Bloomberg News

Restaurant Real Estate Bringing 53% Increase in Value: Real M&A

September 12, 2011

Sept. 12 (Bloomberg) -- The cheapest restaurants in America are luring activist investors who are betting companies from Ruby Tuesday Inc. to Cracker Barrel Old Country Store Inc. can make more money selling their own real estate than food.

The 10 biggest U.S. restaurants that sell for less than the value of their property, plants and equipment trade at 70 cents on the dollar, according to data compiled by Bloomberg. With the restaurants slumping twice as much as the Standard & Poor’s 500 Index this year, firms from Biglari Holdings Inc. to Carlson Capital LP and Becker Drapkin Management LP are agitating for board seats at eateries with fixed assets that are worth an average of 53 percent more than the companies themselves. Ruby Tuesday has $1 billion of such assets, twice its market value.

Activist funds are targeting land and buildings owned by restaurants after U.S. commercial property values rose for a second month following the biggest gain on record. While profits at eateries are being squeezed as food costs increase and diners pare spending in the face of an economic slowdown, investors still stand to gain by forcing managers to sell real estate as demand for commercial mortgage-backed bonds rises to the highest level since the credit crisis, Stifel Nicolaus & Co. said.

Selling property “certainly is an avenue to do something to benefit shareholders,” Josh Zamir, managing principal at Capstone Equities LLC, a New York-based private equity firm that specializes in real estate, said in a telephone interview. “When a company’s stock is trading at or about or below the real estate value, it means the market is not recognizing the value of their real estate.”

Eating Out

Meridith Hammond, a spokeswoman for Maryville, Tennessee- based Ruby Tuesday, declined to comment on whether it would consider property sales. Julie Davis of Lebanon, Tennessee-based Cracker Barrel said in an e-mail that selling property is “a form of financing and at this time it’s more expensive than other financing that’s available.”

Shares of restaurant chains have declined on concern consumers will spend less money on meals with U.S. economic growth deteriorating two years after the longest recession since the Great Depression ended.

The economy expanded 0.7 percent in the first half of this year, the weakest stretch since the recovery began in June 2009. As job growth stalled last month, a RBC Capital Markets survey showed one-third of Americans now plan to spend less dining out in the next 90 days, the largest proportion in almost a year.

Valuation Gap

The Bloomberg U.S. Full Service Restaurant Index, which includes Ruby Tuesday, Cracker Barrel and 15 other companies, had fallen 24 percent through last week after reaching a record in July. That’s almost double the retreat in the S&P 500, the benchmark gauge of American common equity, over the same span.

The slump left 22 publicly traded U.S. restaurants selling for less than the value of their property, plants and equipment after deducting depreciation, data compiled by Bloomberg show. The 10 biggest, which include Ruby Tuesday and Cracker Barrel, now trade at an average 30 percent discount.

Ruby Tuesday, valued at $459 million after plummeting 44 percent this year, sells for the biggest discount to its net fixed assets. Cracker Barrel has about $1 billion in land and buildings, exceeding its market capitalization by 16 percent after the company lost almost a third of its value.

The valuation gap is enticing investment firms, which are trying to make a “quick buck” from property sales that could be used to buy back shares or fund cash payouts, according to Steve West, a St. Louis-based analyst at Stifel.

Wall Street Embrace

The real estate could then be rented back in so-called sale-leaseback arrangements, according to Sam Yake, an analyst at BGB Securities Inc. in Arlington, Virginia.

“Wall Street loves” companies that sell their real estate and then lease those properties instead, he said. “It’s one tool in an investor’s arsenal” to boost value, he said.

Ruby Tuesday climbed 3.4 percent today, while Cracker Barrel advanced 4.9 percent. Both companies outpaced the S&P 500’s 0.7 percent gain.

Last month, Dallas-based firms Carlson Capital and Becker Drapkin increased their combined stake in Ruby Tuesday to 8.6 percent after they began buying shares last quarter.

At the time, the funds said in a filing with the Securities and Exchange Commission they bought shares with the intention of nominating their own directors and seeking discussions with management on ways to “maximize shareholder value.”

After the firms made their initial investment, Ruby Tuesday said in July that it had appointed Steven Becker and Matthew Drapkin as members of its board. Neither Becker nor Drapkin returned telephone calls or e-mails seeking comment.

Zero Hour

Clint Carlson, president and chief investment officer of Carlson Capital, also didn’t respond to a telephone call or e- mail requesting comment.

Biglari Holdings, which owns 9.3 percent of Cracker Barrel, plans to nominate Sardar Biglari, its chairman and chief executive officer, to Cracker Barrel’s board of directors at its annual shareholder meeting, a regulatory filing this month said.

“Now is the hour to place real owners in the boardroom to deliver real value for all owners,” Biglari wrote in a letter to Cracker Barrel Chairman Michael Woodhouse, which was dated Sept. 1 and included in the filing.

Cracker Barrel said it rejected an earlier demand by Biglari to appoint himself and his company’s vice chairman to the board. Biglari refused a proposal from Cracker Barrel that would have allowed him to appoint two other independent directors, subject to certain guidelines.

Burgers and Shakes

San Antonio-based Biglari Holdings, which began amassing its stake in Cracker Barrel last quarter, also owns Steak ‘n Shake. The chain, which specializes in burgers and shakes, sold 13 of its outlets from 2008 through 2009 and began leasing the properties instead, according to a company filing.

At Steak ‘n Shake, “real estate is a source of great value,” Biglari wrote in a January 2008 letter to shareholders urging a new slate of directors to help turnaround the chain.

Biglari declined to comment, according to his assistant.

“Selling the real estate is an obvious way to optimize return,” Dan Veru, chief investment officer at Fort Lee, New Jersey-based Palisade Capital Management LLC, said in a telephone interview. The firm manages $3.7 billion, including about 465,000 Cracker Barrel shares. “Activists can be an agent of change to force the sale of these restaurants’ real estate.”

“We’ve always felt there was a lot of value” in Cracker Barrel’s property, he said.

Residual Value

Investors are eyeing land and buildings owned by restaurants as property values recover from the depths of the financial crisis. U.S. commercial real estate prices rose 0.9 percent in June, the second straight advance, Moody’s Investors Service said in a report last month.

The increase followed a 6.3 percent surge in May, which was the biggest ever recorded by Moody’s. Prices had fallen five consecutive months to an all-time low in April.

More than $23 billion in commercial-mortgage bonds have also been sold this year, double last year’s total and the most since 2007, data compiled by Bloomberg show.

Even when a restaurant is struggling, “there is residual asset value that the shareholders would have a claim on --that’s the land,” said Bryan Elliott, an analyst at Raymond James Financial Inc. in St. Petersburg, Florida. That’s why activist investors “push for property sales,” he said.

--With assistance from Anna-Louise Jackson, Anthony Feld and Jeffrey McCracken in New York. Editors: Michael Tsang, Daniel Hauck.

To contact the reporters on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net; Jonathan Keehner in New York at jkeehner@bloomberg.net; Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Robin Ajello at rajello@bloomberg.net.


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