When Buffets (BOCB), which runs 250 self-service restaurants, announced on June 4 that it was acquiring its major rival--HomeTown Buffet--shares of both companies slipped. But industry watchers think the deal will be good for both.

One investor blames the decline on Buffets' lack of Street following: It has not provided any investment-banking business since it went public in 1985. Another investor ascribes it to expectations of an earnings dilution. But Roger Lipton, who heads Lipton Financial Services, an affiliate of Axiom Capital Management, is upbeat. ``It's a match made in heaven,'' he says. Lipton thinks Buffets has become ``even more undervalued'' as a result of the acquisition.

Now at 12, shares of Buffets, whose restaurants are mainly in the Midwest, should more than double in a year or so as the deal bolsters sales, earnings, and cash flow, says Lipton. The merged chain will be the nation's 25th-largest eatery and the largest buffet-style outfit--with Old Country Buffet restaurants in 32 states. HomeTown operates 93 restaurants, mainly on the West Coast. HomeTown's shares, which fell from 15 1/8 to 13 3/4 when the deal was announced, closed at 13 7/8 on June 18.

``The big deal about the acquisition,'' says Lipton, ``is Dennis Scott,'' now HomeTown's chairman--and co-founder of Buffets. He left Buffets five years ago to run HomeTown. Under his stewardship, HomeTown grew to become a premier restaurant, notes Lipton, while Buffets' profit margins have narrowed.

With Scott rejoining Buffets as chief operating officer, Lipton expects he'll bolster Buffets' top and bottom lines. Next year, Lipton figures Buffets' sales should climb to nearly $1 billion, with cash flow of $2 a share and earnings per share of $1.15. For this year, Lipton expects the merger will lift Buffets sales to $794 million, cash flow to $1.66 a share, and earnings to 85 cents.

Analyst Michael Mueller of Montgomery Securities says the acquisition gives Buffets an immediate presence outside the Midwest.



Updated June 14, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.
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