Bloomberg News

Fidelity CEO Seeks Restaurants as Insurance Focus Narrows

February 07, 2012

(Updates shares in the 13th paragraph.)

Feb. 6 (Bloomberg) -- Fidelity National Financial Inc., the largest U.S. title insurer, is weighing restaurant investments after exiting some insurance businesses at a profit, Chief Executive Officer George Scanlon said.

“We’re taking that capital, keeping it as dry powder,” he said today in a phone interview after the company announced an agreement to buy restaurant chain O’Charley’s Inc., in a deal valuing the target company at about $220 million. “One of the things that we’ve been looking at is the restaurant industry.”

Fidelity has reached agreements to divest a stake in a claims-processing business, its flood insurer and a property- casualty unit in the past two years. The Jacksonville, Florida- based company had invested in restaurants before the O’Charley’s deal, through American Blue Ribbon Holdings LLC, which owns and operates Max & Erma’s, Village Inn and Bakers Square eateries.

“The restaurant business can scale pretty quickly, and there are clearly cost benefits to being bigger, particularly on the purchasing side,” Scanlon said.

Fidelity National’s investment in Village Inn and Bakers Square in 2009 resulted from the insurer’s bets on distressed debt of a restaurant company.

Restaurant operators have been forced to raise menu prices because of higher raw ingredient prices. Food and beverage costs climbed in the fourth quarter, and restaurant margin narrowed to 10.5 percent of sales from 11.1 percent a year earlier, O’Charley’s said in a statement today. U.S. food prices may rise as much as 3.5 percent this year, according to a Department of Agriculture estimate.

Title Insurance

The O’Charley’s deal helps Fidelity to expand beyond title insurance, an industry that ex-CEO Alan Stinson once called an oligopoly, because the declining number of companies selling the coverage allowed providers to raise prices.

“There aren’t many acquisition opportunities that we could make in the title-insurance space, for antitrust reasons,” Scanlon said.

Americans may dine out more as the economy improves. U.S. consumer confidence rose for the fifth straight month in January on signs of strength in the labor market, according to the Thomson Reuters/University of Michigan final index of consumer sentiment. The Bloomberg U.S. Full Service Restaurant Index, which includes O’Charley’s and other casual-dining operators, gained 3.3 percent last month.

O’Charley’s, which has posted losses for the past four years, fits the investment profile of Fidelity Chairman William P. Foley II, said Mark Dwelle, an analyst at RBC Capital Markets, in a phone interview today. The restaurant chain sells steaks, seafood and pasta.

‘Sees an Opportunity’

“It’s the type of business that he likes to buy,” said Dwelle, who has an “outperform” rating on Fidelity. “He sees an opportunity to turn it around and create value there over time.”

Fidelity will pay $9.85 in cash for each share of the restaurant company that it doesn’t own, compared with its closing price of $6.92 last week, the insurer said in a statement today.

O’Charley’s surged 42 percent to $9.81 at 4 p.m. in New York. Fidelity slipped 1 percent to $18.25. The Nashville, Tennessee-based restaurant chain gained 26 percent this year through the end of last week, while the title insurer advanced 16 percent in the period.

Fidelity owns 9.5 percent of the restaurant chain, meaning the remaining stake will cost about $200 million. Evercore Partners Inc. is advising O’Charley’s, which is getting legal counsel from Bass Berry & Sims Plc, according to a statement today.

Jefferies

Jefferies Group Inc. is the financial adviser to Fidelity National. The deal includes a $6.7 million termination fee, the restaurant company said in a regulatory filing.

Fidelity plans to purchase the shares of O’Charley’s that it doesn’t own through a tender offer that will begin on or about Feb. 24 and end on April 2, according to the statement.

O’Charley’s agreed in October to sell 50 restaurants, or about half of its real estate, to Scottsdale, Arizona-based Store Capital. The chain said it would use the net proceeds of about $105 million to retire almost all its long-term debt.

Title insurers use their records and public documents to verify a seller is a property’s true owner and that it is free from liens. The companies collect a one-time premium at the closing of the purchase and pay costs that may arise if someone disputes the new owner’s right to the property.

--Editors: Dan Kraut, Peter Eichenbaum

To contact the reporters on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net; Leslie Patton in Chicago at lpatton5@bloomberg.net

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net; Robin Ajello at rajello@bloomberg.net


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