Chain Leader

David Farkas

The Potential Fallout of the Darden-RARE Deal
August 21, 2007

LongHorn Steakhouse #48, in Fairview Park, Ohio, is doing steady business on Aug. 17, a Friday night. Things could be better, of course, acknowledged General Manager Tyson Werner, but the restaurant lost half its parking lot earlier this year, part of a re-construction of the mall behind the restaurant.

Soon this LongHorn will be updated, particularly the bar area and kitchen. The restaurant won't miss a day of business during remodeling, which is done at night, explains Werner. Still, he's hoping customers won't be put off by three days of plastic sheeting and missing walls.

Those may be the least of his worries. The announcement on Aug. 16 that Darden Restaurants is purchasing LongHorn parent RARE Hospitality for $38.15 a share in a cash deal worth $1.4 billion didn't mention what might happen to RARE's Managing Partner program. Darden doesn't have a similar "ownership" program for general managers, Werner added.

Werner, who looks to be in his early 30s, joined RARE because of the chance to get a piece of the action after a dozen years with Tony Roma's. He isn't in the program yet and now wonders if he ever will be.

Otherwise, Werner seemed happy with the deal, which will make him an employee of the largest casual-dining company in the world. He said President and COO Gene Lee explained the deal and its ramifications in a conference call to the troops Thursday. An upcoming meeting in Cincinnati for the Ohio region will furnish more transitional details.

Casual-dining analyst Bryan Elliott of Raymond James said in a note that the $38.15 per share offer--a whopping 39 percent premium to RARE's closing price on Friday--showed how undervalued casual-dining stocks have become recently given the difficult macro environment.

"[This acquisition] highlights the deep value that we have been discussing in recent weeks during a series of ratings upgrades in our universe," he wrote. Elliott also thinks California Pizza Kitchen, Panera Bread Co., The Cheesecake Factory and P.F. Chang’s --which he rates a "strong buy"--have plenty of long-term potential despite their current valuations.

Posted by David Farkas on August 21, 2007 | Comments (0)