In late February, CKE Restaurants, Inc. (CKR) agreed to be acquired by Thomas H. Lee Partners, a private equity firm, for about $928 million, including $309 million of net debt. Under terms of the agreement, CKE had the right to search for a better offer, and in early April the company got one.
After going through due diligence, CKE announced that it was canceling the deal with Lee and accepting an offer from Apollo Management VII, L.P., valuing CKE at about $1 billion. That’s a fraction of McDonald’s Corp.’s (MCD) market cap of about $76 billion and about a third of the market cap for Burger King Holdings Inc. (BKC). CKE’s market cap is about $680 million, so Apollo’s offer represents a 40% premium.
CKE’s share price took a big bounce when the deal with Lee was announced, from $8.91 to $11.37 in one day, up 28%. The shares are trading at about $1 higher today, down a little from Friday, when the stock set a new 52-week high.
CKE, which owns Hardee’s and Carl’s Jr. restaurants, has been trailing its larger competitors’ growth rates since last October and would still be way behind were it not for the buyout offers. Apollo, and its founder Leon Black, were among the first private equity firms to go after distressed companies and the company grew to where it now holds about $50 billion in assets.
But Apollo has done some deals recently that haven’t worked out too well. The company bought Linens ‘n Things, which has since filed for bankruptcy and Harrah’s Entertainment is restructuring debt in an effort to avoid bankruptcy. Real estate firm Realogy and retailer Claire’s stores have also announced distressed-debt buybacks. Apollo’s offer to buy the Great America amusement park in California for $635 million has also run into opposition from a couple of large shareholders.
Apollo’s $3.8 billion purchase of General Electric Co.’s (GE) silicone plants is lost almost a billion dollars last year under the name Momentive. Sales at CKE are expected to be no better than flat for the current fiscal year, and profits are expected to be down, from EPS of $0.87 in 2009 to an estimated EPS of $0.81 for 2010.
Hardee’s and Carl’s Jr. have been struggling and, without the Lee offer and subsequent sweetening by Apollo, CKE would still be struggling to get back to even with a year ago’s share price. It’s hard to discern what Apollo sees in this deal, but then they bought Linen ‘n Things too. The company must issue rose-colored glasses at the door.