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Analysts name next restaurant buyout targets

Private-equity interest in the restaurant industry is growing by the day, analysts and industry observers have noted, and a working list of which companies are next for a possible buyout is getting longer.

Since February, a plethora of deals have closed or are in the making. CKE Restaurants Inc., which owns the Hardee’s and Carl’s Jr. brands, is debating two private-equity offers, one from Thomas H. Lee Partners valued at $928 million, and a potentially larger offer reportedly from Apollo Management. Papa Murphy’s International was sold to Lee Equity Partners for a reported $180 million, and Wingstop was recently purchased by Roark Capital Group, a private-equity player with numerous restaurant and franchise brands.

In March, Brinker International Inc. sold On the Border Mexican Grill & Cantina to Golden Gate Capital, a firm that purchased the majority of Romano’s Macaroni Grill last year. And earlier this month, California Pizza Kitchen Inc. said it was exploring strategic alternatives, which analysts have said may end up in a sale to a private-equity buyer.

A working list of the next restaurant companies that may be ripe for private-equity purchasing came out last week from Jefferies & Co. analyst Jeff Farmer. He looked at recent increases among restaurant stock prices to gauge whether investors may have priced in expectations of possible buyouts. Eleven small- and mid-cap restaurant stocks have increased more than 35 percent since the CKE bid was announced in February, Farmer’s research showed.

Farmer’s four potential acquisition candidates:

* Jamba Inc. (JMBA)
* Morton’s Restaurant Group Inc. (MRT)
* Red Robin Gourmet Burger Inc. (RRGB)
* McCormick & Schmick’s Seafood Restaurant Inc. (MSSR)

He noted that share prices for both Jamba and Morton’s Restaurant Group have increased more than 70 percent since February, when the CKE buyout offer was announced. Red Robin shares have jumped 37 percent since then, and McCormick & Schmick’s shares have increased 41 percent, Farmer said. He added that lower debt levels and improving sales trends could favor more attractive buyouts for Red Robin and McCormick & Schmick’s.

Meanwhile, Stifel Nicolaus analyst Steve West called out Jack in the Box Inc. (JACK) as one of the industry’s next potential takeout targets in a research note in February.

In a follow-up interview last week, West said he still believes Jack in the Box may be the next company to go private.

“I still think it’s the take-out target in the group,” West said.

West noted that Jack in the Box has “relatively zero debt” compared with the rest of the restaurant industry and that the company’s value could be heightened because of its Qdoba brand and in-house distribution system. West said a private-equity firm could get $35 a share for the company. Jack in the Box’s stock closed at $24.78 on Friday, and has traded between $17.84 and $28.35 during the past 52 weeks.

Jack in the Box and Red Robin each declined to comment, citing company policy to not discuss buyout speculation.

Jamba, Morton’s Restaurant Group and McCormick & Schmick’s did not return calls seeking comment by press time.

Contact editor Sarah E. Lockyer at [email protected].

TAGS: Finance News
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