Sometimes important investing news can reach you in even the remotest of locations. While in a mountain village in the Dominican Republic last Wednesday morning, I got wind of a headline on an under-the-radar restaurant acquisition.
Darden Restaurants (DRI) is offering to buy Ruth's Hospitality Group (RUTH) . This wasn't played up as big news -- though it was in the news -- perhaps due the relatively small size of the deal. DRI offered $21.50 per share for the operator of Ruth's Chris Steak House, for a total deal value of $715 million. That represented a 34% premium to RUTH's closing price on Tuesday. RUTH shares have done little over the past several years, and prior to the offer, were trading at 2016 levels. Investors who took positions at the $4 pandemic prices have done well, but longer-term shareholders not so much.
RUTH has been profitable in the two-and-a-half years since the pandemic, and last year earned $38.6 million, or $1.16/share. DRI is at least picking up a well-established brand with decent profit margins, including 2022's 7.6% net profit margin.
While this is a small-potatoes deal for a small-cap restaurant name, it brings to light the question of whether the publicly traded restaurant sector may be going through another round of consolidation. Plenty of names that are struggling for a variety of reasons including debt, labor and food costs, and intense competition. These woes for businesses are making this a good environment for the stronger to acquire the distressed. Several weeks ago, I wrote about a possible initial public offering idea for CAVA Group, noting that in 2021 only five chains went public, including Dutch Bros (BROS) , First Watch (FWGR) , Krispy Kreme (DNUT) , Portillo's (PTLO) , and Sweetgreen (SG) , and how most of those saw their share prices struggle following the IPOs.
Darden, whose brands include Olive Garden, LongHorn Steakhouse, Yard House, The Capital Grille, Seasons 52, Bahama Breeze, and Eddie V's made its last acquisition in 2017 when it bought Cheddar Scratch Kitchen for $780 million.
We'll keep watch on other publicly traded restaurants that might make interesting acquisition targets.
