On the Margin
Expect more chains to go private

Expect more chains to go private

This post is part of the On the Margin blog.

Country Style Cooking Restaurant Chain Co. said Friday that it is going private in a merger with a couple of investment companies.

CSC is a little known company, at least in the U.S., because it is a Chinese concept that is publicly traded here.

But consider it a sign of things to come. A few publicly traded domestic companies could go private in 2016, as valuations in the restaurant industry are starting to come down, and performances at more chains could draw questions from investors.

As it is, the IPO market is cooling down. The decision by Jimmy John’s not to go public, and then the delay in the secondary offering by The Habit Restaurants Inc., both served as signals that the once red-hot market for companies looking to go public has cooled off.

Restaurant stocks, meanwhile, have come down from their lofty heights in recent months amid concerns about sales, interest rates and a slowing economy.

For much of the past two years, restaurant valuations were too high for many private-equity groups to consider a buyout. In general, private investors don’t want to pay much more than 10 times cash flow to take a chain private. And restaurants at their peak were averaging well over that — effectively pricing them out of the take-private market.

And any chain that was trading at lower levels was considered too weak a player for a buyout.

Declining stock prices will change that. All but six of the restaurant chains we track at Nation’s Restaurant News are down over the past six months. All but 11 are down over the past year.

That could bring down the market value of chains that still have plenty of room for improvement, which is what private-equity investors are looking for in a buyout — because those private-equity groups will one day want to take that company public again or sell it to someone else.

At the same time, interest rates remain low, despite the Federal Reserve’s recent decision to start raising interest rates for the first time in years. Low-cost debt would provide the fuel for many private-equity groups to buy out publicly traded restaurants.

Country Style Cooking went public five years ago, and its stock at one point was trading at more than $25 per share. But it has fallen steadily since then, particularly recently amid disappointing sales — same-store sales fell 10.7 percent in the company’s third quarter, for instance. The stock was trading at below $5 per share. The company received a go-private proposal in August from a pair of Chinese investment companies and entered into an agreement on Friday.

Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze

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