Friday Letter Bains bet in Japan

Japan has never been much of an LBO market. From 1998 to 2010, only 2 percent of Japanese private equity deals were worth $1.25 billion or more, according to recent research from advisory firm Brightrust PE Japan.

Every now and then, however, a big transaction comes along. The latest example is Bain Capital’s $2.1 billion acquisition of casual restaurant chain owner Skylark, whose 3,600 stores operate under the Gusto, Bamiyan, Jonathan's and Yumean brands. Founded in 1970, Skylark is the country’s largest family restaurant operator and posted $4.5 billion in sales last year.

Bain, which opened an office in Tokyo in 2006, has bet big in Japan before. When Skylark completes, it’s expected to be the largest private equity deal in the country in two years – as was Bain’s $1.1 billion deal for Japanese telemarketer and call centre company Bellsystem24 back in 2009.

Skylark, too, has set private equity records before. In 2006 its original management buyout, led by CVC Asia Pacific and Nomura Principle Finance, was the largest take-private ever recorded in Asia at approximately $2.4 billion.

But things didn’t go as planned for the sponsors of the PTP. In 2008, Skylark had around $4 billion in turnover but reported losses of roughly $278 million and was struggling to repay its debt. Having already sold some of its stake in the company to Nomura to raise cash, CVC ended up handing its remaining 20 percent stake to Chuo Mitsui Capital, a private equity fund owned by lender Chuo Mitsui Holdings.

Nomura has also been keen to exit the asset for some time. In early March, media reports suggested Bain was in the final stages of negotiations for a $3.4 billion deal. But it was delayed by Japan’s worst crisis since World War II – the Tohoku earthquake and subsequent tsunami and nuclear crisis.

It seemed negotiations got underway again over the summer, but then 120 Gusto restaurants in Northeastern Japan were temporarily closed after 30 cases of confirmed bacillary dysentery were linked to 15 Gusto locations.  The source was identified, restaurants reopened and sales reportedly recovered. Finally, the deal was ready to move ahead.

Now, Bain plans to bring its fast food expertise to bear. In Japan, the firm owns Domino’s Pizza, while globally some of its biggest success stories have been growing Dunkin’ Brands and Burger King restaurants in the US. Burger King, for example, after four years under the watch of Bain, TPG and Goldman Sachs, reduced customer wait time by 30 percent, reduced staff turnover, grew revenue to $2.05 billion from $1.66 billion and reduced debt to $285 million from $1.3 billion.

Repeating the trick with Skylark could result in some tasty returns.  Especially if, as seems likely, Bain has timed its entry well. An unloved asset acquired in a downturn is usually a good starting point for a successful private equity investment.