by Lawrence Meyers | May 2, 2012 9:40 am
Private equity firm Centerbridge Partners has agreed to buy out P.F. Chang’s China Bistro (NASDAQ:PFCB) for $1.1 billion, coming six months after CEO Rick Federico claimed that he had no intent to sell the company.
So what happened, and what might it mean for other restaurant stocks?
If you’ve ever been to a P.F. Chang’s, then you understand that the food is good, the concept is strong, the service is consistent and the brand is well-known and provides a reliable product.
PFCB had a great period of growth but has struggled in recent years, partially because of the struggling economy, but also because of increasing competition in concept restaurants at different price points. 2011 in particular was difficult for the company, as operating earnings fell 20% on flat revenue, and fell 20% YOY in the latest quarter on flat revenue. Operating cash flows had fallen from $160 million in 2010 to $102 million last year. In short, it looks to me like the chain has run its course domestically.
From my perspective, management clearly decided that if they could get out, this was a great time. Let someone else take on the risk of a turnaround.
From Centerbridge’s perspective, it is buying a solid brand for just about 0.85 times revenues (backing out cash), that generates $125 million in operating cash flow (adding back dividends, which no longer get paid). Private equity doesn’t want to spend big bucks to expand. It wants a cheap way to grow cash flow, and that suggests looking to an international partner to expand the concept, and moving more into licensing the company’s products. We already see P.F. Chang’s food in grocery stores. I suspect Centerbridge wants to license the food the same way Starbucks (NASDAQ:SBUX) has done.
So now that P.F. Chang’s is off the board, are any other restaurants in the same position?
The first place my mind goes to is Cheesecake Factory (NASDAQ:CAKE), and then it quickly moves away. Cheesecake always has been very prudent with its expansion, and while it has roughly the same number of stores as Chang’s, the company continues to grow at a 14% rate. It has incredibly consistent free cash flow, no debt and no reason to take a buyout unless the price is very, very generous.
Brinker International (NYSE:EAT), which owns 1,500 Chili’s restaurants, is no different — plus, it already has international locations.
DineEquity (NYSE:DIN), which owns Applebee’s and IHOP, might be one candidate. The problem here is DIN has $1.5 billion in debt and only generates $100 million in free cash flow. Earnings are struggling and sales are dropping. The other problem here is that there’s nothing unique about the food at these chains. P.F. Chang’s is unique in its approach to Chinese food. And, of course, Chipotle Mexican Grill (NYSE:CMG) remains in a high-growth phase and is too expensive for a buyout.
I suggest you buy restaurant stocks on the basis of their concept, execution and financials, not on whether a buyout is possible.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.
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