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Volume 20 No. 42
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Split with brother paved way for sale to Compass

The story behind Compass Group’s purchase of Levy Restaurants goes deeper than a two-part sale occurring over six years. It involves a family dynamic, financial pressures and the once-strained relationship between the company’s founders, brothers Larry and Mark Levy.

They have since patched up their differences and are close again, Larry said, but it hasn’t always been so smooth. Mark co-founded The Levy Organization with Larry in 1976 before renaming it Levy Restaurants two years later, but he hasn’t been part of Levy Restaurants for the past 19 years.

Levy sold the remainder of Levy Restaurants to Compass Group for $250 million in 2006.
“There was a short period of time when my brother and I didn’t agree on things,” Larry said. “We didn’t speak to each other. This went on for two to three years. It was rough on our mother and our kids. I borrowed a lot of money at 54 years old to buy him out. I was mad, he was mad.”

Mark, who remains in the food business as CEO of Mastro’s Restaurants, a chain of steakhouses across the U.S., said: “I think we just had a different point of view on what direction we wanted to take the company and it worked out very well for both of us. I would say it was just a time for change and we made the change. That’s how I look at it.”

The rift began when Mark, serving as vice chairman, wanted to sell Levy Restaurants shortly after it had expanded nationally into sports in the 1990s. At the time, the company had about five deals outside of Chicago. Larry, the chairman and CEO, told his younger brother that it was too early to sell. Mark got angry and demanded to be bought out.

“He was concerned that the much better capitalized competitors would win more of the future business,” Larry said.

Unlike his brother, who had accumulated significant money in real estate, Mark had been in the insurance business and didn’t have that type of wealth. “This was his way to realize what we had created” in building the sports portfolio, Larry said.

The buyout was completed in 1998, and the brothers mutually agreed at the time to keep the terms confidential.

In the meantime, Levy Restaurants’ sports business grew at a rapid rate and the firm became a “cash-flow monster,” according to Larry. “I owned a company with no debt but had to borrow money from the cash flow to pay off my brother,” he said. “I was very uncomfortable having to do that.”

Levy in Sports

Levy Restaurants handles food service in more than 100 sports venues in the U.S. and Canada, including more than half the arenas that are home to an NBA and/or NHL club.

Type of venue        No. of venues

Minor league ballpark                    32
NBA/NHL arena                             28
College stadium                             11
College arena                                11
Motorsports track                          10
MLB ballpark                                  7
NFL/CFL stadium                           6
MLS stadium                                  6
Minor league arena                        4
Tennis stadium                               3
Horse racing track                          2

                                          Source: SBJ research

One solution was taking the company public to help relieve the financial burden of paying off his brother. But then Compass Group came calling in the winter of 1999. At the time, Levy officials were looking to expand business internationally. The company had a 30 percent market share domestically and its bankers told Levy that there would come a point where it couldn’t grow anymore in the U.S.

So Larry and Jeff Wineman, Levy Restaurants’ head of business development, scheduled meetings in England and France, but every stop they made they got the same answer: Venues were committed to Compass Group as their food provider.

“Larry always had incredibly grand aspirations, clearly beyond the borders of the U.S.,” Wineman said. “On the way to Heathrow, Larry took a call from Mike Bailey, chairman of Compass. They invited us to stop by their headquarters on the way to the airport.”

There was mutual interest in doing business together: Levy wanted a joint venture, while Compass preferred buying its competitor outright.

About the same time, Levy contacted Aramark about selling the company to the Philadelphia firm to become its premium food provider.

“When Compass started negotiating with us, we approached Aramark,” Larry said. “It was very easy to see very quickly that the cultures were very different. Compass loved what we did and they were using phrases like, ‘You’re going to be the cherry on our sundae.’ Aramark was very mechanical. It was almost a commodity kind of conversation. I did talk to Joe Neubauer [Aramark’s CEO at the time] and he asked me why we didn’t take their offer. I said, ‘You didn’t make an offer.’ They didn’t think anybody else would buy our company.”

After more meetings between Levy and Compass, the two parties signed a complex deal in September 2000 in which Levy agreed to sell 49 percent of the company for $87 million. The kicker: Levy could not sell the other 51 percent to anybody else, while Compass had a 12-year period in which it could purchase the remaining portion of the company. It turned out to be a bold formula with the final sale price tied to Levy’s previous year’s earnings.

In the end, the deal allowed Larry to pay off his debt over his brother’s stake in the company. In January 2006, Compass Group bought the remaining 51 percent for $250 million, almost three times the original transaction.

After the initial transaction, Compass Group, the world’s largest food-service company with $28 billion in revenue, provided Levy with major cost savings on purchasing and insurance, and taught its American counterparts the finer points of acquisitions, Larry said.

“We bought the [SMI Motorsports] account through them in [2001], worth $40 million in sales, and it paid off big right away,” he said. “It turned out to be a key acquisition because we learned how to do events that happen one weekend a year. It’s helped us with the U.S. Open and the Kentucky Derby.”