CORRECTED-DEALTALK-Soaring valuations in restaurant industry to spur M&A

Fri Jan 17, 2014 9:46am EST

(In paragraph one, corrects the ticker symbol (Reuters instrument code) for Panera Bread Co; in paragraph nine adds missing word "for")

By Olivia Oran

Jan 17 (Reuters) - Several full-service casual dining chains are looking to sell themselves, hoping that strong valuations from fast-growing rivals like Chipotle Mexican Grill Inc and Panera Bread Co mean that deals could be accomplished at favorable prices this year.

Consumers have shunned restaurants that offer table service in favor of faster and cheaper options at the counter, an industry known as fast casual restaurants.

As a result, a number of casual dining chains such as Ruby Tuesday Inc and TGI Fridays are exploring sales processes, people have told Reuters. Others like Dave & Busters and Darden's Red Lobster chain are also considering sales.

These companies have had their own struggles, but are coming to market at a time when valuations in the restaurant sector overall are at all-time highs.

"The valuations for these brands appear pretty lofty in contrast to a pretty crummy operating environment for many of these companies which are rumored to be for sale," said Bob Derrington, an analyst at Wunderlich Securities.

The stock prices of fast casual chains have soared, with companies trading at 23 times their last 12 months' earnings before interest, taxes, depreciation and amortization.

Even casual dining chains whose operating performances have deteriorated in the last several years have seen a spike in valuations. These chains, which traded at roughly nine times their last 12 month's EBITDA five years ago, are now trading at around 12 times, according to market data.

One sizable restaurant deal has already been inked in January - Apollo Global Management LLC's agreement to acquire Chuck E Cheese parent CEC Entertainment Inc for $1.3 billion.

In the last two years, there were only two large restaurant deals: Roark Capital's acquisition of Carl's Jr. parent CKE Restaurants and Centerbridge's purchase of P.F. Chang's China Bistro Inc.

FAR FROM ROSY OUTLOOK

Restaurant stocks have climbed over 46 percent in the last 12 months, according to a restaurant index from investment bank Stifel Nicolaus that includes over 40 different public companies. The gain compares to a 26 percent rise for the S&P 500.

In addition to the soaring stock prices of companies like Chipotle and Panera, restaurant chains looking to sell now can benefit from recent successful public offerings from restaurant chains like Noodles & Company and Potbelly Sandwich Works.

Even so, the outlook for the restaurant industry remains far from rosy.

U.S. restaurant industry sales are expected to top $683 billion in 2014, an increase of 3.6 percent from last year, according to a forecast released last week by the National Restaurant Association. The projected rise would be an improvement from 2008 and 2009, but still lagging pre-recession growth.

Ruby Tuesday said in early January that same-store sales at company-owned stores had fallen 7.8 percent in the fiscal second quarter ended Dec. 3 compared with the same quarter a year prior. It also said it would close 30 U.S. locations.

Red Lobster, which Darden said it would sell or spin off amid pressure from activist investor firm Barington Capital as well as overall softness in casual dining, saw same-restaurant sales decline 4.5 percent in its fiscal second quarter ended Nov. 24.

"There are haves and have-nots in this business," said John Tibe, U.S. joint head of retail investment banking at Jefferies LLC.

It remains to be seen if the sheer number of companies on the market will lead to any deals this time around, given the difficulties many face.

"Buyers are concerned about valuations and how they're going to get an acceptable return especially with larger chains," said Bob Bielinski, managing director of CIT corporate finance, retail and restaurants. (Reporting by Olivia Oran in New York; additional reporting by Lisa Baertlein in Los Angeles; Editing by Michael Erman and Leslie Adler)

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