* 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 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
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 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.
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)