growth recently has been lackluster. Last November the company received notice from Nasdaq that it was not in compliance with certain rules. Before that, the company had announced that its board of directors had directed its audit committee to review historical stock-option-granting practices and related accounting. The internal investigation prohibited Back Yard Burgers from filing its quarterly results with the Securities and Exchange Commission in a timely manner.