Restaurateur Sam Fox, who runs the Fox Restaurant Concepts in Phoenix, Arizona, has always been known as a quirky, hands-on operator who has his pulse on what consumers want next.
When he was in negotiations to sell one of his chains, North Italia to The Cheesecake Factory (NASDAQ: CAKE), he decided to go whole hog, and as Michele Maynard noted in Forbes.com last week, sold the entire restaurant chain to Cheesecake Factory for $353 million.
The sale includes Flower Child, a follow-up to True Food Kitchen, which he sold to P.F. Chang’s China Bistro in 2012 for $1.1 billion dollars, The Henry, upscale eateries mostly in California, Arizona and Texas, Blanco Tacos & Tequila, which specializes in innovative Mexican food, and Arrogant Butcher, a craft cocktail bar and eatery. Fox’s restaurant group operated 45 eateries in seven states.
The two chains had already formed a partnership. The Cheesecake Factory got the ball rolling by investing $88 million in the growing North Italia chain and its fast-casual healthy chain Flower Child. That set the stage for the two chains to become acquainted and see whether they could establish a more lasting partnership.
The Cheesecake Factory’s CFO Matt Clark expected the acquisition to spike its revenue by $450 million in 2020. But Wells Fargo’s restaurant analyst Jon Tower wasn’t thrilled with the deal and lowered his price outlook from $47 to $46.
Here’s what Sam Fox and David Gordon, president of The Cheesecake Factory, said about the deal:
Sam, you were interested in selling North Italia to Cheesecake Factory and ended up selling your entire restaurant chain including Flower Child and The Henry. Why?
Fox: We’ve been working on being partners with North Italia and Flower Child for some time now. They made equity investments in both of them. As we spent time getting to know one another, it was a good opportunity to monetize the company, continue to do what I do every day, and having top leadership to help run the company.
Describe the fit between Fox Restaurant Concepts and Cheesecake Factory.
Fox: We wouldn’t have done the deal if it didn’t fit in together. The beauty of the deal is, we’ve been partners for the last three years, understand each other’s business, and getting to know the people, a lot of our culture is aligned. A lot of our philosophy and how we do business is aligned. It made more and more sense the more time we spent together.
So you’ll be running the Fox Restaurant Concepts under Cheesecake Factory and CEO David Overton’s leadership. What changes do you expect to see?
Fox: That’s the beauty of the deal. I get to work as an incubator, a wholly-owned subsidiary and get to stay in Phoenix. They wouldn’t have bought it if they wanted to change it. They got to know us, and they love the company and what we do. The Cheesecake Factory is smart enough, and David sees the magic of what was happening.
What will Cheesecake Factory’s ownership enable it to do that it couldn’t do on its own?
Fox: If you look at the success they’ve had for the last 40 years, having a lot of smart people in the room is good. We’re continuing to grow around the country. We’ll learn from a lot of the expertise they offer. But we also have access to capital, and more important, we have access to great human capital. We’re aligned with a great partner to grow our brands around the country. That gives us comfort and a safety net based on having access to their playbook, which over the last 40 year grew their organization into a more than $2 billion business.
Why was Cheesecake Factory interested in acquiring the Fox Restaurant Concepts?
Gordon: As we got to know Sam and his team, we also learned more about North Italia. We learned more about growing it into a national concept. We could see 200 North Italia’s. We’re both experts in experiential dining. We have similar cultures focused on delicious memorable food, made from scratch, with a fanatical emphasis on service and hospitality in both organizations. Both understand that all comes with having great people. We thought we could add value and that helped us to decide to move forward to accelerate our growth, diversify our business, and broaden our net.
An industry analyst was critical of the deal and questioned Cheesecake’s history with mergers. Your reaction?
Gordon: Not sure what acquisition he’s referring to. This is the first one. We figure we’re good with people, we love the fact that the team will be a wholly-owned subsidiary and can continue to innovate. Sam can explore new ideas. If and when there’s a great natural brand, we help them grow.
Fox Restaurant Concepts has devised very ingenious names like Flower Child and Arrogant Butcher. How have you done that?
Fox: I don’t think we have a one size fits all approach. These names come to me in moments or, while we’re working on a project, based on a word, a dish, a building. It’s not a formula. With Flower Child, when they left, we wanted them to feel happy. Our tag line was happy food for a happy world.
Why develop the deal with Sam Fox leading a wholly-owned subsidiary?
Gordon: We specifically structured it so Sam and his team could continue to run the daily operations and innovate the menu. North Italia is the only brand run by Cheesecake Factory.
How will this deal help Cheesecake Factory’s bottom-line in the future?
Gordon: We made a smart investment in Sam and the Fox Restaurant Group. It allows us to continue to allocate capital, pay our dividends, continue shareholder buyback, and add value to our growth potential.
Will you, Sam Fox, be developing new concepts and keep your pulse on changing consumer tastes?
Fox: We’ll continue to grow what we have. When the time is right, we’ll work on new stuff. We’re always working on new ideas and food. Creativity goes on every single day; we’re always spinning off new ideas.
Two years from today, what do you expect to see from the Fox Restaurant Concepts/Cheesecake Factory partnership?
Gordon: From Cheesecake Factory’s viewpoint, I expect we both end up seeing growth. At the same, we’ll continue to grow Cheesecake Factory at a pace that will grow to 300 locations from over 200. We look forward to taking the next step, with the Fox Restaurant Group partnership.