Report: Darden Among Suitors for Del Frisco's
Could the restaurant industry be on the verge of another major M&A shakeup? Shares of Del Frisco’s Restaurant Group spiked as much as 30 percent Monday as reports of a possible move surfaced. According to The Deal, three leading restaurant companies are in the mix to buy part, or all of, the company’s brands.
It said final bids came in at about $9 per share, higher than some analysts expected. The company was trading for $6.23 late Monday.
Per “sources connected with the matter,” The Deal labeled three bidders as possible buyers: Darden, which wants to buy Del Frisco’s entire business; Ruth’s Hospitality; and Landry’s. The latter two allegedly are only interested in Del Frisco’s steakhouses. DFRG runs 16 Double Eagle Steakhouses, 24 Del Frisco’s Grilles, 17 Barcelona Wine Bars, and 21 Bartacos across 17 states and Washington, D.C.
In this past quarter—Q1 of 2019—here’s how the results broke down by brand, year-over-year:
- Double Eagle: Same-store sales of negative 0.4 percent; customer counts of negative 1.5 percent; average check of 1.1 percent.
- Del Frisco’s Grille: Same-store sales of 0.2 percent; customer counts of negative 6.9 percent; average check of 7.1 percent.
- Barcelona: Same-store sales of 3.7 percent; customer counts of 3.6 percent; average check of 0.1 percent.
- Bartaco: Same-store sales of 6.7 percent; customer counts of 5.5 percent; average check of 1.2 percent.
DFRG posted an adjusted net loss of $3.4 million in the quarter and revenue of $120.4 million.
The M&A news comes less than a week after the company said it would cut about 12–15 percent of its G&A staff during Q2 and Q3 of this year. “A reduction in force is a difficult but necessary step and we are committed to treating impacted employees with respect and support through this period of change,” CEO Norman Abdallah said in a statement.
He said the “reduction in force” would generate pre-tax general and administrative cost savings of roughly 3 million this year ($5 million on an annualized run-rate basis).
“We have identified additional synergy opportunities to enhance our efficiencies and streamline our teams now that we have moved past our recent development ‘peak’ of 15 restaurant openings in the space of 10 months,” Abdallah added.
The company has already opened six of its planned eight restaurants for 2019. Abdallah said Del Frisco’s is also nearly finished with its integration process for Bartaco and Barcelona, which it purchased for $325 million last June. The company plans to grow restaurant count 10–12 percent each year.
The G&A reductions are on top of more than $10 million in integration benefits, Abdallah said, planned to take by 2020 or 2021.
The employee cuts will impact all levels of the organization in Del Frisco’s restaurant support center, the field across three of the four brands, and its contract support. “Customary transition assistance will be provided to affected employees,” the company said.
Abdallah had this to say of the possible sale: “With respect to the strategic alternatives review process announced in December 2018, our board of directors continues to work with Piper Jaffrey & Co., our financial advisor, and Kirkland & Ellis LLP, our legal advisor, in a diligent manner.”
Del Frisco’s first unveiled the strategic review process in December 2018, noting then as it did last week that a sale could occur, but was not guaranteed.
It came as activist investor Engaged Capital LLC, which at the time owned just under 10 percent of the company’s shares, was turning up the pressure. It sent a December 6 letter to DFRG urging the company to consider a sale, either of the entire DFRG or of its individual concepts.
Engaged had no shortage of criticism considering DFRG’s performance up to that date, calling its sales “abysmal,” since its IPO in 2012. The company said DFRG declined 47 percent in the six years that followed, while its closest peer (Ruth’s Chris) has nearly quadrupled in value.
The company said DFRG’s concepts were attractive, however, to perspective buyers. Double Eagle, for example, it called “one of the premiere high-end dining concepts in the U.S. with [average-unit volumes] in excess of $14 million per restaurant, restaurant-level EBITDA margins of 25 percent, and the potential to triple its unit count. It also said Bartaco had the potential to be a “blockbuster concept.”
DFRG’s portfolio has shifted a lot lately for a company that runs less than 80 restaurants. In addition to the Barteca June acquisition, the company sold Sullivan’s Steakhouse last September for $32 million.
If Darden were to scoop up all of DFRG, it would operate one of the largest and most diverse publickly traded portfolios in the restaurant space.
The casual leader’s current lineup includes Olive Garden (860 units), LongHorn (512), Cheddar’s Scratch Kitchen (159), Yard House (78), The Capital Grille (58), Bahama Breeze (42), Seasons 52 (42), and Eddie V’s (20) for a total of 1,772 restaurants. Darden reported blended same-store sales growth of 2.8 percent in the third quarter and employees 180,000 people.
Per The Fly, Stephens analyst Will Slabaugh told investors the DFRG deal "makes sense on some level," for Darden. It would allow the company gain growing brands while "virtually eliminating corporate overhead." He also provided some insight on the other side of the coin, saying Darden moving deeper into upscale dining "would be somewhat of a surprise."
Ruth’s Hospitality Group runs just the 154-unit Ruth’s Chris brand, of which 76 are franchised. Tilman Fertitta’s Landry’s includes a host of concepts in its umbrella, including Joe’s Crab Shack, Morton’s, McCormick & Schmick’s, Rainforest Café, Saltgrass Steakhouse, Bubba Gump, and Mastro’s.