Zoe’s Kitchen’s Path to Recovery: Go Private

Last week, fast-casual Mediterranean chain Zoe's Kitchen (ZOES) surprised investors by delaying the release of its second quarter 2018 results. The next morning, the company announced it had reached an agreement to be taken private for $12.75 per share -- cashing out shareholders after a particularly rough year-and-a-half stretch.

In this segment from Industry Focus: Consumer Goods, the cast breaks down Cava Group's $250 million offer, the fast-casual legend backing it all, and how Zoe's can get a fresh start under new leadership.

A transcript follows the video.

This video was recorded on Aug. 21, 2018. 

Vincent Shen: Alright, let's move on to the deal now. We have a little bit of this backdrop, this context for Zoe's, where it's come from since its IPO in 2014. After just over four years as a publicly traded company, it's being taken private again. 

At first glance, it's an odd situation, because Cava Group, the buyer, is a smaller chain with only 66 restaurants to Zoe's 261. I'm a huge fan of Cava, which has over 15 locations around D.C. alone. You'll catch a lot of Fools grabbing a bite to eat there. It's really the buyers, I think, that make this such an interesting transaction. Can you tell us a little bit about the story there?

Nicholas Rossolillo: Yeah. Cava Group came in with an offer of $12.75 per share for Zoe's to take the company private again. That values the company at $250 million, below the debut IPO price that you mentioned earlier for Zoe's investors. For long-term investors, probably not a lot to be happy about here. However, given the report on Friday and seeing that Zoe's numbers continue to deteriorate, things may have been about ready to get worse before they got better. This could be some short-term reprieve for investors in the company, with this buyout press release. 

It's also interesting, just this morning, several institutional investors have come out and actually said that they think that this $12.75 per share price is too low. Part of this deal is that another suitor can come in within the next month and offer a higher bid for Zoe's. It'll be interesting to see if someone else does come in and say, "Hey, we actually think this company is worth more. There's more potential than this $12.75 share price that's been offered so far."

Shen: I'll add to that, this go-shop period for Zoe's, it's about a 35-day period where they can basically go out and seek other buyers and potentially higher bids for the company. An interesting development, in terms of this deal. But on the other side of that, in terms of this deal value and who might be really happy about that, we have, on Cava's side, its CEO, Brett Schulman, he's going to take the reins for the combined company. They did not have the funds to come up and make this deal by themselves. 

They're also getting a big equity infusion from Ron Shaich, who's taking the chairman position. If that name sounds familiar, it's because Shaich was the man essentially behind Panera Bread, former CEO. That company was bought out last year. Since then, he's formed this fund, Act III Holdings. They're focused on finding these niche opportunities in the restaurant industry and consumer-facing industries. When it comes to the restaurant fast-casual space, Mediterranean cuisine definitely seems like a ripe niche opportunity for them to jump on. You've managed to combine, here, two of the most popular names in this space, between Zoe's and Cava. I think having Shaich's guidance is going to be a major positive for Cava going forward, given his experience growing fast-casual businesses. 

You mentioned previously, when we were prepping for the show, investors not being too pleased with the buyout price since Cava is coming in at the absolute lowest point, essentially, in Zoe's trading history. On the flip side, the value there, you definitely see that for Shaich and Cava. At least from what I've seen -- and I was talking with some Fools about this, too -- the number of candidates that we could think of putting in a better offer, a better bid for Zoe's, it's very slim. It would essentially be a tuck-in. Not exactly a lot of other restaurant chains in this Mediterranean niche that can really do this. It would have to be a completely new addition, essentially, for a bigger chain. Again, the prospects for that, I think it's great to have the option. I'm curious to see whether any bids actually materialize. 

Rossolillo: That's the golden question right now. Who can do it? 

Shen: Exactly. Final point, Nick, I'll ask you this -- if this deal goes through in its current form, what do you think is next for Cava and Zoe's? I know it will be a private entity, outside of the public market's view. I'm curious what you think some of the levers are that Shaich and Schulman might pull to bring Zoe's chain specifically back to growth. What can they do?

Rossolillo: Shaich obviously has a lot of experience in growing a national brand, a successful fast-casual brand. That's probably going to be a point of emphasis for Cava and Zoe's. Between the two, a little over 300 total locations but still only in 24 states total. Still lots of room for growth across the country. Then, obviously, shoring up those existing Zoe's locations that are confounding investors with those quarterly losses going on two years now. That's probably going to be the two areas of focus, is taking the brand national, getting more exposure out there to consumers, and then figuring out what's wrong with the actual business itself right now, that consumers are headed for other pastures.

Shen: Last thing I'll mention, which is covered in the release, is that, at least at this point in time, Cava has mentioned that they do intend to keep Zoe's as a distinct, separate chain, maintaining that brand name, since it does have, at this point, the bigger base and probably larger recognition.