The Pot Keeps Boiling at Morton's


By Gene Marcial Morton's Restaurant Group (MRG) has whetted the appetite of several large restaurant operators since the company's board of directors put Morton's in play. At least two large restraurant chains may make a run for the operator of the famous Morton's of Chicago steak houses.

The board, at Morton's annual shareholder meeting on May 10, announced that it will explore a full range of "strategic alternatives," including "a potential sale of the company." The unexpected move was a response to the surprise and unwelcome May 1 offer of BFMA Holdings, a buyout investor group, to acquire Morton's at $28.25 a share. BFMA has already picked up 9.3% of Morton's stock -- and the backing of raider Carl Icahn, who has agreed to put up $240 million for proposed deal (see BW Online, "A Bitter Food Fight at Morton's").

But BMFA suffered a setback at the annual meeting as shareholders overwhelmingly rejected its proposal to unseat three members of the board, including Chairman and CEO Allen Bernstein and Executive Vice-President and CFO Thomas Baldwin. The board then formed a committee composed of four outside directors to evaluate BFMA's hostile buyout offer.

TALKING TURKEY. Barry Florescue, chairman and president of BFMA, says despite the failure to replace the three directors up for reelection, his group achieved one of its purposes -- to force Morton's to publicly commit to explore the company's sale and to seriously address BFMA's own offer. Florescue says he's ready to negotiate with the committee. Morton's is being advised by Greenhill & Co. on the BFMA offer and other possible alternatives.

But it's far from certain that BFMA will end up victorious. Although management says it hasn't received any offer outside of BFMA's bid, some industry sources say several major restaurant companies are now taking a close look at Morton's as a possible acquisition.

"Morton's is cheap any way you look at this successful and profitable famous restaurant company," says Roger Lipton, veteran restaurant industry analyst, who now heads Lipton Financial Services, an affiliate of Axion Capital Management. He also owns shares in Morton's. Management, led by Bernstein and Baldwin, has done a terrific job at running the company's fine-dining restaurants in a quite profitable way, says Lipton. But he adds that it could still grow larger, faster, with a deep-pocketed merger partner or owner behind it.

BEYOND BURGERS? Lipton says it's certain that the speculation about other large companies being interested "has merit and could well develop into another offer for Morton's." Who would be the possible suitors? Lipton points to Wendy's International (WEN), which he says "has been looking for a new concept" to enhance its chain of hamburger restaurants (the nation's third-largest), and Darden's Restaurants (DRI), the world's largest casual-dining restaurant operator. Both companies' shares trade on the Big Board.

Wendy's stock has bucked the market's downturn and has been rising, to $24.80 a share on May 14 from $16.75 on July 31, 2000, giving it a market capitalization of $2.8 billion. Wendy's operates more than 5,500 units -- about 4,400 of which are franchised.

Darden's stock has also gone against the tide, climbing to $27.41 a share on May 14 from $15.43 on June 21, 2000. With a market cap of $3.2 billion, Darden operates two major chains: Red Lobster, which has 652 units, and The Olive Garden, which has 488 restaurants. Lipton believes Darden may want to broaden its operations by providing customers with a choice of upscale restaurants, to complement its chain of moderately priced casual-dining eateries.

CHEAP MEAL. Morton's shares, also listed on the New York Stock Exchange, have been rising, too, edging up to $25.25 a share on May 14, from $17.75 on June 7, 2000. With a market cap of just $105 million, Morton's has grown from 9 restaurants to 57 in 51 cities.

One Morton's insider claims that BFMA isn't genuinely interested in owning and running its target. Based on its past history of deals, BFMA aims to make money by putting companies in play by buying a big block of shares with the ultimate purpose of cashing in when a higher bid comes in, says this insider. Analysts figure that Florescue may up BFMA's bid to $30 to $32 a share. Lipton argues that at its current price of $25, Morton's is a bargain. He figures it's worth at least 35.

So far, Morton's appears to have beaten back BFMA's goal of placing its own nominees on the company's board. And it may well have thwarted -- at least for now -- BFMA from acquiring the fine-dining restaurant owner and operator. But has Morton's simply driven itself from the frying pan into the fire? Marcial is BusinessWeek's Inside Wall Street columnist


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