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Italy in Ohio So Cheap Bravo Brio Proves Takeover Bait: Real M&A

To get one of the best deals in the restaurant industry, potential acquirers can look to a chain of Italian eateries in Ohio.

Bravo Brio Restaurant Group Inc., which lost more than a third of its market value since reaching a high six months ago, yesterday traded at 14.7 times free cash flow, according to data compiled by Bloomberg. That’s the lowest among comparable companies from BJ’s Restaurants Inc. to Texas Roadhouse Inc. and less than half the median restaurant, the data show.

Bravo Brio, which has more than 90 locations in Ohio and 29 other states, may now attract interest from Darden Restaurants Inc., owner of Olive Garden and Red Lobster, with its Brio Tuscan Grille chain of upscale Italian eateries, according to Miller Tabak & Co. Brinker International Inc. would also make sense as a buyer, B. Riley & Co. said. With Bravo Brio offering more long-term earnings growth at a cheaper price than all its competitors, the company may command a 50 percent premium in a takeover, according to Fifth Third Asset Management.

“This is a company that clearly has some runway of growth in front of it,” Destin Tompkins, a Nashville, Tennessee-based analyst at Morgan Keegan & Co., said in a telephone interview. “It becomes potentially an acquisition target.”

Ashley Swenson, a spokeswoman for Columbus, Ohio-based Bravo Brio, said it isn’t considering selling itself and hasn’t been approached about a deal by either Darden or Brinker.

Bravo Brio Chief Executive Officer Saed Mohseni is “very confident that as a standalone company we can continue to grow,” Swenson said via telephone.

Today’s Trading

Rich Jeffers, a spokesman for Orlando, Florida-based Darden, and Maureen Locus of Dallas-based Brinker said their companies don’t comment on takeover speculation.

Bravo Brio shares climbed 2.5 percent to $16.48 today in New York, the third-biggest gain in the Russell 2000 Restaurants Index of 28 companies.

Founded in 1992, Bravo Brio has 47 Bravo! Cucina Italiana restaurants that focus on casual dining with chefs that cook pizza, pasta and steak in view of its patrons, its website said. The company also operates 37 Brio Tuscan Grille eateries.

After raising $161 million in its October 2010 initial public offering, shares of Bravo Brio surged 78 percent to $24.96 a share on June 28. The stock then retreated as much as 42 percent on concern a deteriorating U.S. economic recovery would curb demand for higher-end restaurants, according to Stephen Anderson, a New York-based analyst at Miller Tabak.

Relative Value

Bravo Brio ended at $16.08 a share yesterday, or about 14.7 times its cash from operations of $1.09 a share, after deducting capital expenses, according to data compiled by Bloomberg.

The median multiple for comparable “high-growth” restaurants cited by Miller Tabak stood at 37.7 times free cash, while Louisville, Kentucky-based Texas Roadhouse, the second-cheapest eatery in the group, traded at 17.8 times.

Bravo Brio’s so-called PEG ratio, which compares a company’s price-earnings ratio with its projected profit growth, also shrank to 0.94, data compiled by Bloomberg show. That means among its competitors, Bravo Brio offers buyers the greatest potential earnings power at the lowest relative price.

Darden could use Bravo Brio to help counter a decline in revenue at Olive Garden, where same-store sales in November fell by the most in almost two years, according to Miller Tabak’s Anderson. Bravo Brio, which is opening more upscale restaurants nationwide, could also boost Darden’s growth, he said.

Meal Prices

The average check at Brio Tuscan Grille was about $25 per person, almost 60 percent higher than Olive Garden, which charged about $16 per guest, according to company filings.

Darden as an acquirer “makes complete sense,” said Conrad Lyon, a Los Angeles-based analyst at B. Riley.

Bravo Brio “matches well with the likes of a Darden,” he said. “It would assimilate well given the Italian concept -- that’s what they know with Olive Garden -- and with a theoretically newer, more upscale brand.”

Brinker, with more than 1,500 restaurants in 32 countries, may also be interested in bolstering its Maggiano’s Little Italy chain by picking up Bravo Brio, according to B. Riley’s Lyon.

Analysts estimate that sales at Bravo Brio will increase 14 percent this year, versus a 2 percent increase for Brinker, data compiled by Bloomberg show.

“They’re very definitely poised to grow,” George Henning, president and chairman of Pacific Global Investment Management Co. in Glendale, California, which manages about $450 million and holds about 400,000 shares of Bravo Brio, said in a telephone interview. “It’s definitely a chain that will get close scrutiny” from potential acquirers, he said.

‘Very Much Undervalued’

On its own, analysts estimate that Bravo Brio is worth about $24.83 a share, data compiled by Bloomberg show. That’s 54 percent more than its closing price yesterday.

Scott Billeadeau, who helps oversee about $17 billion at Fifth Third in Minneapolis and is considering buying shares of Bravo Brio, says any potential acquirer would have to willing to pay at least $25 a share to convince the board to sell.

Bravo Brio is “very much undervalued,” said Miller Tabak’s Anderson. “At this kind of valuation, I wouldn’t be surprised if it were a strategic acquisition.”

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