DEALTALK-Jack in the Box strong candidate for PE takeout

Tue May 25, 2010 10:53am EDT

* PE firms see topline recovery in sector by late 2010

* Stock's cheaper valuation, low debt catalysts

* Bids around $32/shr seen as fair value

By Renju Jose

BANGALORE, May 25 (Reuters) - As private equity firms continue their hunt for potential targets across the mid-tier restaurant landscape, rumors on who's next to be taken private tend to swirl around fast food chain operator Jack in the Box (JACK.O).

The stock exhibits some of the same features -- cheap valuation and a low debt load -- that made the company's peer CKE Restaurants CKR.N bought out by Apollo Management [APOLO.UL] in April.

"I think, Jack would be the most attractive, at least in my view if I am a private equity investor," Stifel Nicolaus analyst Steve West told Reuters, adding that the stock was cheaper than CKE.

PE firms are betting on a sustained topline recovery at restaurants over the next six to nine months, Director at Fitch Ratings, Carla Norfleet Taylor, said from Chicago.

Cash-generating opportunities at San Diego-based Jack in the Box -- like refranchising revenue and potential asset sales -- as well as lower debt compared with its peers also add to the lure.

"The real kicker is the SG&A leverage, and a sponsor could show and could really eliminate costs out of the structure once the franchises are sold and the Qdoba banner is gone," said Anthony Visano, analyst at Trapeze Asset Management.

The fast food chain, which also operates the Qdoba Mexican Grill restaurants, aims to be about 70 percent to 80 percent franchised by 2013, from about 47 percent now.

Coupled with an anticipated improvement in comparable sales at the company's core markets of Texas and California, this could translate into bids in the low-30s.

"If you sum all that up, you have got $32 (per share), about 14 times reported earnings multiple, which is in line with peers," Visano said.

"I don't see why anyone would fight that ... and that $32 could be $48 in three years."

Trapeze Asset Management owns nearly 1 percent of Jack in the Box's stock.

Jack in the Box shares closed at $22.11 Monday and trade at about 11 times forward earnings. This compares with a restaurant sector average ratio for price to earnings of 16.

BETTING ON TOPLINE RECOVERY

Smaller restaurants, which took a big hit from decreased consumer spending and aggressive discounting by larger chains during the recession, are looking better as the stocks remain cheap even as customers start to return.

"This might be a good (time) to acquire small to mid-size restaurant companies that are currently experiencing a prolonged period of revenue declines ... at reasonable prices," Fitch's Taylor said.

Recently, Mexican restaurant chain Rubio's Restaurants Inc RUBO.O was acquired by Mill Road Capital LP for about $91 million in cash. [ID:nSGE6490O4]

CKE Restaurants, the owner of the Hardee's and Carl's Jr fast-food chains, accepted a $694 million bid from Apollo Management and terminated a lower-priced offer from Thomas H. Lee Partners. Jack's peer Sonic Corp (SONC.O) could also be in acquisition play, though a high debt load at the drive-in chain should give potential acquirers pause.

Sonic did not reply to a request seeking comment, while Jack in the Box declined to comment in an emailed response.

"I have heard people talking about Sonic as well ... but Sonic has a ton of debt already and typically a private equity firm would like to come in and lever up the balance sheet," Stifel's Steve West said.

"You would not be able to do that with Sonic, but with Jack in the Box you could." (Reporting by Renju Jose; Editing by Maju Samuel)

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Comments (1)
JohnAGordon wrote:
The refranchising and G&A leverage could (and is) occuring whether public or private. But the real point is who wins/who loses, how much is the debt, how much is the LIBOR spread, and how does the company and investors really gain in this transaction?

John A. Gordon
Chain Restaurant Earnings and Economics Experts
www.pacificmanagementconsultinggroup.com

May 25, 2010 1:09pm EDT  --  Report as abuse
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