Hamlet’s on the Upswing Again : Restaurants: After a few profitless years, owners of the 41-year-old gourmet hamburger chain expect a stock offering to spark new expansion.
In the cutthroat restaurant business, the Hamburger Hamlet chain stands out because it has managed to survive for 41 years thanks to its gourmet hamburgers, affordable prices and distinctive dining rooms featuring red-plastic booths and dark wood paneling.
But in 1988 the Sherman Oaks company was loaded up with debt in a $29-million leveraged buyout by Weatherly Restaurant Group, headed by New York investment banker Thomas A. McFall.
Since then, Hamburger Hamlet Restaurants Inc., which has 25 restaurants--most of them in Southern California--has not had a profitable year because of all the debts it had to pay. The company has posted a string of losses totaling $3.3 million, and Hamburger Hamlet also ran into some troubles with its creditors last summer.
So last month McFall pulled a classic step out of the LBO survival manual: The company went public, and Hamburger Hamlet raised $23.5 million in a stock offering and used the proceeds to pay off most of the $27.9 million in debt remaining from the buyout. By wiping out most of Hamburger Hamlet’s debt, the move will make the company profitable and allow McFall to keep opening new restaurants.
The offering has also made McFall and the other Weatherly investors instantly richer. In 1988 McFall paid $1.3 million for his 46% stake in Hamburger Hamlets, which after the stock offering is down to 20%, but those shares are now worth more than $8.5 million. (Another LBO investor, Edward H. Arnold, also did well. Arnold sold 250,000 of his 866,801 shares in the stock offering, for a profit of about $2.5 million.)
“They did the right thing in reducing leverage,” said Dennis I. Forst, a restaurant analyst with Sutro & Co. Inc. in Los Angeles. “They’ve got decent growth prospects. I think the menu is a good one. It’s fairly diverse and has items that you can’t get in other places.”
So why isn’t McFall happy?
He would have preferred to keep the chain private because going public diminishes his control over the company. The only reason he sold stock, McFall said, was because the company that financed his LBO, Chicago-based Heller Financial Inc., wouldn’t lend Hamburger Hamlet any more money.
Heller “was absolutely inflexible,” McFall said. “We had the ability to grow more rapidly than the lender would allow us.”
Heller executives could not be reached for comment.
The problems with Heller date back to at least June, when Hamburger Hamlet was out of compliance with some debt covenants, according to the company’s prospectus. Heller waived compliance with the covenants until the end of this year.
Now that the company has gone public, though, McFall said he intends to add to his stake in Hamburger Hamlet rather than selling.
Before Weatherly bought it, Hamburger Hamlet had grown steadily but slowly since the first restaurant opened in 1950 on Sunset Boulevard, and in the mid-1980s it had embarked on a costly shift toward upscale restaurants. Many of its older restaurants, meanwhile, had begun looking tired and worn.
McFall, 37, a Hamburger Hamlet customer long before he became its part-owner, concedes that there was an irrational element in his decision to buy Hamburger Hamlet.
“Some of it was purely emotional in that I believed . . . it was a business I would enjoy,” he said. “Brilliance was not as much a part of the decision as was gut instinct.”
McFall said the company’s growth since the 1988 acquisition has proved him right. As its chairman and chief executive, he opened four new Hamburger Hamlet restaurants and closed two less profitable restaurants opened by Hamburger Hamlet founders Harry and Marilyn Lewis (who owned 70% of the company before the buyout).
Now McFall wants to devote all of his time to Hamburger Hamlet, so he plans to sell his controlling interest in a private New York-based investment banking advisory firm called Weatherly Private Capital Inc. (WPC), which he started in 1982. WPC formed Weatherly Restaurant Group, which bought Hamburger Hamlet, and Hamburger Hamlet has paid WPC more than $2.2 million for a variety of financial consulting services since the 1988 buyout.
McFall resigned as WPC’s chairman last month, but he plans to retain an interest in about 10 privately held businesses bought over the years by various Weatherly entities. One of those businesses--Vroman Foods Inc., a Toledo, Ohio, frozen-foods company--in August filed for protection from its creditors under Chapter 11 of the U.S. bankruptcy laws.
McFall declined to discuss the case in detail, but said Vroman is almost ready to emerge from bankruptcy. He said his stake in Vroman is less than 30%.
Now Hamburger Hamlet, which has about 1,450 full-time employees, plans to open six new restaurants in the next year plus at least four restaurants each year thereafter, McFall said.
The company intends to limit the expansion to its existing markets in Southern California, Chicago and Washington, but the new restaurants will have a somewhat lighter, leaner look compared to the chain’s traditionally dark, old-fashioned dining rooms. Already some of the older restaurants have a newer look thanks to a remodeling program begun after the buyout.
“Our philosophy was to go back and breathe life into the underlying company,” McFall said. “People grew up with the Hamlets. To preserve that special quality was very important.”
McFall predicted that Hamburger Hamlet would earn $3.75 million on revenues of about $66 million next year. By contrast, in the nine months that ended Sept. 29, Hamburger Hamlet lost $233,000 on revenues of $39.5 million.
Nevertheless, excluding interest payments, the chain has been profitable each year since the LBO, McFall said. Last year, for example, it had an operating profit of $3 million. Plus, he said, each restaurant has had an operating profit since the buyout, and same-store sales (excluding sales from newly opened restaurants) have remained stable despite the recession this year.
Restaurant analysts said that Hamburger Hamlet will do well because it fits into the growing market for moderately priced, full-service restaurants.
“If you’re not making large expenditures on durable goods items, you have a little bit of extra money” to eat out, said Mike Mueller, a restaurant analyst with Montgomery Securities in San Francisco. “There’s also trading down from white-table restaurants to these types of restaurants. Even when times are tough, people want to eat out occasionally to cheer themselves up.”
Hamburger Hamlet’s stock, which went public at $11.50 per share, closed Monday at $11.25.
Meanwhile, McFall is looking forward to expanding Hamburger Hamlet.
“The other businesses I have an investment in,” he said. “This is the business I love.”