California Pizza Kitchen Inc. became the latest restaurant company to delve into the deal making fires, which some analysts have said are heating up after transactions for CKE Restaurants, Papa Murphy’s and the Monday announcement for the purchase of Wingstop.
Los Angeles-based CPK said Monday its board of directors has authorized management to consider various options for enhancing shareholder value, which could include a possible sale, merger, changes to capital structure or other business combination. The company has hired Moelis & Company, a global investment bank, as its financial adviser.
CPK, which operates or franchises 253 namesake casual-dining locations, said it would not comment until its board of directors approved a course of action, but that no action is guaranteed.
Analysts have already speculated on a possible buyout.
“We think CPK is testing the waters to see if they can get an acceptable bid,” securities analyst Larry Miller of RBC Capital Markets said in a report Monday. “With [Hardee's and Carl's Jr. parent CKE Restaurants Inc.] being the first to garner an offer … we have suspected more deal activity.”
CPK’s announcement followed reports last week that the company was seeking private-equity buyers, which sent its stock price up 14 percent on Friday, to close at $20.74 per share. Shares on Monday rose another 10 percent to $22.92 in early trading, and finished up 2.1 percent to $21.07.
Most analysts said a buyout seems most plausible, given CPK’s long-term growth prospects, the additional revenue channel offered by its branded frozen foods line, as well as its healthy cash flow and low debt load.
In addition, analysts agreed that CPK management could ratchet up stalled unit growth to pre-recession levels of between 8 percent and 10 percent if the economy continues to improve, eventually reaching more than 500 full-service units.
“Given [CPK’s] small-cap status — $510 million market cap — and favorable balance sheet, we would not rule out an all-cash transaction from private equity,” Stephen Anderson, a senior analyst with MKM Partners, said in a report Monday.
Anderson also noted that a merger with another restaurant company may make sense, with the most likely suitors having low leverage and strategic interest in the upscale casual-dining space. He mentioned Darden Restaurants Inc., parent to the Olive Garden and Red Lobster brands, as a possible buyer that would fit the profile, although the Orlando-based company is likely focused on its 2007 acquisition of Rare Hospitality, and its debt reduction efforts.
Other analysts noted that the leak of news about CPK’s plans could have damaged efforts for the company to garner the right price.
“While we view the search for strategic alternatives as further evidence that private equity is finding value in restaurants at current valuation levels, we believe that the premature leak of the news has damaged [CPK’s] ability to garner an offer that will represent a measurable premium to current levels,” said Brad Ludington, an analyst with KeyBanc Capital Markets Inc.
David Tarantino, an analyst with Robert W. Baird & Co., also notes that a financial buyer would be difficult to find, given that CPK is now valued at more than eight times its earnings before interest, tax, depreciation and amortization, which is more expensive than the 7-to-8-times average multiple for comparable transactions.
Nevertheless, recent deals have fueled the belief that the restaurant merger-and-acquisition market is heating to a frenzy after a drought caused by the lingering recession and lack of access to credit.
CKE Restaurants Inc., for example, which is the Carpinteria, Calif.-based parent to the Carl’s Jr. and Hardee’s chains, is in the process of considering rival buyout bids. One from private-equity firm Thomas H. Lee Partners and another from Apollo Management. Earlier this month, private-equity firm Lee Equity Partners signed an agreement to purchase Papa Murphy’s International, the 1,200-unit take-and-bake pizza franchisor. On Monday, an affiliate of private-equity firm Roark Capital Group announced the acquisition of Richardson, Texas-based Wingstop Restaurants Inc., parent to the 440-unit chicken-wing chain.
Also on Monday, CPK reported preliminary first-quarter results, including a same-store sales decline of 2.7 percent. Total corporate revenue for the quarter ended April 4 fell 2.7 percent to $156.7 million. The company is scheduled to report full results for the quarter on May 6.
CPK’s preliminary results were better than expected. In February, company officials said same-store sales were expected to fall between 3 percent and 4 percent. As a result of the improved sales trends, CPK raised its earnings estimate for the first quarter to 10 cents per share, compared with earlier expectations of earnings between 5 cents and 7 cents per share. The forecast includes a benefit of about 3 cents per share from gift cards not yet redeemed.
Rick Rosenfield and Larry Flax, CPK’s co-chief executives, said sales in February and March surpassed expectations, thanks in part to initiatives such as the launch of a call center to improve off-premise sales, a new catering program, expanded wine offerings, and a new “Small Cravings” menu including smaller-portioned and lower-priced options.
Contact Lisa Jennings at [email protected].
