M&A Watch: Do All Restaurant Chains End Up Private? (MSSR, MRT, RUTH, CAKE, PFCB, CPKI)
Landry’s, Lone Star, Capital Grille, Outback, Smith & Wollensky, and on and on… How many public restaurant and dining chains can be taken private? Apparently many more. McCormick & Schmick’s Seafood Restaurants, Inc. (NASDAQ: MSSR) is under a tender, Morton’s Restaurant Group, Inc. (NYSE: MRT) is seeking a buyer, and we have a line-up of other casual dining or upscale dining chains which we think can join in the waves of public food chains that have gone private.
McCormick & Schmick’s Seafood Restaurants, Inc. (NASDAQ: MSSR) is currently the most recent of the upscale dining chains that has an offer to go private. The offer comes from Landry’s via Fertitta for $9.25 per share and the stock is trading higher than the proposed offer. The 52-week trading range is $6.14 to $11.98, so the thought is that shareholders will demand a higher price. At $9.45, this company’s market cap is only $140 million against 2010 sales of $351 million. As a reminder, this was a $20.00 to $25.00 stock back in 2006 to 2007.
It was less than a month ago that Morton’s Restaurant Group, Inc. (NYSE: MRT) announced a strategic alternatives exploration which could involve a sale. By the way, ‘strategic alternatives’ almost always translates to “looking for a buyer.” This stock is at $7.50 today and it traded from $6.44 up to $7.20 when it made this announcement. The upscale steakhouse has a current value of $120 million against $296 million in 2010 sales.
But what about other chain restaurants? Our view is that any of these chains could be ‘go-private’ candidates at any point. Many management teams have grown very tired of living by a monthly or quarterly benchmark of same-store sales growth. We have identified several others we think can easily be taken private in the months or years ahead. The only caveat is a simple one: these management teams and corporate insiders will have to want to go private. Here are a few other dining chains to possibly consider.
Ruth’s Hospitality Group Inc. (NASDAQ: RUTH)… Great steaks, hot steak ovens, upscale, and worth one-quarter of its 2005 to 2006 post-IPO peak. It has a loyal customer base (even if the Houston Ruth’s needs a major face lift) because of great steaks and its $170 million valuation offers much room for a buyer to milk more money out of the model whether a buyer would want to grow the chain count or not. Sales in 2010 were $357.6 million. At $5.20, its 52-week range is $3.15 to $6.60.
The Cheesecake Factory Incorporated (NASDAQ: CAKE)… Great continental food under flagship brand and under Grand Lux. Valuation is always a concern here at $1.75 billion in market cap against $1.66 billion in 2010 sales. The price tag may drive away buyers, but the way to milk more money out of this one boils down to a buyer simply cutting the portion sizes by a fraction. At a share price of $29.69, its 52-week range is $21.56 to $34.00.
P.F. Chang’s China Bistro. Inc. (NASDAQ: PFCB)… Great upscale Chinese or Asian-fusion at flagship brand and more casual and takeout venue of Pei Wei, with the latter having more growth opportunities. The market cap is $1.08 billion and 2010 sales were $1.24 billion. With shares at $46.20, its 52-week range is $37.36 to $53.39. This one now targets roughly 40% of its income to be paid out in dividends.
California Pizza Kitchen Inc. (NASDAQ: CPKI)… Upscale pizza? This one was supposedly going private before, yet here is still public. It has a market value of about $400 million and 2010 sales were $642 million. At $16.35, its 52-week trading range is $12.95 to $22.92.
You have noticed that no buyout targets have been offered up. For any of these to be taken private it will require that management wants to go private. Having a cheap stock might not matter in the slightest. All of these offer at least some of what private equity seeks… Premium products in premium locations, creating at least a partial barrier to entry, with cash flows. All of these models can be leveraged some and can probably be milked for more cash flow if they were private. A private equity buyer often may treat any restaurant chain more like a cash flow monster than it does a giant growth engine. After all, there are only so many locations that a single concept can support.
High-end pizza, high-end Chinese, high-end continental, high-end anything… even relatively upscale can work. If these kick off major cash flows for a private equity investor, all that matters is that they kick off enough consistent cash flow that they can be leveraged up and/or sold off at a higher price to a different buyer down the road while they are busy kicking off cash today.
Just because we believe these can be targets down the road does not mean they will all become targets. At the end of the day, value is in the eye of the beholder.
JON C. OGG