Business
Tortilla Flat
Last year Houston’s Ninfa Laurenzo saw her venerable restaurant chain go bankrupt. Will new ownership be a recipe for success?
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Sysco was worried too. It had had its first serious problems with Ninfa’s in October 1989, when it sent the company a note about $425,000 that was past due. Ninfa’s explained that it was expanding into new concepts and was going through a temporary cash crunch. So Sysco arranged a deal that allowed Ninfa’s to continue receiving regular shipments until it could come up with new financing. Over the next five years Sysco sent fourteen notes to Ninfa’s, pleading for payment. Ninfa’s would send checks to the company from time to time, but during that period, 140 of them, amounting to $4.5 million, bounced. The Laurenzos tried to keep Sysco at bay, saying they were close to lining up the money they needed to pay the food distributor.
Then, in the fall of 1996, Sysco received thirteen checks totaling $300,000 from Ninfa’s, none of which cleared the bank. Ninfa’s attorney worked out a new payment schedule with Sysco, but a few days later, he told the company that Ninfa’s wouldn’t be able to make the first payment. Sensing insolvency, Kenneth Spitler, the chief executive of Sysco’s Houston operation, took action. On October 16, Sysco and Southern Produce filed a petition with a U.S. bankruptcy court to force Ninfa’s into involuntary bankruptcy. Sysco also cut off all supplies to the chain. “It was not an easy decision to make, particularly because I liked them,” Spitler says. “But our backs were up against a wall.” Ninfa’s managed to find another supplier, but it was too late. Fourteen days later, Ninfa’s filed a Chapter 11 bankruptcy petition, claiming $9.1 million in assets and $14.6 million in liabilities.
The day the news hit the Houston Chronicle, there was a huge outpouring of support from the community. Flowers and cards flooded Ninfa’s headquarters on Canal Street, and restaurant sales jumped 9 percent. Sysco was perceived as the bad guy. Indeed, about a month after Sysco filed the petition, Ninfa’s fired back a counterclaim, saying that Sysco had “systematically and secretly” overcharged the restaurant chain for years. The two eventually settled the suit out of court, and Ninfa herself publicly apologized for the accusation.
The immediate challenge was to keep Ninfa’s open until a buyer could be found. Morian Investments’ Reed Morian, whose wife is an heiress to the Cullen family fortune, contributed $1.5 million in temporary financing, approved by the bankruptcy judge in the case, William R. Greendyke. And Malcolm Lovett, a well-known Houston investment banker, agreed to sign on as a financial adviser. “We had to find a way to keep meat in the freezer and liquor in the bar,” he says.
Lovett shuttered both Bradley’s and the Lonesome Steer, refocusing the company on its Ninfa’s restaurants. He then centralized purchasing, to keep a lid on costs, but decentralized management, sending many of the company’s top-level executives back to manage the restaurants. As many as two hundred people were laid off companywide, managers’ salaries were reduced, and the Laurenzos took pay cuts of 15 percent or more—reducing annual labor costs by $1 million.
Last May six groups submitted bids to acquire the company: Watermarc Food Management Company, a publicly traded Houston company run by Ghulam Bombaywala that owns Marco’s Mexican Food Restaurants and the Original Pasta Company; Gene Street, who founded the Black-eyed Pea Restaurants, owns fourteen Good Eats restaurants, and recently agreed to acquire El Chico; NCM Investments, a company owned by Houston investor Niel Morgan, who recently acquired five Antone’s Delis in Houston; the GulfStar Group investment banking company and Tony Vallone, who owns Tony’s, Anthony’s, and Grotto in Houston; a group led by the owners of Serranos in Austin; and MESBIC Ventures, which owns four Ninfa’s franchises in Dallas.
The Serranos Group was the underdog among the bidders. True, David Quintanilla and his half-brother, Adam Gonzales, operated nine successful Mexican restaurants in Austin, but they offered no initial cash investment, only payment to Ninfa’s creditors from 80 percent of the cash flow generated by the restaurants. Nevertheless, the creditors committee was impressed with their proposal. “While the other bidders were talking about how they were going to finance the deal, we focused on how we were going to run the business,” Quintanilla says.
Enter Niel Morgan. He had one of the highest offers, but despite being an early investor in such successful restaurants as Cafe Annie and Cafe Express, he had no experience operating a restaurant chain, much less a Mexican-restaurant chain. “Serranos was right from central casting,” he says, “so we joined forces and made a revised bid.” Last August the creditors committee selected the Serranos-Morgan bid, a $27.6 million deal made up of loans, assumed debt, and $3.5 million in cash. The plan is expected to be approved by the creditors and Judge Greendyke.
Losing bidders complain that it’s a sweet deal for Morgan but not for the creditors. Morgan, who is providing the $3.5 million in cash through loans to Ninfa’s, will be the first to be paid back, at 10 percent interest per year over five years. He will also have first lien on all the assets if the business fails. The creditors, meanwhile, will be paid back over seven to nine years. Metro Bank, for one, which Ninfa’s owes $2.4 million, has raised objections to the plan. “The current secured creditors [mainly the banks] go from a fully secured position to a second position [after Morgan],” says one unsuccessful bidder, who asked not to be identified. “It’s a very good deal for Niel Morgan. It’s a very mediocre deal for the secured debt holders.”
Leonard Bryan, the chief financial officer of Sysco Food Services of Houston (which Ninfa’s owes $2.8 million) and the chairman of the unsecured creditors committee, disagrees. “Obviously, we would have been happier if someone had brought $15 million in cash to the deal,” he says. “We’re putting our bet on the person who we feel can best pay us over time.”
Although it may not be such a great deal for the creditors, it may be an even worse deal for the Serranos Group, who won’t see a dime until Morgan and the creditors have been paid back. And some doubt whether they will be able to turn the chain around. At Serranos, Quintanilla keeps labor and food costs down through computerization and automation. He’s betting that by lowering Ninfa’s food costs, which average 30 percent of sales, versus 27 percent at Serranos, he can squeeze more profits out of the restaurants. “We’re not going to touch the recipes,” he says. But competing bidders think that lowering the food costs will lower the quality of Ninfa’s food, which many agree is better than Serranos’.
What do the Laurenzos get out of the deal? Roland Laurenzo, who is 50, will remain with the company for a year as a consultant to help with the transition. He plans to open his own restaurants under a licensing arrangement with Serranos, including one in Austin at the site of the old Coyote Cafe, expected to open this month. And Ninfa? Under the deal, the restaurant’s 73-year-old namesake is guaranteed lifelong employment with the company as chairman emeritus. “Ninfa’s without Ninfa wouldn’t be Ninfa’s,” says Morgan.
Looking back, would the Laurenzos have done anything differently? Roland says he wouldn’t have expanded the chain outside its Houston base. “I did the things I thought I had to do to keep the thing going,” he says. As for Ninfa, she says she has no regrets. “Life is a gamble,” she says. “If I hadn’t opened the little taco stand, there wouldn’t be a Ninfa’s. We have a beautiful success story, nothing to be ashamed of, something to be very proud of. You can’t take that away from us.”
Claire Poole is a former staff writer at Forbes.
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