Papa Gino's Team Buys Chain, Eyes New Growth

(Monday, April 11, 2005) - After putting growth into low gear for several years, executives who navigated the buyout of Papa Gino's Holdings Corp. here are optimistic the deal will spur a new expansion drive that could carry the company beyond its regional New England borders.

Papa Gino's management, led by chairman and chief executive Thomas J. Galligan III, teamed up with the Boston-based private equity firm Bunker Hill Capital LP to purchase the 370-unit company from former equity sponsor BancBoston Capital.

The company declined to divulge the terms of the agreement. However, vice president of marketing, Michael McManama, said the acquisition--which gives Bunker Hill a controlling interest in the company--would provide additional equity to support anticipated growth.

Papa Gino's Holdings Corp. operates two regional quick-service brands: the 162-unit Papa Gino's, which offers pizza and other Italian selections; and the 196-unit D'Angelo Sandwich Shop chain, which features submarine sandwiches, soups and salads.

Outlets are heavily concentrated in Massachusetts and Rhode Island, although the company also has units throughout New England. The company's system wide sales for the fiscal year ended in February were $248.4 million, an increase of 3.5 percent over the prior year's results.

The corporation, in addition to expanding the two chains outside of their Northeastern stronghold through the addition of company-owned outlets, intends to expand Papa Gino's franchising program.

That strategy would take the brand beyond its present 150 company-owned units and one dozen licensed operations located in such nontraditional venues as Fenway Park and Massachusetts General Hospital.

D'Angelo, which has 144 company-owned and 52 franchised outlets, also will grow through franchising, executives said.

The company also expects to add to its current roster of 12 dual-branded stores as it expands.

Over the next five years, Papa Gino's Holdings Corp. projects opening 50 company-owned and franchised units in New England and 120 units in other Eastern states, bringing systemwide sales to an estimated $360 million.
One challenge both brands will face is a lack of national presence, having operated solely in the New England region for more than three decades. Nevertheless, executives are confident they can take both chains on the road.
"I think they will play well in new markets from a quality perspective," said Nick Valenti, chief executive of Restaurant Associates in New York and a long-time Papa Gino's board member. "Tom and his team have done quite a lot in past few years to upgrade quality. I think the quality of the product will compete nicely against the national chains."

Galligan said the company had formulated a strategy to expand both concepts several years ago. But the Sept. 11, 2001, terrorist attacks and the subsequent economic downturn convinced executives to put their plans on hold while concentrating instead on internal growth, operations and guest service.
However, he said, the recent decision to restart expansion plans required an equity partner that could help the company implement a long-term strategy. "We were at a critical point," Galligan said.

BancBoston had held a controlling economic interest in Papa Gino's since the company acquired D'Angelo from Purchase, N.Y.-based PepsiCo in 1997 for an undisclosed sum.

"Eight years in the equity world is two or three lifetimes," Galligan said. "And [BancBoston] was looking for a possible exit strategy."

At that point Bunker Hill Capital, a new private equity firm formed by former BancBoston executives, entered the picture. "What we liked about the company was it had a first-class management team," said Theresa Nibi, a managing partner of Bunker Hill and former vice president at BancBoston. "We also thought both brands were strong in the market. We liked the scale of the business--370 units in great locations. And we liked its prospects of growth through franchising."

Bunker Hill, which has raised a $250 million private equity fund, invests in four areas: specialty retail, consumer products, business services and industrial products. Nibi said she has been familiar with Papa Gino's since 1995, when she was named to the company's board. Although she left the board in 2003, she since has returned.

Valenti said the transaction has enabled the company to speed up its five-year plan. "The stability of this transaction also enables the company to move forward in its franchise area," Valenti said.

Papa Gino's already has inked deals with several foodservice operators, all of which have prior experience in the business. One Albany, N.Y.-based company that operates about 20 Dunkin Donuts shops is planning to open about 31 units in the corridor between Albany and Hartford, Conn. Other franchise markets include Long Island, N.J., and Orlando, Fla., which will be developed by a former Taco Bell franchisee in the area.

For the most part, though, Galligan explained, "The primary focus is to grow contiguously using our own distribution centers."

Papa Gino's has its own commissary that prepares fresh dough daily, and D'Angelo operates its own bakery.

While the company has begun to calibrate future expansion, it also has started to work to improve operations at the unit level. Papa Gino's comparable-store sales increased 5 percent in the most recent fiscal year, after rising 3 percent the year before. D'Angelo's comps grew 2.5 percent last year, after rising 1 percent in the previous year.
"Papa Gino's executives have been very focused on continuous improvement, and they do what they do well," Nibi observed.

Papa Gino's outlets generate an average unit volume in excess of $800,000 annually on a check average of $10.25, while D'Angelo's average unit sales run about $560,000 on checks of $8.25.

Both brands offer seating for dine-in customers, but delivery accounts for about 80 percent of sales at Papa Gino's. Sales from delivery at D'Angelo run closer to 25 percent.

The company's 12 dual-branded stores average between $1.2 million and $1.3 million annually, Galligan said. The blended units feature a single counter and offer selections from the menus of both brands.

The company has been marketing itself aggressively as well. Papa Gino's signed local sports favorites Adam Vinatieri of the New England Patriots and David Ortiz of the Boston Red Sox as brand spokesmen. Vinatieri has been linked successfully to Papa Gino's bundled value-meal promotion that offers a large cheese pizza and a small order of chicken tenders for $13.99.

"We offered the program last fall, and it turned out to be the most successful promo in our history," McManama said.

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Mimi Woodman

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