Cracker Barrel’s Steaks, Stores Seen Luring Bid: Real M&A

Country fried steak and pork chops are among the biggest bargains around for buyers seeking deals in the U.S. restaurant industry.

Cracker Barrel Old Country Store Inc., the owner of namesake restaurants and gift shops, trades for 12.9 times free cash flow, less than 89 percent of U.S. peers valued at more than $1 billion, according to data compiled by Bloomberg. The Lebanon, Tennessee-based company’s valuation is lagging behind rivals even after a 38 percent rally since Biglari Holdings Inc. disclosed a stake in 2011 and requested strategy changes.

Cracker Barrel’s cash generation is strong enough to spark takeover interest among private-equity firms, who could pay more than $82 a share, according to CL King & Associates Inc. That’s 33 percent more than yesterday’s close. The $1.46 billion company also owns real estate, including stores, corporate headquarters and a motel, that may be valued at more than $1 billion, presenting an opportunity for a buyer to unlock value, said Northcoast Research Holdings LLC.

“Without a doubt, someone could certainly buy them,” Gary Bradshaw, a Dallas-based money manager at Hodges Capital Management Inc., which oversees about $750 million including Cracker Barrel shares, said in a telephone interview. “There’s a lot of value. They’ve got a great product. The stock is inexpensive.”

Julie Davis, a spokeswoman for Cracker Barrel, declined to comment when asked whether the company would be open to a sale or has held talks with potential buyers.

Chicken, Dumplings

Cracker Barrel, founded 43 years ago in Tennessee, now runs about 620 combination restaurants and country stores in 42 states, generating $2.58 billion in sales during the fiscal year that ended in August. The menu ranges from chicken and dumplings to smoked ham, while the stores feature rocking chairs, pancake mixes and toys.

Biglari (BH), the San Antonio-based owner of the Steak ’n Shake chain, announced that it had purchased a stake in June 2011, after Cracker Barrel had missed the average profit estimate from analysts for two straight quarters. While shares of Cracker Barrel surged a combined 166 percent in 2009 and 2010, the rally ended last year, with the shares losing 8 percent.

Biglari, run by Chairman and Chief Executive Officer Sardar Biglari, criticized Cracker Barrel’s management and financial- disclosure practices in a September 2011 letter to other shareholders.

“Our concern over Cracker Barrel’s leadership stems from its poor strategy, poor operating performance, poor financial disclosure, and lack of ownership, which if left uncorrected, in my view, will lead to poor shareholder returns,” Biglari wrote. “The time to act is now.”

CEO’s Plan

Hours after Biglari’s letter was released publicly, Cracker Barrel CEO Sandra Cochran spoke during a conference call with analysts, outlining priorities for luring more customers and boosting profit. The strategy included new marketing tactics, an updated menu and pricing strategies, cost-cutting initiatives and returning more cash to shareholders. Cracker Barrel’s quarterly dividend has since doubled to 50 cents.

Cracker Barrel went on to post 6 percent revenue growth in fiscal 2012, the fastest annual pace in seven years. Operating margins also improved to a six-year high of 7.4 percent from 6.8 percent in fiscal 2011. Yesterday, the company reported a 2.6 percent decline in quarterly net income.

Biglari sent his letter in September 2011 after Cracker Barrel denied him a board seat. He failed to gain entry to the board again this year, with shareholders this month voting against his second attempt.

Lighting Fire

“Although Biglari has been unsuccessful twice, certainly there has been a catalyst for some changes,” Stephen Anderson, a New York-based analyst at Miller Tabak & Co., said in a phone interview. “It’s really lit a fire underneath management to get something done.”

While Cracker Barrel’s stock has surged 38 percent since Biglari disclosed his stake, the company is still trading at 12.9 times its free cash flow from the last 12 months, according to data compiled by Bloomberg. That’s lower than 89 percent of U.S.-based restaurant operators valued at more than $1 billion. Its price-sales ratio of 0.55 is the third-cheapest in the industry and compares with an average of 1.6 for the 19 other companies in the group, the data show.

Cracker Barrel’s valuation and operational turnaround makes the company attractive for potential acquirers, according to Bradshaw of Hodges Capital.

Cheap Shares

“The stock is cheap,” and “they’re doing a lot of things to enhance productivity,” Bradshaw said. “They could be a takeover target.”

Michael Gallo, a New York-based analyst at CL King, said private-equity firms are the most likely suitors and could be lured by Cracker Barrel’s free cash flow. It has produced $110.4 million during the past four quarters.

It “generates a lot of cash,” Gallo said in a phone interview. “It has a lot of characteristics that I think a financial buyer might find attractive.”

Acquirers could offer more than his $82 share-price estimate, he said.

Private-equity buyers could also be lured by the chance to profit from selling the company’s real estate and exploring franchise and royalty opportunities, said Robert Derrington, a Nashville, Tennessee-based restaurant analyst at Northcoast Research.

Headquarters, Motel

Cracker Barrel’s holdings include the properties where 409 of its stores are based, according to the company’s last annual report. Cracker Barrel also owns the 90-acre (36-hectare) site where its headquarters is located, six undeveloped properties, another six parcels it plans to sell, and a motel used for housing management trainees and the public, according to the Sept. 25 filing.

Selling the store properties could garner more than $1 billion, Derrington said.

“The overwhelming positive attributes of Cracker Barrel’s business for a potential suitor would be things like its substantial owned properties,” he said. There could be “some more creative minds who would like to try and come in and make and offer for the company and look at ways to monetize” the real estate.

Cracker Barrel’s debt could deter private-equity suitors looking to add leverage to the company, according to Anderson of Miller Tabak. In the span of two quarters in 2006, total debt jumped to $919.6 million from $208.7 million. Cracker Barrel has since reduced that to $538.9 million.

Stock’s Surge

Gains in Cracker Barrel’s stock may also deter buyers, Anderson said. The shares surged 63 percent through yesterday from their 2011 low of $37.99. Today, they declined 0.5 percent to $61.45.

“It’s going to be more of a premium than it was back when it was $40 a share,” he said. “It’s probably not going to be really as much of a depressed-asset, restaurant-turnaround story.”

Even with the steps taken by the company to improve performance and the resulting surge in its share price, private- equity suitors may still see opportunities for improvement, said Bradshaw of Hodges Capital. He drew a parallel with Outback Steakhouse, the restaurant chain that was purchased in 2007 by investors led by Bain Capital LLC and then relisted this year through the initial public offering of Bloomin’ Brands Inc.

“Private equity can begin growing the store base a little bit faster than management is doing, which would make it that much more attractive,” he said. “Just like you’ve seen with Outback Steakhouse and some of these get gobbled up by private equity, it wouldn’t surprise me that they buy Cracker Barrel. It would make an attractive acquisition.”

To contact the reporter on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net

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