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    Inside Roark Capital

  • How a young private equity firm came to own 16 restaurant brands with $11 billion in systemwide sales.

    Barney Wolf
    Roark Capital founder Neal Aronson has helped the firm grow to include several premier quick-service companies, including CKE and Arby’s.

    “The franchisees hated the company,” says Romaniello, now a Roark managing partner. Most of Carvel’s resources had been diverted to its supermarket business, which angered franchisees. There hadn’t been a new flavor in five years or a new product in eight. “I called Neal and said, ‘What have you gotten me into?’” Romaniello says.

    The new managers set about turning that around by refurbishing the stores and giving franchisees the OK to sell a product they wanted: Italian ice. By the end of the first year under Roark leadership, 21 new menu items were added. Franchisees’ trust in the owners rose dramatically.

    The following year, Focus Brands was formed to hold Roark’s foodservice acquisitions. Cinnabon and some franchising rights for Seattle’s Best Coffee were then acquired in 2004.

    “In the early days, there were real synergies and reasons to put companies together in Focus,” says Hill, who became Cinnabon’s president. “There was talent at Carvel that Cinnabon could benefit from, and talent at Cinnabon that Carvel could use.”

    Focus added Schlotzsky’s in 2006, Moe’s Southwest Grill in 2007, and Auntie Anne’s in 2010. The purchases were financed primarily through Roark’s first private equity fund.

    Later acquisitions were made with capital from the second and third investment funds. Romaniello and Hill moved to Roark in 2008 to help with acquisitions and operations.

    The deals became larger and more diverse—fast-casual, full-service, and quick-service restaurants, including some with company-owned units, not just franchisees.

    “We have been slowly and methodically learning as much as we can about restaurants,” Romaniello says. “I’m not sure I’d call ourselves experts at this point, but we certainly have a lot of years of study, learning about the industry and through our experiences.”

    The acquisitions are a team effort, Hill says, relying on Roark’s operational, financial, and other resources.

    “We look first at the brand and the company,” he says. “What are the characteristics of that concept? How are the unit-level economics? That’s key. If it’s franchising, it better be great unit-level economics, or a franchisee would never get involved in it.”

    Each deal brings its own set of challenges, says Erik Morris, a managing director who joined Roark in 2007 after leading investments in several quick-service restaurant companies at private equity firm Grotech Capital Group.

    “They’re all different, and so I think we’ve gotten better at it,” he says. “We learn a lot from every company we evaluate, and then as we work with the companies.”

    Making an acquisition is just “the ticket to play,” he adds. “We then focus our time on what are those three or four key strategic initiatives for that business.”

    Nash, who died in 2008, passed on several lessons to Aronson, one of the biggest being that the best investments require great patience. At Roark, that patience is being tested with Arby’s. Roark bought control of Arby’s for $430 million in cash and debt, despite 2010 results that one analyst dubbed “amongst the worst in modern restaurant history.”

    Romaniello and Hill say Arby’s had started to turn around when Roark made the acquisition, but Aronson is more blunt in his assessment of the company, which was part of the Wendy’s/Arby’s Group, led by investor Nelson Peltz’s Triarc Co.

    “Arby’s was a mess—in menu, speed of service, cleanliness, physical box, focus, relationships, strategy, marketing,” he says, ticking off the woes. There were four CEOs in six years, a problem Aronson blames on previous ownership.

    Still, Arby’s core attributes lined up for Roark, including the brand differentiation, great history, a large and loyal customer base, good locations, and upside potential.

    “The things that were wrong we saw as fixable, as long as we had time,” Aronson says, noting that a private company has that luxury.

    To help with Arby’s, two industry pros—Jon Luther, Dunkin’ Brands chairman, and former Yorkshire Global Restaurants CEO Sid Feltenstein—were added as independent directors on Arby’s board. Luther is Arby’s chairman.

    So far, it seems the risk is paying off. Arby’s same-store sales rose 2.8 percent last year and have grown every quarter since Roark acquired the chain.

    Few of Arby’s issues were present at CKE, which was acquired from private equity firm Apollo Global Management. It has strong unit-level growth and is stable, “with an excellent management team and differentiated brands,” Aronson says.

    Although CKE has debt—the company refinanced $1 billion last year—Aronson says it’s very manageable.

    “We want CKE to reach their potential,” just like all of Roark’s other brands, he says. If capital and expertise are needed to help the brands grow, “we’ll provide that.”

    While the firm has not sold any of its restaurant companies yet, that time will come.

    “As a private equity company, we will need to, and will” divest companies, Aronson says. “You’ll see us sell some companies over time, and you’ll see us take some companies public. That is part of our obligation to our investors.”

    Roark “has plenty of capital” now for its companies’ needs and to make additional acquisitions, but Aronson can see a fourth private equity fund down the road.

    “We don’t know when yet, but it will happen,” he says. “We’re growers, not cutters. We like growth, and we’re looking to invest in growth.”