Grotech Hopes to Repeat Success of Long John Silver's

Grotech Capital Group Inc. is getting back into the fish business.

The local venture capital and buyout firm last week closed a $150 million deal to buy Captain D's Inc., a large chain of fast-casual seafood restaurants.

The Dec. 27 sale, which is to be announced this week, is Grotech's second foray into seafood restaurants. One of its most successful investments was the 1999 leveraged buyout of Long John Silver's Restaurants Inc., in which Grotech invested $22.5 million.

It merged Long John Silver's into another of its restaurant investments, the A&W Restaurants chain, in 1999, to form Yorkshire Global Restaurants Inc. Grotech, based in Timonium, Md., and Vienna, sold A&W and Long John Silver's for $320 million in May 2002, returning about 10 times the initial investment.

Grotech's controlling partner in the Captain D's deal is the Boston private equity firm Charlesbank Capital Partners LLC. Michigan's state employee pension fund also provided equity. Of the $150 million purchase price, about half was financed, said Frank A. Adams, Grotech's founder and a managing general partner.

Captain D's was sold by the Lone Star Funds, a Texas-based global private equity fund that buys distressed assets. Lone Star acquired the chain in its 2002 acquisition of Nashville-based family-dining chain Shoney's. Under Lone Star, Captain D's expanded steadily to more than 300 company-owned stores and more than 200 franchises. Adams said Captain D's is profitable.

Adams said the strategy with Captain D's will be similar to that of Yorkshire: a good brand that has been held back by limited resources. In this case, Captain D's was a "cash cow," Adams said, but much of that cash was being used to fund its less-successful sibling, Shoney's.

Officials at Lone Star could not be reached last week. A spokesman for Captain D's did not return phone calls. Adams said there are no plans to change Captain D's management, led by president and fast-food veteran Ronald E. Walker.

In addition to brand, co-location is a key part of Grotech's strategy. With Long John Silver's and A&W, Yorkshire expanded primarily by building locations shared by both restaurants. That way, Adams said, "If you go to lunch with someone, and you want a burger and they want seafood, you can both have what you want." Simple, but it worked.

For it to work now, Grotech will have to buy more restaurants. Adams said the Captain D's acquisition will be used as a platform to buy other restaurants and build a multibillion-dollar restaurant company. Other past food-related investments by Grotech include Lloyd's Barbeque Co., ice cream maker Brigham's and a Minnesota online grocer.

Grotech manages about $1 billion in an eclectic mix of investments in consumer product, information technology, high-technology and health care companies. It provides venture money for promising start-ups but also has a long history of controlled buyouts of established companies. Locally, it was an early venture investor in Advertising.com Inc. (bought by America Online Inc. last year), Digex Inc., USinternetworking Inc., and United BioSource Corp., Ethan Leder's burgeoning pharmaceutical research firm.

Adams said expansion is the first order of business for Captain D's. "We were very successful in A&W and Long John Silver's expanding into Europe and Asia, and we look forward to doing that with Captain D's," he said.

Another Coal IPO

First Reserve Corp., the largest private equity player in the energy sector, made plans to take its second mid-Atlantic-based coal producer public early this year.

Connecticut-based First Reserve, along with New York's Blackstone Group, brought Maryland-based Foundation Coal Holdings Inc. public in a $519 million initial stock offering, with most of the proceeds going directly to First Reserve and Blackstone.

Alpha Natural Resources Inc., based in the southwestern Virginia town of Abingdon, last month filed a preliminary prospectus to raise up to $250 million in a public stock offering. Alpha is First Reserve's other major coal company holding, which First Reserve created out of the remnants of Pittson Coal Co.'s operations in 2002. Alpha is bigger than Foundation, with 44 underground mines and 20 surface mines, mostly in central and upper Appalachia, producing the kind of low-sulfur, high-BTU steam coal that is in huge demand at the moment. First Reserve had to share Foundation's spoils with Blackstone, but it is the sole controlling shareholder of Alpha.

Alpha's offering is being managed by Morgan Stanley, UBS and Citigroup.

Terence O'Hara's e-mail address is oharat@washpost.com.