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Analysts weigh in on CPK buyout

Most upbeat on deal with Golden Gate, but one investor group pushes for alternative plan

Securities analysts were generally positive that Golden Gate Capital’s proposed $470 million buyout of California Pizza Kitchen Inc. would be beneficial for the casual-dining brand’s turnaround.

However, at least one activist investor group expressed dissatisfaction and urged the company to consider other alternatives.

Los Angeles-based CPK announced the deal early Wednesday, saying the San Francisco-based private-equity firm would pay $18.50 a share for the company. The per-share price represents about an 11-percent premium over Tuesday’s closing price, and a 15-percent premium to its 30-day average stock price, analysts said. Golden Gate said it would begin its tender offer by June 8.

The deal, which is expected to close in the third quarter, comes a little over a year after the Los Angeles-based parent of 265 casual-dining restaurants said it would seek strategic options, including a possible sale.

EARLIER: CPK latest restaurant to seek a deal

Like most in the casual-dining space, CPK took a hit during the recession, with same-store sales falling 6.6 percent in 2009 and down 2.4 percent in 2010. In its most recent first quarter, CPK reported declines in profit and revenue as same-store sales declined 2.1 percent.

“We are very excited as we open a new chapter in the very successful history of CPK,” Rick Rosenfield and Larry Flax, the restaurant company’s co-chief executives and co-chairmen, said in a statement Wednesday. “Golden Gate Capital is a leading investor in the restaurant industry, with a proven track record as a value-added partner to its portfolio companies, and we believe that its significant commitment and experience in the sector will benefit all of our stakeholders.”

The Clinton Group, which with affiliates owns about 5.1 percent of CPK’s shares, however, expressed concern about the deal, saying in Securities and Exchange Commission filings Wednesday there may be better alternatives to maximize shareholder value.

The investor group suggested, for example, that CPK consider a leveraged recapitalization and self-tender offer at or above $19.50 per share.

Clinton Group said it planned to discuss with CPK’s board its concerns over the proposed buyout, including a management succession plan, questions about executive compensation and accountability.

Clinton, which also is a shareholder in Red Robin Gourmet Burgers Inc., is among the activist investors that have pushed for changes at that company, including the ouster last year of then-chief executive Dennis Mullen.

Analysts said Wednesday CPK’s co-CEOs, Rosenfield and Flax, are expected to stay with the company if the Golden Gate deal goes through. CPK said in its annual report that Rosenfield, Flax and chief operating officer Sue Collyns had extended their employment contracts through December 2012.

Securities analyst Conrad Lyon of B. Riley & Co. in Los Angeles said he would feel better about CPK’s future if Rosenfield and Flax remain in charge.

“My fear is when you have a financial entity taking control, rather than a strategic one,” he said. “A large risk with a financial buyer is that they might not be as strong with execution.”

Golden Gate’s restaurant properties include On The Border Mexican Grill and Romano’s Macaroni Grill, two casual-dining brands it acquired at different times from Chili’s parent company Brinker International Inc. The firm also has invested in several retail concepts, including Eddie Bauer, Zales and Express.

“The business that the CPK team has built, with its great product offerings, makes it an ideal fit with our long-term oriented approach to investing,” Josh Olshansky, a managing director with Golden Gate Capital, said in a statement Wednesday.

Observers, however, gave mixed views about how the private-equity firm’s restaurant brands have fared so far.

Golden Gate has owned Macaroni Grill the longest -- since 2008 -- though Brinker retained a minority interest in that brand. Lyon said he feels that Macaroni Grill has suffered in quality and service since Golden Gate took ownership.

Craig Weichmann of Weichmann & Associates, a boutique mergers and acquisitions consultant based in Greenville, Texas, had a different impression.

“All indications show they’ve done a good job in ownership of [On The Border and Macaroni Grill], in putting in management teams and bringing in capital,” he said.

For Macaroni Grill in particular, Weichmann added, “the word so far is very positive that progress is being made in what is still a bad operating environment.”

For CPK, Weichmann said it likely would be easier to stage a turnaround as a private company.

“One of the benefits of being private versus public is you don’t have to tell everybody how well or how poorly you're doing,” he said. “Things need to be done to strengthen operations, but it can be done in the silence of not being under the microscope as a public entity.”

A look back at California Pizza Kitchen’s history

Attorneys Rosenfield and Flax founded CPK in 1985, opening their first location in Beverly Hills. The two then-budding restaurateurs hired the late Ed LaDou, the first pizza maker at Wolfgang Puck’s Spago who is often credited as the father of California-style wood-fired pizza made with non-traditional toppings.

Flax and Rosenfield later said the relationship with LaDou didn’t work out and he left the company. But the pizza maker left behind what would become the company’s top-selling menu item: barbecue chicken pizza.

The two began growing the concept, reaching 26 locations by 1992, when PepsiCo bought a controlling stake in the company and rapidly expanded its growth.

Private-equity firm Bruckmann Rosser Sherrill & Co. bought out PepsiCo in 1997 and took the chain public in 2000, raising $72.5 million. Flax and Rosenfield remained on the board, but turned day-to-day control over to a new management team, a decision they would later regret.

In 2003, the board asked Flax and Rosenfield to take the reins again, and they have remained at the helm ever since.

New initiatives under way

Over the past few months, CPK has focused on menu optimization by trimming low-performing dishes from the menu, a move that has also helped lower back-of-the-house labor costs, CPK officials told analysts earlier this month.

In June, a new menu will introduce nine new items as well as a new emphasis on health and wellness. The chain also is increasing menu prices by 0.7 percent, the first increase in almost two years, to help offset rising commodity costs.

EARLIER: New menu at CPK focuses on wellness

In addition, CPK said it would shutter underperforming units and has ended its experiment with a fast-casual variant called CPK ASAP and closed one of two locations of its secondary brand LA Food Show.

Two underperforming corporate CPK locations were scheduled to close in the second quarter, and the company said it would continue to prune such restaurants from its portfolio as leases come due.

Brad Ludington, an analyst with KeyBanc Capital Markets in Dallas, said the rampant growth during the period when Flax and Rosenfield were away from the helm resulted in some poor real estate choices that are dragging down results now.

“There are around 30 to 40 restaurants that they need to look and potentially close,” he said. “As a private company, they might have the opportunity to make those kinds of decisions faster.”

Contact Lisa Jennings at [email protected].
Follow her on Twitter: @livetodineout

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