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Despite credit crunch, deal making looks healthy in ’08

Even as the nation’s credit crunch promises to slow the pace of deal making in the restaurant industry, operators still can anticipate a healthy merger-and-acquisition environment in the year ahead, investment professionals said.

Deals will take longer, and the number of transactions and valuations no doubt will decrease compared to the past few years, observers said. But with public companies trading at historic lows, some concepts still promising healthy returns and a large number of corporate-owned restaurants slated to be refranchised, bankers, lenders and buyers will stay busy in 2008.

Nation’s Restaurant News took a look at two dozen publicly traded restaurant companies that sources have speculated are ripe for buyouts—either because of historically low stock prices, room for leverage on the balance sheet, or investor impatience and pressure for increased returns.

The buyout targets range from the largest of companies, such as Brinker International Inc., which has a stock price that has been trading within $1 of its 52-week low and holds a debt-to-EBITDA ratio of just 1.8, to the smallest, such as Max & Erma’s Restaurants Inc., which has been rumored to be looking for a buyer for some time and posts an attractive latest-12-month enterprise-value-to-EBITDA ratio of 5.3.

BUYOUT TARGETS?Even with the current credit crunch, deals will get done, experts say. These restaurant companies could fit a buyer’s profile.

TEV/EBITDADefinitions: LTM = latest twelve months; TEV = total enterprise value; EBITDA = earnings before interest, taxes, depreciation and amortization; NA = not available; NM = not meaningfulSOURCE: COMPANIES SELECTED BY NRN; DATA PROVIDED BY: BB’T CAPITAL MARKETS (SOURCED FROM CAPITAL IQ, BLOOMBERG, AND SEC FILINGS)
Benihana Inc. BNHN$14.40$33.8242.58%$229.72$40.706.1x5.6xNA
Brinker International Inc.EAT23.3935.7465.442,509.61528.646.4x7.0x1.8x
Buca Inc. BUCA1.226.3919.0923.825.797.3x5.7x3.3x
California Pizza Kitchen Inc. CPKI15.0325.2359.56449.7967.036.8x5.2x0.3x
Caribou Coffee Company Inc. CBOU4.619.2749.7391.8216.865.1x6.0xNA
CKE Restaurants Inc.CKR14.2123.2461.14826.81159.756.9x6.7x1.8x
Così Inc.COSI2.286.7733.6891.77NMNMNMNM
Flanigan’s Enterprises Inc.BDL8.1512.3066.2615.263.776.9xNA1.6x
Frisch’s Restaurants Inc. FRS27.7138.3272.31144.4929.306.3xNA1.4x
Granite City Food & Brewery Ltd. GCFB3.346.6150.5354.731.05NM14.8xNM
J. Alexander’s Corp.JAX11.0915.3972.0674.1913.586.3xNA1.6x
Jamba Inc.JMBA3.2212.2526.29189.37NANA13.1xNA
Krispy Kreme Doughnuts Inc. KKD2.5513.9318.31170.9315.8615.3x7.5x6.1x
Landry’s Restaurants Inc. LNY21.7132.3067.21357.17169.866.8x6.1x5.2x
Luby’s Inc.LUB10.6211.8389.77299.8433.388.2x7.9xNA
Max & Erma’s Restaurants Inc. MAXE2.509.6325.966.399.425.3xNA4.9x
McCormick & Schmick’s Seafood Restaurants Inc. MSSR15.0130.9848.45229.2531.267.9x5.9x0.6x
Mexican Restaurants Inc.CASA6.6011.7056.4122.494.196.9xNA1.6x
Morton’s Restaurant Grp. Inc. MRT12.2020.8258.60222.8129.089.5x5.6x2.0x
O’Charley’s Inc.CHUX13.8723.4559.15321.8694.794.9x4.8x1.5x
Panera Bread Co.PNRA35.2962.7856.211,132.38143.407.8x6.3xNA
P.F. Chang’s China Bistro Inc.PFCB25.0547.1053.18672.62105.067.7x6.8x1.2x
Rubio’s Restaurants Inc.RUBO9.2512.9871.2694.6212.197.4x4.8xNA
Steak n Shake Co. SNS10.8318.1059.83311.1865.987.1x7.6x2.9x

Speculation also is circulating that active restaurant industry purchasers may target companies such as O’Charley’s Inc., Luby’s Inc. and Steak n Shake Co., all of which have reported increased investor pressure in recent months. All three companies have seen hedge funds increase their respective holdings and become more vocal about changes to capitalization or ownership.

“Valuations are going to come back to historical norms from the high-single or double-digit numbers we’ve seen over the past 12 to 18 months,” said J. Jason Myler at Boston-based BB’T Capital Markets, Investment Banking. “With credit tightening and financing packages taking on new—or actually old—terms, it’s inevitable that valuations are going to slide.”

No one yet knows how far valuations will drop, Myler said, or whether they will rebound should the economic environment improve. That would prompt consumers to spend more, which could lead to better restaurant performance and growth projections that could lead to better returns on investment, he noted. Currently, however, there is “pain on all sides,” he said.

“Even beyond the take-private world, you have sellers saying to buyers, ‘Yesterday my business was worth $100 million and today you’re telling me it’s worth $85 million?’” he said. “Plus, on the buyer side, there is pain with lenders and their new terms. The landscape is shifting on both sides.”

Despite a wait-and-see approach to mergers and acquisitions, however, deals will get done, observers said.

“Strategic buyers will re-enter the process, and opportunities will be there,” Myler said, “and you can’t ignore the huge amount of capital that needs to get put to work.”

Scott Norrick, principal at Chicago-based Hospitality Investment Advisors LLC, also predicts healthy transaction counts in the years ahead.

“There will still be activity,” he said. “It may shift from the financial buyers and private-equity groups…but with the pullback in prices, you may see more activity from strategic players.”

Before starting Hospitality Investment Advisors, Norrick was a senior vice president of development at Steak n Shake and more recently at Darden Restaurants Inc. He said that even though he predicts a pullback from the private-equity-led buying spree the restaurant industry experienced from 2005 through 2007, some industry-focused private-equity funds could be interested in acquiring another concept to gain leverage on the cost side.

“What you may see is a firm looking to leverage multiple concepts,” Norrick said. “A company with a pretty strong management team is attractive, where they could garner G&A savings with a second concept.… It’s both a financial and a strategic deal.”

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