Back in July, I picked OSIRestaurant Partners
If you break this company up into its mature concepts and its growth concepts, I have a hard time fathoming the two parts being worth less than $45 a share. I get a similar value if you simply halt the expansion of the Outback brand and slow the expansion of Carrabba's and Bonefish, and let the cash flow start piling up. $28 is a real bargain.
This morning, OSI Restaurant Partners announced that its founders, along with two private equity firms, have agreed to take the company private for $40 a share in cash. The deal values OSI Restaurant Partners at about $3.2 billion, including debt.
The buyout offer brought a nice pop to the share price of some other restaurant companies, too. Restaurateurs that have also had a tough go of it in the past year, including Applebee's International
Because the deal is all cash, current shareholders would be giving up their ownership in the company and any future improvement in operations. This makes the comments in the press release about the benefits the company will receive by going private quite interesting. I have no doubt that OSI Restaurant Partners will be able to focus entirely on executing its plans by going private and that business performance should improve, but because shareholders won't benefit from this, why do these feel-good comments matter? The part of the release that's interesting for shareholders, though, is that the company will solicit and review superior proposals -- if any are made -- in the next 50 days.
For most of the day, the shares have traded slightly north of $40, which points to the market expecting a better bid to come along. While I have no idea whether one will, I have followed the company for a number of years and have held shares for a little more than a year. My pitch above pegs the company at $45, and I can see prices up to $48 a share as reasonable. Like the market, I believe the current offer is a bit low, but unless someone steps up with a better offer, it's hard to argue with the $40-per-stub price tag.
The offer trails a few years of disappointing performance for the company. Since 2002, OSI Restaurant Partners' margins have continuously declined, though sales growth has remained strong as the company continued expanding and opening new stores. The theory was that with improvements, margins would eventually normalize, and that even with reduced margins, the company still generates plenty of cash. However, because traffic has also slowed down this year and margins continued to come under pressure, the company began talking of a slowed expansion and looking at other measures to increase shareholder value.
At worst, $40 will be paid for each share in the not-too-distant future. And there's always the possibility that a slightly higher offer will come along, because on top of its usually strong operating cash flows, the company also owns the real estate where some of its locations sit. The combination of cash and real estate might be worth more to another party, and while selling the real estate might not be in the long-term best interest of the restaurant operations, it might bring about the best value for shareholders. For these reasons, I'm willing to sit tight.
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At the time of publication, Nathan Parmelee owned shares in OSI Restaurant Partners, but had no financial interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.