The Deal: Minimum Wage Rhetoric Has 'Diet' Taste

NEW YORK ( The Deal) -- The term "minimum wage" has come to carry with it the same kind of visceral reaction (or, standing ovation, depending on which side of the aisle you stand on) that the Affordable Care Act has in Washington right now.

But those private equity managers whose firms invest in sectors where most employees are affected by a minimum wage can watch Congress' fight over the budget and debt ceiling if they want to handicap how soon they will have to factor wage increases into profit and loss statements to investors.

Inside-the-Beltway sources said the entire public debate in all likelihood will prove to be much ado about nothing. Virtually no one is anticipating the House GOP will sign off on legislation paying a higher minimum wage.

"I see little risk in Democrats pushing for it, especially in an election year," one source close to the Washington wage debate said. "It would fit in with the narrative that the GOP is a far-right intransigent party."

However, that would come as welcome news to restaurant chains' private equity backers.

Businesses are doing what they can to get out from Affordable Care Act obligations they perceive as being too onerous -- like cramming employees down into 30-hour work weeks to turn them into part-timers ineligible for health benefits. But the minimum wage hike, if enacted, isn't something they can take out on the staffers. They will have to charge customers more, instead.

Potbelly ( PBPB) - the sandwich shop backed by leveraged buyout shop American Securities and Howard Schultz, the founder of Starbucks ( SBUX) -- filed IPO paperwork in August with risk language in it that could spook investors.

While its assessment of cost fallout to shareholders resulting from the Affordable Care Act's implementation is less than sanguine, the company said customers of the growing sandwich chain may feel the brunt of a minimum wage price hike. "As significant numbers of our associates are paid at rates related to the applicable minimum wage, further increases in the minimum wage or other changes in these laws could increase our labor costs," Potbelly stated in its initial public offering filing, also noting that " significant numbers of our food service and preparation personnel are paid" at or around the minimum wage.

"Our ability to respond to minimum wage increases by increasing menu prices will depend on the responses of our competitors and customers," the filing said.

Local legislatures are also getting in on the act of trying to get retailers to pay closer to a living wage. When, earlier this year, the Washington city council threatened to impose a law requiring retailers with sales greater than $1 billion and floor plans exceeding 75,000 square feet to pay employees $12.50 hourly, Wal-Mart Stores ( WMT) said it would abandon plans to develop outlets in the district.

Dan Hoverman, director with Houlihan Lokey's capital markets group, said the Wal-Marts and Potbellies of the world could ultimately see some kind of a net benefit from a minimum wage increase -- many customers could find themselves spending more at their outlets. And, he noted, some might need it.

"Real income has gone down significantly since the financial crisis," Hoverman said, noting that more than half of the average American household's income is allocated to food, transportation and housing.

Businesses have already laid off employees, and others have scaled back full-timers' hours to offset Affordable Care Act requirements. Many might not have room to cut staff further.

"I don't think this will alter the employment picture that much," Hoverman said. Sources said the backlash is likely never coming. Or, at least, not in this political environment.

Not all restaurateurs and LBO shops need fret. Some parts of the restaurant sector could completely miss out on the pain of a potential wage increase.

"It depends on the price point of the restaurant," said Marc Leder, co-CEO of Sun Capital Partners.

He offered the example of a steakhouse, where staff already make more than the minimum wage, in part because their expertise on crucial matters like wine pairings creates a premium for those workers.

Further, one source added, a minimum wage increase will not have a tremendously substantial impact on many consumer dining operations' books. While not universal, the source said that on average, only one-third of a restaurant's cost structure will go toward hourly pay. The more a business pays its employees already, the less the impact of a substantive wage hike will be felt.

Expenses would realistically rise no more than 10%, industry and private equity sources said, and that would only go for the most extreme cases: employers with a large group of employees at the very base of the minimum wage.

While LBO shops are taking sandwich makers and food service companies public, they're also plowing cash into deals for high-end hamburgers, signaling they don't anticipate a major disruption to lines of business.

Until a sea change switches the color of the United States House of Representatives from red to blue, consumers and private equity execs alike can rest assured their roast beef hoagie won't cost much more, either.

Written by Jonathan Marino.

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