What happened
Darden Restaurants (DRI 0.15%), the parent company of the Olive Garden, Longhorn Steakhouse, and Cheddar's restaurant chains, among others, is acquiring upscale steakhouse operator Ruth's Hospitality Group (RUTH), in a deal valued at about $715 million. Darden stock was essentially flat on the news. However, shares of Ruth's Hospitality were up by a whopping 33.8% as of 12:33 p.m. ET to a level just a few cents shy of the deal price of $21.50 per share.
So what
In late March, on Darden's fiscal 2023 third-quarter conference call, an analyst asked CEO Rick Cardenas about the possibility of making an acquisition. "We'll talk to our board when the right opportunities come to play, and we'll be ready when they do," Cardenas replied. The right opportunity was apparently Ruth's Hospitality.
The deal between these two restaurant companies has already been unanimously approved by both boards of directors. Darden intends to pay the $21.50 per share in an all-cash transaction, and believes it has enough resources that it won't need to seek additional funding.
Now what
Darden shareholders may want to dial in at 8:30 a.m. ET Thursday to management's conference call, when it will explain more of the rationale behind the deal for Ruth's Hospitality. From a concrete financial perspective, not much was said Wednesday, other than that management believes the deal will add between $0.10 per share and $0.12 per share to Darden's earnings per share in the company's fiscal 2024, which will begin May 29.
For some investors of Ruth's Hospitality, this might be a disappointing end. The company went public back in 2005 and finished its first day of trading at $20.71 per share -- not far from its buyout price nearly 18 years later.
Now that it's trading within 1% of its buyout offer, there's little reason for most investors to keep holding Ruth's Hospitality stock. That money would likely be better deployed into other top stocks. For Darden shareholders, my recommendation would be to evaluate the acquisition of Ruth's Hospitality to see if it enhances or takes away from the Darden investment thesis. That will be easier done Thursday after management goes into greater detail about the deal.