UPDATE 3-Darden to buy RARE steakhouse chains

Thu Aug 16, 2007 7:29pm EDT

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(Adds details, CEO comments)

By Nichola Groom

LOS ANGELES Aug 16 (Reuters) - Darden Restaurants Inc. (DRI.N), owner of the Olive Garden and Red Lobster restaurant chains, said on Thursday it will acquire LongHorn Steakhouse parent RARE Hospitality International Inc. (RARE.O) for about $1.2 billion plus debt.

The two restaurant companies said in a joint statement that Darden will buy all of RARE's outstanding common stock for $38.15 per share in cash, a 39 percent premium to its closing share price of $27.51 on Thursday.

The transaction will bring RARE's casual dining LongHorn Steakhouse and higher end Capital Grille chains into Darden's portfolio, which includes smaller chains Bahama Breeze and Seasons 52, but no steakhouse business.

The news follows the closure and sale of Darden's poorly performing Smokey Bones barbecue restaurants earlier this year, and comes seven months after the Orlando, Florida-based restaurant operator first said it was considering the purchase of a rival chain.

Based on RARE's 31,083 shares outstanding as of July 1, Darden will pay about $1.19 billion in cash. The rest of the $1.4 billion purchase price includes RARE's $125 million of convertible notes and capital lease obligations.

Atlanta-based RARE owns, operates or franchises 317 restaurants, including 287 LongHorn outlets, while Darden has nearly 1,400 eateries.

Malcolm Knapp, president of a restaurant research firm, said RARE's primary chain, LongHorn, will provide Darden with plenty of opportunity for growth.

"It's a really good deal for both sides," Knapp said. "Darden needed something of scale that didn't need to be fixed ... LongHorn is pretty concentrated, mostly in the East, so they have a lot of the U.S. left to exploit."

HIGH PREMIUM

In an interview following the announcement, Darden Chief Executive Clarence Otis said he was comfortable with paying such a high premium for RARE because of the company's long-term prospects for growth.

"Their stock price is depressed. It's depressed because the market's depressed overall, it's depressed because of concerns about consumer discretionary spending and because of where we are in the beef cycle. All of those things are temporary."

Otis also said he was optimistic about the casual dining industry even though higher gasoline prices and interest rates are squeezing consumers' ability to eat out.

"People have jobs and are feeling pretty good about their jobs," Otis said. "As we look at the big picture, what we are seeing is basically a financial crisis that is not all that connected to Main Street."

The deal has already been approved by the board of directors of both companies, they said.

Darden expects to begin the tender offer for RARE's shares on Aug. 31, and should close in October. Otis said there would be job cuts, but he did not yet know how many.

The deal is expected to be neutral to Darden's earnings per share in fiscal 2008, excluding one-time transaction and integration costs.

To finance the deal, Darden will use a $1.2 billion senior interim credit facility and a $700 million senior revolving credit facility.

Following the deal's close, RARE President and Chief Operating Officer Gene Lee will become president of Darden's new specialty restaurant division, which will include Capital Grille, Bahama Breeze and Seasons 52.

RARE Chairman and Chief Executive Phil Hickey will serve as an adviser to Darden for a year.

LongHorn President David George will continue to run that chain, while RARE Chief Financial Officer W. Douglas Benn will stay with the new company and will have day-to-day responsibility for the integration.

RARE shares were up 34 percent at $36.75 in extended trade following the announcement. Darden shares closed up 16 cents at $39.96 on the New York Stock Exchange.

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