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On March 17, we posted a note titled “Feels like 2007” - in that post we provided a list of restaurant companies that could be on the “A” list for a private equity transaction and/or for becoming victim of the rumor mill.  Here is the list again: CAKE, PFCB, MSSR, TXRH, BOBE, EAT, CHUX, RRGB, PEET and CPKI.

Late Friday, the WSJ reported that private equity firms are among those considering an acquisition of CPKI.  In the CKE Restaurants proxy filed back on March 17, it was revealed that three other private equity firms were taking a look at the books of CKE Restaurants.

Today CPKI announced 1Q10 same store sales of (2.7%) and revenues of $156.7M vs. consensus of $157.2M. It is also guiding 1Q10 EPS to $0.07 vs. prior $0.05-0.07; EPS excludes an approximate $0.03 benefit for gift card breakage - consensus is $0.07.  More importantly, the company CPKI announced that its board has authorized management to consider a wide range of financial and strategic alternatives to enhance shareholder value.  Included in the announcement was the statement that “Financial and strategic alternatives may include, but are not limited to, changes in the company's capital structure, or a possible sale, merger or other business combination.”

If management is looking to sell the company because they want liquidity (the co-CEO owns 8% of the company) I can understand that, but changing the capital structure will not create shareholder value.  Moelis & Company are going to produce a table for management that will look something like the table below.  The format is taken from the CKE Restaurants proxy as part of the fairness opinion that was used to justify the THL offer for CKE.  

For the purposes of a comparative valuation for CPKI, we used BJRI, TXRH, CAKE, BWLD, DRI, PFCB, RUTH, EAT, BOBE and RRGB.  These companies represent a mixture of regional and national brands that have both meaningful and limited growth opportunities.  CPKI’s presence in the supermarket channel gives it national brand characteristics, with a regional concentration of restaurants.  Given the turmoil of the past year, historical numbers are important for context to the risks of the business but, not that representative of the growth potential over a typical 5-7 year holding period for a private equity firm.  That being said, a fair range of $20 to $25 is possible, with $22 looking likely.   

Lastly if a bidder does emerge for CPKI in a range of $20-$25, the acquisition price will be significantly higher than what THL is offering for CKE restaurants.  THL is currently offering $11.05 for CKE, which I think not a great price for shareholders.  I think the price should be closer to $14-$15. 


Howard Penney

Managing Director