How the Sun heated up bagel chain Bruegger’s

March 22, 2011, 12:50 AM UTC

Private equity firm Sun Capital Partners last week sold bagel chain Bruegger’s Enterprises to Le Duff America, the North American subsidiary of France’s Groupe Le Duff SA. No financial terms were disclosed, but a source says the deal gave Sun around a 13x return on its original 2003 investment, and an internal rate of return (IRR) in excess of 30%.

Steve Liff, who leads Sun’s New York and Los Angeles deal teams, took some time to discuss what went right:

Fortune: Sun is known as a turnaround shop, and press at the time of your Bruegger’s acquisition in 2003 suggested that the company was struggling. Why was it in bad shape?

Liff: When we bought it, the company was extremely overleveraged. So we saw a path to buy the debt, turn it into equity and take ownership.

Bruegger’s had gone on an expansion years several years before we bought it, and had gotten into some bad real estate it had to shed. But, again, it was still over-leveraged, so it didn’t have a lot of money to reinvest in the stores that remained or to innovate on its menu. That left them looking older and tired, particularly when compared to newer competitors like Panera and Einstein Bagels, which were upgrading the idea of what a bakery-café should feel like.

Also, we were looking at the company in the midst of the Atkins craze, so carbs were out of style.

All of that led to the company being an underperformer. It was a difficult topline situation.

So why invest?

When you looked at all of the headwinds Bruegger’s had facing it at the time, sales had been trending down only slightly for the prior couple of years. We scratched our heads and thought: “They could be doing a lot worse.”

We realized that the company had really good franchise value, a good core product in kettle-boiled, New York-style bagels – most of the others baked their dough – and a strong customer following. So we felt that we could provide some needed capital to renovate the stores, revamp the menu and supplement the management team to get it done.

It seems that the big menu changes were to introduce more lunch items. Was that you or management?

We knew that the menu was tired and needed change, but the nitty-gritty was done by management. For example, we all agreed that the coffee needed to be upgraded – which got done – and also that we needed better sandwiches, salads and soups. Plus, we put in drive-thrus. Management was involved in the discussions about change, and in charge of implementing them.

This obviously is a strong return for Sun. Did it always look promising?

Well, we obviously believed in our investment thesis, but things certainly got worse before they got better. It takes time to implement the changes we discussed. It’s kind of like your golf game. You might decide to invest money to get better, by taking lessons. The instructor teaches you a new swing, but you’re going to get worse before your game improves. That’s what turning around a restaurant chain is like.

You’ve held this company for over eight years? Why for so long, and why sell now?

We did look to sell in in 2008, right before a lot of the financial problems hit. We ended up pulling it because we saw what was coming down the pike. We then revisited the situation last year, because it was held in a couple of open funds, plus had a few people ask, “Hey, are you looking to sell Bruegger’s.” We also heard some strategics could be interested.

Overall, it was a good time to sell, because the M&A and financing markets are back, plus the company still has plenty of upside for its new owner.

What’s your favorite Bruegger’s bagel?

I like a lot of them, but probably the everything.