Restaurant Spinoff Still Looks Appetizing

 | May 09, 2012 | 5:00 PM EDT  | Comments
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wen

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jack

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FRGI

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Back in November 2011, I discussed why the pending spinoff of Carrols Restaurant Group (TAST) into to separately traded entities was likely to offer appetizing returns. In November, shares traded for around $10. Last week shares in prior to spinoff were trading for $15.

The spinoff of Carrols is now complete, with Carrols remaining as an operator of Burger King franchises while Fiesta Restaurant Group (FRGI) holds the Pollo Tropical and Taco Cabana concepts. Carrols currently trades for $4.40 while Fiesta shares are at $11.50. Despite the 60% advance since my first suggestion, however, these businesses are likely to still offer tasty rewards for investors, although the upside potential is not as easy to handicap as it was when there was a defined corporate transaction.

Several weeks ago, Carrols announced that it had reached an agreement to buy an additional 278 Burger King restaurants from Burger King Holdings, which will almost double Carrols' Burger King restaurants, to nearly 600 locations. Carrols is offering $16 million in cash and a 28.9% equity stake to Burger King Holdings. The fact that the Burger King Holdings is taking an equity stake is intriguing. It suggests that the company clearly feels that Carrols can create tremendous value over the long run with the new stores.

As it now stands, the new Carrols has a market cap of $80 million and an enterprise value (EV) of approximately $140 million. At the end of the first quarter (March 31, 2012), the Burger King division generated $3.5 million in earnings before interest, taxes, depreciation and amortization (EBITDA). Annualized, that comes to about $14 million, but EBITDA will surpass that amount once the other 278 locations are included in its filings. EBITDA of $20 million to $25 million would not be a bad guess for 2012, which puts Carrols' value at 6x times EV/EBITDA, well below multiples for similar names such as Wendy's (WEN) and Jack In The Box (JACK). To be sure, Burger King is in the midst of a marketing overhaul that seems to be working; comp-store sales growth for Carrols was over 5% in the first quarter.

The Fiesta Restaurant Group could also be appetizing now as a stand-alone pure-play Mexican concept. Its current market cap is $260 million with an EV of $460 million. (Note: Yahoo! Finance shows EV of $570 million, but I think it's because Fiesta's ticker is new and info hasn't been updated; total pre-spinoff debt was $274 million, of which $200 million belonged to Fiesta.)

Fiesta will likely generate around $60 million in EBITDA in 2012, or 8x times EV/EBITDA. The Fiesta concepts are growing faster than the Burger King franchises, and the reason for the spinoff of Fiesta was so that the appropriate valuations could be applied to two different restaurant segments -- namely, fast food vs. casual dining. Mexican restaurants are widely popular in America, and the Fiesta concepts are growing same store comps by 6% to 9%, very attractive numbers in the restaurant industry.

The easy gains from the spinoff have already been made, but with the addition of new Burger King locations and a pure-play Mexican concept, patient investors may want to look closer. After all, in this economy, the restaurants that Carrols and Fiesta operate should do well.

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