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NATION'S RESTAURANT NEWS - June 3, 2002

Ron Ruggless
Landry's surfs for turf, nets Chart House chain for $45M

...continued from Published News

Landry's Restaurants, Inc.'s planned acquisition of 38 Chart House restaurants and a Poehe's dinnerhouse promises to give the seafood specialist more than 30 premier waterfront locations to add to its multiconcept inventory.

Landry's disclosed May 20 that it would acquire the 39 units from Chart House Enterprises Inc. for $45.5 million and the assumption of some liabilities. The 39 restaurants had revenues of more than $100 million in 2001, the company said.

The deal is subject to a vote of approval by the shareholders of Chicago-based Chart House, which plans to change its name after the deal to reflect the ongoing operation of its six-unit Angelo & Maxie's steakhouse chain.

"This is very exciting for Landry's," said Tilman J. Fertitta, chairman and chief executive of the 213-unit company, which owns such brands as Joe's Crab Shack and Rainforest Café in addition to its namesake seafood dinnerhouse chain. Fertitta said the Chart House acquisition "is something that we have been looking at for many years, that we almost made a few years ago. It's a great addition to our existing seafood brands. And it adds a large number of prime waterfront locations."

Among Chart House's many waterfront sites are spectacular locations in New Jersey overlooking the New York City skyline; in the Maryland cities of Annapolis and Alexandria; in Malibu, Monterey and Redondo Beach, California; and in the Florida cities of Miami, Daytona Beach and Fort Myers. The Poehe's site is in Coronado, CA.

Paul West, Landry's vice president of finance and chief financial officer, added, "We'll have the largest collection of waterfront restaurants in America."

Fertitta said: "Chart House has been known throughout the country for its unique locations for many years. These are locations that you really can't develop anymore. They are such unique locations regarding development zoning and planning today that you can't even go and acquire a location like these."

The deal with Chart House is expected to close within 60 days. Thomas J. Walters, chief executive of Chart House, said his company had "experienced many positive and exciting changes over the last four years. … The sale provides the funds necessary to retire all of our senior and subordinated debt." Walters added that the company's Angelo & Maxie's brand "has developed a significant niche in the very competitive steakhouse market. We believe this exciting brand has a very bright future."

In March Chart House reported a fiscal 2001 net loss of $20.4 million on revenues of $150.9 million, compared with a fiscal 2000 loss of $5.0 million on revenues of $141.7 million.

In addition to Rainforest Café, Joe's Crab Shack and its Landry's Seafood House brand, Landry's owns and operates the casual-dining Willie G's, Charley's Crab, The Crab House and the Kemah Boardwalk entertainment complex south of Houston.

Fertitta said 10 to 12 of the 39 units would be converted to the Joe's Crab Shack concept or to one or two other of Landry's brands. Four to five sites will be sold off, he added, "because they don't fit with what we want to do."

He said the company anticipated that in two to three years, the 20 to 22 Chart House restaurants would generate average annual revenues of $3.8 million for each location and yield restaurant-level cash flows of 18 percent of sales.

Allan F. Hickok, a restaurant research analyst with U.S. Bancorp-Piper Jaffray, said the deal is a good fit for Landry's. "Landry's has a history of opportunistic and shrewd purchases of assets as part of its strategy to grow the company," Hickok said. "They've proven that they are pretty darned good at that and (also) integrating the assets with their core operations as an adjunct to new-restaurant construction and expansion."

Hickok also said Chart House was of interest to Landry's because the acquired business primarily is a seafood chain. Currently, 85 percent to 90 percent of Chart House's menu is seafood, and 75 percent of total sales are generated by seafood items, he noted. Chart House's check average is $25, and alcohol represents 22 percent of sales.

Hickok said the marquee Chart House locations are an excellent addition to Landry's. "In many cases it would be extraordinarily difficult or extraordinarily expensive to develop if you were to attempt to do that today," he said.

Landry's CFO West said, "One of the unique things is the remaining (average) lease term of about 26 years. Chart House did a very good job of acquiring unique, high profile waterfront locations that couldn't be replaced today.

"We think these leases are under market," West added. "They have the benefit of low base rents."

The Chart House menu and décor are more upscale than Landry's typical casual-dining format, Hickok observed, adding that the more up-market look gives the company more vertical integration to complement its lower-market Joe's Crab Shack.

Hickok said Landry's may incur some possible risks in its Chart House transaction, because it comes on the heels of Landry's acquisition - earlier this year - of C.A. Muer Corp. of Detroit for $28 million. That purchase added 16 fine-dining and casual restaurants to Landry's portfolio.

C.A. Muer, which had annual revenues of about $60 million, gave Landry's the Charley's Crab and Big Fish concepts; the 500-seat Grand Concourse in the former Pittsburgh & Lake Erie Railroad Station in Pittsburgh; Chuck & Harold's in Palm Beach, FL; and Gandy Dancer in the Michigan Central Railroad Depot in Ann Arbor. The former Muer restaurants operate in six states.

Landry's acquired Rainforest Café in 2000 and has since boosted its financial performance markedly. "If they can integrate and improve an operation like Rainforest," Hickok said, "they have a great shot at integrating Chart House."

Landry's expects the conversion and sale of some Chart House units to occur in the year and a half to two years after the deal is closed. Fertitta said, "We will reengineer the ambience. We don't have to do what we would have had to do five years ago, because there has been a lot of money put into the units for deferred maintenance. We can do a window wash instead of a complete re-engineering of the concept."

Analysts expect the Chart House deal will generate $95 million in revenues and $15 million in restaurant-level cash flow in fiscal 2003 and $75 million in revenues and $14 million in restaurant-level cash flows in 2004.

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