Behold the life cycle of the American restaurant concept. A restaurateur and/or entrepreneur has an idea for a new dining concept. They open a location or two and do some good business. Things take off, and eventually the concept attracts enough attention to tap the public or private equity markets to expand the business.
Then the trouble starts. People realize the menu isn't all that special or unique despite some autographed googaws on the wall. Or they release that dining amongst flatulent tortoises is only fun the first time. Or they get sick of listening to shrieking children and watching animatronics rodents dance on stage. Then the same-store sales start to falter, guidance is lowered, and investors flee the scene.
What happens next has a lot to do with the quality of management or the board's willingness to bring in new management, or both. Some concepts, like CECEntertainment (NYSE:CEC), get it together and stay in the game. Others, like Planet Hollywood and Fashion Cafe, go into bankruptcy. And then still others get bought out -- as in Landry's Restaurants (NYSE:LNY) buying out the Rainforest Cafe.
With Thursday's announcement, Dave & Buster's (NYSE:DAB) is going that route. This operator of entertainment-themed restaurants targeting adults agreed to an all-cash offer of $18.05 per share from Wellspring Capital Management, which will look to improve operations. Factoring in the debt, the deal looks to be worth about $375 million -- a relatively low valuation on a price-to-sales basis, but not so bad on a P/E or cash flow basis.
Looking at a long-term chart of Dave & Buster's, you can see the life cycle of an American restaurant concept play out before your eyes. Optimism in the latest "new new thing" pushed the stock up in the early years and was then followed by a nasty dive as earnings growth got choppy. While the company made progress and the stock rose nicely from its lows in late 2001, it announced a sizeable earnings miss for the third quarter along with the buyout announcement.
In other words, things may have been getting better, but the process was still pretty inconsistent. With that in mind, and a reasonable offer on the table, I can understand why Dave & Buster's was inclined to sell out.
I'm sure there will be some investors who are angry that the company sold out for a price below the 52-week high, and others may feel that they were robbed of a promising long-term turnaround situation. Given the difficulties of the casual dining market and the company's performance, though, $18 in cash isn't such a terrible outcome.
For more Foolish food for thought:
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- More Cheesecake, Anyone?
CEC Entertainment is a Motley Fool Hidden Gems recommendation.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
