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Analyst targets possible Darden acquisitions

Mark Kalinowski names BJ's, CPK and Yard House as potential purchases

Speculation that Darden Restaurants Inc. may be shopping for another brand was revived Wednesday by an analyst who pinpointed three West Coast-based chains as possible acquisition targets.

After attending a Darden analyst conference this week, Mark Kalinowski of Janney Capital Markets wrote Wednesday that the chance the company would make an acquisition within the next 12 to 24 months was growing.

Darden officials did not spend much time during their formal presentations talking about potential acquisitions, Kalinowski noted, but they have said earlier that an acquisition was under consideration.

Kalinowski said Darden would most likely seek out a brand to acquire within casual dining that has proven itself in at least two regions and is differentiated in market position to some degree, while offering unit growth potential.

He pointed to BJ’s Restaurants Inc., based in Huntington Beach, Calif., as one brand that fit the profile, as well as Los Angeles-based California Pizza Kitchen and Irvine, Calif.-based Yard House restaurants.

Last year, analyst Steve West of Stifel Nicolaus Weisel wrote that Darden’s management had outlined more specific criteria for a potential acquisition, including a leverageable supply chain, superior unit economics, higher average checks, and the ability to expand nationally and generate around $500 million to $1 billion in sales.

EARLIER: Analyst: Darden open to acquisitions

At the time, West said Darden officials indicated they preferred the categories of steak, Asian or a “differentiated bar-and-grill concept.” Mexican would also be considered.

West also speculated that BJ’s might fit the bill as a bar-and-grill option with strong unit economics and national potential. BJ’s officials did not return calls.

California Pizza Kitchen officials said last year they were looking at strategic options for increasing shareholder value, including a possible sale. CPK spokeswoman Erin Murphy said the company would not comment on the Darden speculation.

Harald Herrmann, Yard House president and chief executive, said bankers and analysts have been interested in learning more about his company’s performance in recent months. But, he said, the company is not currently in talks with Darden or any other potential buyer.

Yard House is owned by private-equity firm TSG Consumer Partners LLC, and Herrmann noted that it’s natural that observers would look for such investor owners to have an exit strategy.

“It’s not a question of if, it’s a question of when. But the when is up to our private equity partners,” he said.

Darden’s last acquisition was in 2007, when it merged with Rare Hospitality International Inc. in a $1.4 billion deal that brought LongHorn Steakhouse and The Capital Grille into its stable.

At its analyst meeting this week, Darden highlighted the long-term growth potential for the 340-unit LongHorn Steakhouse brand, which could add another 300 to 500 locations; as well as the 735-unit Olive Garden brand, which could grow by as many as 200 to 225 units, Kalinowski wrote.

If Darden decides to acquire a new brand, however, Kalinowski speculated that the 25-unit Bahama Breeze’s days in the Darden portfolio may be numbered.

On Monday, Darden raised its outlook for the year based on new cost projections, but said bad winter weather was likely to hurt sales in the third quarter.

At the end of its second quarter, Darden operated 1,852 restaurants under the Red Lobster, Olive Garden, LongHorn Steakhouse, Capital Grille, Bahama Breeze and Seasons 52 brands.

Contact Lisa Jennings at [email protected].

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