Einstein Noah Coming Back As a Stock Next Week?

Stock Tickers: NWRG, BAGL, PNRA

New World Restaurant Group, Inc. (NWRG-PINKSHEET) is back to the old Einstein Noah Restaurant Group, Inc. name and will trade under the ticker “BAGL” on NASDAQ after this awaited securities sale next week.  As a reminder, all of these security sales are subject to change.  The company has had an active filing and as of today looks like the sale date is for a late-week offering assuming no changes are made.

Einstein as of now is selling 5 million shares at an estimated $19.00 to $21.00 range in what should amount a roughly $100 million stock offering.  This will get it back into NASDAQ compliance and off the deathly Pink Sheets where most investors fear to tread.  Shares closed today at $19.25, if you count a total of 1,870 shares as a real trade.

This is not a simple deal, so be sure to read what we are noting on this and be sure to read through the prospectus link on your own if you are interested in this offering.  Anyone with an “investor’s memory” may recall that the company never went under as far as an operation, but it was definitely an investor flame-out the first time around. We look for special situation investments such as back-door plays into IPO’s or recapitalizations, and this is truly a unique offering in that this one is a bit of both. 

The company also will have what should be some instant brokerage firm coverage after the offering as well because the joint book-runners are Morgan Stanley and Cowen & Co, and the co-manager is Piper Jaffray.  Based on the diluted share percentages and a mid-point price range, this one should have an implied market cap of roughly $313 million. 

What investors need to know is that is and still will be essentiallycontrolled by Greenlight Capital LLC, a New York-based value andalternative investment firm.  As of May 9, 2007 Greenlight held 94% ofthe outstanding stock, and after the offering and a subsequent $25million debt repayment Greenlight will hold 64% of the outstandingstock.  Greenlight became the majority stockholder in September 2003 inconnection with New Worlds’s equity restructuring, acquiring beneficialownership of approximately 97% of the outstanding common stock. In June2006, Greenlight acquired additional shares of common stock through theexercise of warrants. Greenlight is not selling any of its shares ofour common stock in this offering, although it will be facing obviousdilution if you count 64% ownership and an instant ramp up in valuationdilution.

So, what are ‘new’ investors going to see out of the company? 2006revenues were $389.6 million and that has been a fairly stagnant numberthrough the last 5 years if you average the sales out.  2006 posted a$12 million loss, but it claims a $1.13 million profit in this lastquarter.  Its credit facility is going to be cheaper after the offeringand they will be clearing up that $25 million debt with Greenlight.The last quarter EBITDA was also $9.1 million.

Investors should know that same-store-sales look not as robust in therecent quarter, although that may be seasonal or from a variety offactors.  Same-store-sales grew 5.2% in 2005 after two consecutiveyears of negative s-s-s; 2006 saw 4.5% gain in s-s-s, but the April2006 quarter showed 6.2% s-s-s gains.  This April quarter in 2007 sawonly a 1% s-s-s gain.  It also has 597 restaurants at the end of thelast April period, compared to 621 units at the end of the April 2006quarter and compared to 598 units at the end of 2006.  The main drop inunits comes from company-owned stores, so it looks like this is thecompany closing down less fruitful locations or perhaps not renewingleases.

There is also a degree of leverage here as it ended last quarter with$5.1 million in cash.  At April 3, 2007 it carried $170.2 million interm loans with a $57 million mandatorily redeemable preferred stockdue on June 30, 2009 (effective 2-years out).  Based on watching theserecapitalizations over and over for years, if you buy this one you needto just automatically expect that the company will probably try toeither sell more shares or will take on debt to repay debt.  That’s notmeant as a kiss of death, but worth noting.  It also has 31% of itscompany units owned by either franchisees or licensees.  If you searchthe data base and type in the search term “Bagel” youwill find many “bagel shops” for sale; some ‘may’ be Einstein Bros. butusually they do not list the names.  You would have to call eachbusiness broker and fill out confidentiality agreements and makefinancial disclosures to find out about each one.

The company is going to repay the $25 million note to Greenlight andwill repay a $65 million credit facility to replace it with a $90million new facility under more favorable terms.  It is also planningto open more locations with the proceeds and there are some covenantswhere it is to use 50% of excess free cash flow to pay this down,subject to a $5 million cash and equivalent maintenance on its balancesheet.  So unless the company sells additional shares down the road itis going to maintain low cash positions and will have a leveragedbalance sheet.

Einstein’s current base of company-owned restaurants under includes 336Einstein Bros. restaurants and 74 Noah’s restaurants. Also, it hasfranchises of 79 Manhattan Bagel restaurants and license/franchise 97Einstein Bros. restaurants and three Noah’s restaurants. In addition,it has eight restaurants operated under its non-core brands.  It isplanning to open 11 to 15 new company-owned restaurants in 2007:Einstein’s in Atlanta, Chicago, Las Vegas, Phoenix, and in variousFlorida locations.  It is also looking at more Noah’s locations afteropening one in Portland, Oregon.

So, you have been shown the risks here and those need to always beconsidered.  It is going to be a leveraged company compared to manyothers such as a Panera Bread (PNRA-NASDAQ).  But all in all and allrisks aside, you can be pretty sure that this one is going to grab alot of attention.  That doesn’t mean it will go straight up of course,but this is one of the more interesting recapitalizations out there.The Pink Sheet NWRG has been a highly illiquid stock that some dayssees no trading volume and it has doubled in price over the last twomonths.  That will come to an end after this financing because therewill be many traders looking at the name.

There should also be considered some leeway to this $19.00 to $21.00range because of the fact that the NWRG stock is much lower.  Investorsshould also caution against thinking there is an instant arbitrage playhere, because these recapitalizations are never as straight forward asinvestors would hope.  This one should be coming out quite soon, sokeep “NWRG” and “BAGL” on your trading radars.

Jon C. Ogg
June 1, 2007

Jon Ogg can be reached at; he does not own securities in the companies he covers.