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There’s nothing like a high profile deal in the restaurant space to get the analyst community pondering names that might be mispriced!

The P.F. Chang’s deal that was announced yesterday does not really say much about the overall restaurant M&A environment, but it does appear that CEO Rick Federico and his team struck a deal that was very favorable for shareholders.  Centerbridge Partners agreed to take the company private for $1.1 billion, or $51.50 per share, valuing the company at just over 9x 2012 EV/EBITDA.

PFCB – NICE! - pfcb matrix

On October 27th, 2011, prior to the company’s 3Q11 earnings call, Mr. Federico had the following to say:

“I feel compelled to address recent articles stating the company is either for sale or negotiating a sale.  It has also been a question that has been asked on the last couple of conference calls. But, let me save everybody some time so that you can ask other questions when we get to the end of our formal comments. The rumors are not true, and we have no intent to sell this company. We believe in our plan. We have the capital to execute against it. We think about this business on a longer-term basis than just quarter-to-quarter. We acknowledge it may be bumpy, but unanimously, between our management team and our Board believe this approach will deliver the best value to our shareholders.”

Following this statement, the company’s Analyst Day, and subsequent meetings with the company, we began to buy into the company’s turnaround plan and felt that it was finally going in the right direction.  Price action in the stock started to reflect that sentiment too.  The question is, since October 27th, what changed for management to sell now?  Most importantly, it seems that the price is right.  Sales trends for 1Q, also reported yesterday, were a little soft so there is significant work to do.  What we do not know, importantly, is what April sales trends did in response to the national advertising campaign and lunch promotion at the Bistro.

While the Bistro and the international division seem to be on the right track, Pei Wei continues to be a thorn in the side of management.  Given the significant changes that need to take place at that concept, going private may offer management a better environment in which to expeditiously realign Pei Wei than remaining public would.  Perhaps management hears the footsteps of CMG’s new Asian concept, which is likely to expand aggressively over the coming years, and realizes that a better-performing Pei Wei or derivative of the concept (Pei Wei Asian Market) needs to be refined and brought to market before it’s too late.

Read-Through for Casual Dining

The deal had a positive impact on the group’s price action yesterday but we believe it may have been an overreaction; we are unlikely to see an increase in LBO’s in the space for three reasons:

  1. Small cap growth companies, common in casual dining, tend not to go private but rather seek capital via public markets.
  2. Most executives want to keep their jobs.
  3. As with the P.F. Chang’s deal, the typical restaurant deal is for a mature brand that needs to spend some time out of the public scrutiny to right size the ship.  Outback is the classic example of this.  Burger King, on the other hand, refloating just eighteen months after being taken private is just deal makers doing a deal for the sake of it.

In the case of P.F. Chang’s, this could have happened at any point over the past couple of years.  Despite Mr. Federico’s statement in late October, disavowing the possibility of the company being acquired, we saw it as a possibility that made us nervous at that point.  In a note titled “TOO EASY FOR TOO LONG”, on 11/21/11, we wrote, “I don’t want to buy a cheap stock on the “hope” that I get bailed out by some PE firm.  I also don’t want to short a stock that could fall prey to some activists or PE firm taking the company private.”  CHUX and MSSR are two other examples of where it did not pay to hang around on the short side.

Yesterday’s Price Action

Following yesterday’s deal, KONA, TXRH, and DIN were the best performing names besides PFCB.  TXRH was upgraded yesterday. 

CAKE and RT were next in line with RT having a spotlight on it given that it trades at a significant discount to the group.  RT’s leverage ratios and the news yesterday that the company is doing a debt deal make it an unlikely candidate for going private any time soon. 

BWLD popped 2% yesterday but we are confident that it is not going private.  The company is in the market to overpay for a rapidly growing restaurant asset.  BWLD remains one of our top shorts.

DRI outperformed EAT yesterday, but DRI has been underperforming lately due to legitimate concerns about the performance of the Olive Garden and Red Lobster brands.  DRI is not going to go private, but EAT is a possibility, albeit a remote one.

RUTH was down on the day.  This company may be better off as a private company or even under the wing of a larger organization like BWLD.

Howard Penney

Managing Director

Rory Green