Investors flock to hot hospitality business

By THOMAS LEE
Monday, April 23, 2007

Leisure businesses are selling at a frenzied pace.

Thanks to a red-hot commercial real estate market, an abundance of capital and investor demand for stable growth rates and strong cash flow, hospitality and entertainment businesses, including casinos, restaurants, hotels _ even strip clubs _ are attracting plenty of attention from dealmakers, according to the Star Tribune Quarterly Deals Report.

Among the most notable deals in the first quarter: the Seminole Tribe's $965 million purchase of the Hard Rock Cafe company and Red Zone Capital Partners' $100 million acquisition of the Johnny Rockets restaurant chain. Minneapolis-based Piper Jaffray Companies advised on both deals.

Minneapolis-based Southwest Casino Corp. raised $2.6 million in a private placement. The Mercanti Group Inc. and Houlihan Lokey Howard & Zurkin, two Minneapolis-based investment banks, helped arrange the $153 million sale of the Sands Regent, a gaming company, to Las Vegas-based Herbst Gaming Inc.

"There is a lot of merger-and-acquisition activity in this sector," said Randy Bort, a managing director for Mercanti. "The market is extremely hot. I don't see it getting any better."

Dougherty Funding, based in Minneapolis, secured $36 million to renovate the Sheraton Grand Hotel in Fort Worth, Texas, while New York-based RBC Capital Markets helped Hospitality Properties Trust, a real estate investment trust based in Newton, Mass., that owns several hotels, raise more than $700 million through additional equity offerings.

Even the Schieks Palace Royale, an adult nightclub in Minneapolis, fetched $10 million in a January sale to Denver-based VCG Holding Corp.

Under terms of the agreement, VCG Holding paid $6 million for the business and $4 million for the property, a former Federal Reserve bank and a registered national historic landmark. VCG chief executive Troy Lowrie did not return a call seeking comment.

Murray Huneke, co-head of investment banking for Piper Jaffray, said consumers still want to indulge.

"Despite all of the (economy's) issues, consumer activity continues to be reasonably strong," Huneke said.

Piper Jaffray advised Johnny Rockets on its sale to Red Zone, a Washington-based private equity fund controlled by Dan Snyder, owner of the Washington Redskins football team.

Johnny Rockets, the retro 1950s diner that features singing and dancing waiters, leaves consumers "with a certain type of feeling that makes you feel good," Huneke said.

The investment bank also helped Bare Escentuals Inc., a San Francisco-based maker of beauty products, raise $476 million via additional equity.

But what's really boosting the market is the growing clout of private equity firms and booming commercial real estate values, which make financing deals all the easier, experts say. And casinos, restaurants and hotels have plenty of real estate.

Getting banks to loan money for restaurants used to be difficult, said Scott Richardson, managing director of Houlihan Lokey Howard & Zukin. With commercial real estate values soaring, restaurants are now able to leverage their land for attractive financing.

"There is so much money chasing real estate right now," Richardson said. "It's a good place to park your capital."

Awash in cash, private equity firms increasingly are entering industries such as casinos and restaurants that traditionally had been off-limits because the businesses can be tricky to operate and are highly regulated, experts say.

Casinos, though, are cash-rich businesses with high profit margins and strong growth potential in U.S. and overseas markets. Large restaurant chains also offer strong cash flows, valuable brand equity and stable, if not explosive growth.

Red Zone, which owns 12 percent of Six Flags Theme Parks, plans to expand Johnny Rockets, including a smaller and cheaper "Express" version of the restaurant.

"This is an established and popular concept restaurant brand with tremendous growth potential," Snyder said. "There's no reason we shouldn't see 1,000 Johnny Rockets locations within the next five years."

Apollo Management and Texas Pacific Group, two major private equity firms, recently paid $17.1 billion to buy Harrah's Entertainment, the largest buyout of a casino company. DLJ Merchant Banking Partners, another private equity player, and Morgans Hotel Group shelled out $770 million to acquire the Hard Rock Hotel & Casino in Las Vegas.

"There is a tremendous interest in gaming assets," said Bob Pace, chief operating officer of Grand Sierra Resort in Reno, Nev., which operates the state's largest casino outside Las Vegas. Pace said the resort, which faces increasing competition from Las Vegas casinos, is undergoing a $1.8 billion renovation that will include retail space and an indoor water park.

The Seminole Indians of Florida are also diversifying. With the help of Piper Jaffray and some private equity money, the tribe in December bought the Hard Rock restaurant, hotel and casino chain for $965 million from Rank Group PLC. The Seminoles, the first Indian tribe to own a casino, now control 124 Hard Rock cafes in 45 countries, six hotels and casinos, two concert venues and 60,000 pieces of rock 'n' roll memorabilia.