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In the June 12 issue, Business Week's Inside Wall Street column reported that buyout activity among small-caps was accelerating, and Buffets (BOCB) was highlighted as a potential target (see "Small-Caps Redux?"). And true enough, on Monday, June 5, Buffets announced that New York buyout firm Caxton-Iseman has agreed to purchase it for $643 million in cash, or $13.85 a share.
Not so fast, say some big shareholders, who argue that Caxton-Iseman was scarfing Buffets on the cheap. One of those vehemently opposing the deal, which prices the stock at a paltry premium of 7% above the stock's closing price on Friday, is veteran restaurant analyst Roger Lipton, who heads Lipton Financial Services.
Lipton figures that Caxton-Iseman is paying about 4.2 times Bufffets' EBITDA (earnings before interest, taxes, depreciation, and amortization), which he contends is a low-ball offer. He puts Buffets' EBITDA this year at $120 million. The stock was trading at 11 7/8 on Thursday, June 1. On Friday, it closed at 12 1/8 -- after Inside Wall Street's story came out. Buffets inched up to 12 7/8 on Monday, June 5, when the Caxton-Iseman deal was announced. The stock is currently trading at 12 15/16.
FAMILY FARE.
"I have never seen a restaurant chain sold for four times EBITDA in my 25-year experience as a restaurant analyst or financial consultant," says Lipton. He says Buffets is worth at least six times EBITDA, which would place its value at around 21 a share. Buffets, he argues, is a fine company with a hefty cash flow, healthy balance sheet, and rising earnings and revenues.
Buffets owns more than 400 family-style restaurants in 34 states under the names Old Country Buffet and HomeTown Buffet. Last year, it posted revenues of $937 million and earnings of $42.4 million, or 95 cents a share.
Steve Bruno, portfolio manager at New York investment firm Dalton, Greiner, Hartman & Maher, estimates earnings of $1.16 a share for this year and $1.33 for 2001. Bruno puts Buffets' buyout value at $22 a share, based on the company's earnings growth and EBITDA -- way above Caston-Iseman's offer of $13 7/8.
CONFLICT OF INTEREST?
Lipton says he has been advising his clients, who own more than 1 million Buffets shares, to reject the deal. He's contacting other several buyout firms that he thinks may be interested in mounting a counterbid. Buffets' board accepted Caxton-Iseman's offer on Sunday, June 4. Buffets was represented by U.S. Bancorp Piper Jaffray. "I am sure I can find another buyer that would offer a much higher price," insists Lipton, who describes the approved deal as a "a steal" for the buyer.
One other thing bothers Lipton: A possible conflict of interest. Says Lipton: "Buffets' management is getting a piece of the new company, something like a 16% equity stake, according to the initial press release. To me, that connotes conflict of interest on the part of management. In the first place, management is accepting a very low price. And secondly, management is being rewarded by getting a piece of the new company and staying in place to run the company."
Buffets execs, led by CEO Kerry Kramp, will remain, and founder and Chairman Roe Hatlen will assume the role of vice-chairman under the new regime. Current Vice-Chairman Dennis Scott will be a consultant to the company.
PROPERLY APPROVED.
When asked about Lipton's claims, Chairman Halten says the deal was fairly evaluated. He told Business Week that a special committee of Buffets' outside board members had studied the proposed deal and after due deliberation approved it. All the pertinent papers are being filed with the Securities & Exchange Commission which, says Halten, should produce all the details and answers to questions on the deal. He declined to answer directly Lipton's claims that Caxton-Iseman isn't paying a fair price.
Will Halten entertain better offers? "We don't comment on speculation," says the chairman. "This deal is done." Another offer may not remain speculation for long, though, if Lipton and his fellow investors succeed in finding a white knight soon.
Senior Writer Marcial has been writing Business Week's Inside Wall Street column for 18 years. Catch his online column every Tuesday afternoon.
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