Some market watchers are cheering the news that the Cava restaurant chain has agreed to buy out rival Mediterranean casual-dining chain Zoe's Kitchen (ZOES) for about $300 million, but I see Cava's $12.75-per-share bid as a lowball offer. Despite being a broken growth story of sorts, I still believe Zoe's deserves to fetch a higher price, and it will be interesting to see whether any higher offers emerge.
After all, Cava's bid values Zoe's at just $1.15 million per location after considering the company's enterprise value (market cap plus debt minus cash). That seems cheap for a chain with 261 locations and $326 million in trailing twelve-month revenue -- not to mention the fact that Zoe's offered one of the freshest restaurant concepts that I've seen in years. Unfortunately, the company struggled with profitability and the chain's growth and bottom line disappointed investors.
If Cava's bid succeeds, that will end Zoe's short and very disappointing run as a public company. After going public in 2014 at $15 a share, the stock hit a $45 high mark in mid-2015 but has been on a downward slope ever since. Shares closed at $9.56 on Thursday before Zoe's announced the Cava deal on Friday.
I loved Zoe's food from Day 1, but long found the stock prohibitively expensive as growth investors lined up behind it with high hopes. However, the stock finally got cheap enough last summer for me to initiate a position at $10.97.
While I'll wind up in positive territory on my stake if the deal goes through at $12.75, that price will nonetheless represent a disappointing end for a promising chain. But truth be told, I've often been disenchanted with the takeout prices on retail names that I've owned, includes Krispy Kreme, West Marine, Ruby Tuesday, Midas and Force Protection.
The deal is also not likely to be the last in publicly traded restaurant land. Besides Krispy Kreme and Ruby Tuesday, Fogo de Chao, Panera, Buffalo Wild Wings, Einstein Noah and Bob Evans have all been taken out in the past few years.
(This column has been updated with additional details.)
