Darden Surges After Agreeing to Buy Cheddar's, Beating ViewsBy
Olive Garden owner is buying brand from private equity backers
Deal helps fuel expansion at a time of sluggish dining growth
Darden Restaurants Inc. gained the most in more than three years after topping earnings estimates and agreeing to buy Cheddar’s Scratch Kitchen, giving the owner of Olive Garden a fresh source of growth.
Darden announced plans on Monday to purchase the chain for $780 million in cash from private equity firms L Catterton and Oak Investment Partners. Cheddar’s has 165 locations across 28 states and would become Darden’s third-biggest brand.
The plan is to squeeze tens of millions in savings from the merger and use it to boost earnings by as much as 12 cents a share in 2018. Cheddar’s brings a brand with high volume per restaurant, and its “made from scratch” food focus may help appeal to consumers seeking more wholesome options. For Darden, the transaction seems like a “well-priced deal,” said Oppenheimer analyst Brian Bittner.
“The accretive Cheddar’s acquisition is smart use of the company’s cash position,” he said in a report.
The shares gained as much as 9 percent to $82.36 in New York trading. That’s the biggest intraday gain since October 2013 and vaults Darden into record territory. As of Monday’s close, the stock was up 3.9 percent this year.
Olive Garden’s Gain
Third-quarter earnings were $1.32 a share, excluding some items. That topped the $1.27 average estimate for the period, which ended Feb. 26. Same-store sales gained 1.4 percent at Olive Garden, its flagship chain. Analysts had estimated a 0.4 percent increase, according to Consensus Metrix.
The Orlando, Florida-based company also boosted its earnings outlook for the year. It now expects $3.95 to $4 a share, with same-store sales increasing about 1.5 percent.
Investors are betting the acquisition will help reinvigorate a company whose various restaurants are seeing uneven growth. Darden’s Olive Garden has been outpacing some of its other chains, including LongHorn Steakhouse and Capital Grille.
Darden expects to generate $20 million to $25 million in pretax savings from the merger by fiscal 2019. The goal of adding 12 cents a share to earnings next year excludes the initial costs of the integration, the company said.
Cheddar’s, founded in 1979, sells dishes such as pasta, sirloin steaks, grilled catfish and baby-back ribs. It also has a bar with cocktails, beer and wine. Each location averages $4.4 million a year, Darden said.
Catterton and Oak bought Cheddar’s in 2006, when it had just 55 locations, betting that the business’s cooked-from-scratch approach could work on a larger scale.
The strong annual volume per restaurant was key to the acquisition, Darden Chief Executive Officer Gene Lee said on Monday.
“This addition will also enable Darden to further strengthen two of our most important competitive advantages: our significant scale and our extensive data and insights,” he said.