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The Restaurant Industry Gets a Little More Concentrated

By Motley Fool Staff - Aug 21, 2018 at 10:20PM

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Cava Group tucks the struggling Zoes Kitchen under its wing, giving the chain a better chance to thrive.

Zoes Kitchen (ZOES) was snapped up by Cava Group last week, and Zoes' shareholders had their first good day in a while.

In this Motley Fool Money clip, host Chris Hill together with Motley Fool contributors Jason Moser, Ron Gross, and Andy Cross discuss the deal and what it means for Cava, Zoes Kitchen, and the restaurant industry at large, and whether or not a 33% premium for a struggling restaurant was too much to pay.

A full transcript follows the video.

This video was recorded on Aug. 17, 2018.

Chris Hill: Shareholders of Zoes Kitchen got some welcome news on Friday. Cava Group is buying Zoes Kitchen for $300 million. That is a 33% premium of where Zoes' stock had been trading. Good news, Jason!

Jason Moser: I think this is very good news if you're a Zoes' shareholder, this is probably about the best you can expect. If you look at the actual business itself, it's just in a really tough bind right now. Sales simply aren't growing. Difficult to get consumers into the doors when they don't really have a reputation for ... any kind of product. We discussed this earlier in the meeting, like, "What exactly do they serve, now? Is it Mediterranean? Is it Greek?" Ron, what did you say? It was shish kebab, but it's like it's made by Americans? Not really authentic.

Ron Gross: Yeah, that's a good way to put it.

Moser: If you don't have that angle, then it's very difficult, really, to keep on growing traffic. I think that's where Cava really shines. So, combining the two together, maybe that makes sense. Interesting to me that they're going to be maintaining the separate branding. Perhaps Cava's management's going to get in there, I think, tinker with the menu there at Zoes Kitchen somewhat. That gives them a tremendous presence there, in a number of more states than Cava currently exists. And after all is said and done, you've got a guy named Ron Shaich as the chairman of the new company there. I think they'll very much benefit from his experience, as well as current Cava leadership.

Hill: You look at the footprint of Cava and the footprint of Zoes Kitchen is so much bigger. You don't think they're going to take some of those locations and just flip them into Cavas? 

Moser: I wouldn't be surprised if they did, but, based on the language in the release from Zoes, it sounds like they do intend on maintaining the two brands, at least for now. But that remains to be seen, how that ultimately shakes out.

Hill: Am I the only one surprised, not that Zoes Kitchen got bought, but at the premium that was paid? Andy, this is a business that's really struggled. Not that they wanted to necessarily get it in the cheapest way possible, but a 33% premium seems high. 

Andy Cross: Just based on my self-studies of looking at acquisition prices, if you're not paying more than 30% over some average recent price, getting shareholders on board, to sign off on that deal, may be a little bit hard. Even for a company like Zoes. So, it doesn't seem like it's a great asset for current investors, but for investors like Cava to pay that price, it may be well worth it. 

Moser: Yeah, and Zoes is mostly company-owned stores, right? They're not having to deal with that franchise angle. I'm sure that's worth a little bit of a premium. But I mean, it's worth noting that the stock has pretty much just been on a downward spiral since it went public. 

Hill: If it's hard to get shareholders on board if there's not a premium somewhere in the neighborhood of 30%, what does that bode for shares of Tesla? The $420 buyout price that Elon Musk was talking about, at the time, that was only about a 13-15% premium.

Cross: I said it earlier on one of our shows, I think they're going to have to raise that price eventually.

Moser: It's a bit more of a premium today.

Gross: That's true. 

Cross: That's right. Yeah, exactly. Exactly.

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