Shells nets critical, but costly, financing

Shells Seafood Restaurants Inc., a once-popular chain struggling with debt and eager to recapture its glory days, said last week it has obtained critical financing. But repaying the loan will cost the Tampa company and its shareholders a lot of ballast.

The chain foundered in the late 1990s when it attempted to expand its affordable seafood theme from Florida to the Midwest, added nonseafood items to its menu and raised prices.

Enter David Head, an industry veteran who once helped Tampa's Glazer clan sell the now-bankrupt Houlihan's restaurant chain.

After taking over as CEO in April, Head closed all but the chain's 29 Florida shops, shrank the menu, priced 30 entrees at less than $10, slashed advertising and other costs, and cut deals with lenders and vendors. He also stopped trying to compete with chains such as Red Lobster and Friday's.

"The guests were saying, 'Hey, we liked it the way it was. Why'd you screw it up?' " he says.

At the end of the day, however, Head still needed cash. Recently, he was able to obtain loans of $1-million apiece from two groups of private investors. The repayment terms were steep: three-year notes at 15 percent interest (7 percent of it at the end), and the right to purchase 8.9-million shares of stock -- enough to triple the current share count -- at 16 cents a share. The stock closed Friday at 65 cents, up 25 cents.

Shells hired Corporate Capital Consultants Inc. of New York to assess the deal's fairness and got a thumbs-up even though one shareholder likely to benefit is former chairman Frederick Adler, Shells' largest stockholder at 27 percent. He and current chairman Philip Chapman are members of one of the investor groups.

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