CKE Restaurant Buyout and Questions Going Forward

The CKE Restaurants (CKR) going private transaction “go shop” period ends on April 6th, and it seems TH Lee Partners has its new fast food operator in hand.

 We follow CKR closely and looked at the 14A Proxy Statement, as well as CKE earnings data and 10Qs/10Ks. Overall, we still feel the $11.05 price is on the low side, and represents a 12.7 X PE to its FY-10 GAAP earnings. Relevant notes:

•  The CKR experience gives good signals as to the “discount versus not” argument that still conflicts chain restaurants. CKR’s Carls and Hardee’s restaurant level percentage operating margins haven’t delevered to the degree that some chain restaurants have, such as Arby’s or Burger King, that have done more discounting. McDonald’s, which can afford to do both, reached historically high restaurant margins last year.
• The Carl’s geographical concentration in California, which will lag behind the rest of the nation in economic recovery, can be altered only so fast over time.
• The CKR adjusted forecasted EBITDA supplied to UBS for the Fairness Opinion; FY-10 to FY-15 average compound growth rate was projected at 4.5%, versus a FY-04 to FY-10 actual growth rate of 6.2%. But, CKR EBITDA growth has been flat since FY-08 and actually down from the FY-07 peak.
•  The UBS Fairness Opinion compares to a pretty narrow universe of relevant transactions—Burger King, Wendy’s, Arby’s  and Sbarro.
• Since August of 2009, there have been four other Private Equity chain restaurant transactions, including two since March 25, 2010, with press reported EBITDA multiples, all higher than the CKR transaction:

 Papa Murphy’s—9-10 X

On the Border, 9 X

Western Sizzling, 11X

Church’s, 7.1X

Some of the issues going forward are (1) how much debt must the company service in the future—if that’s $450M, what about the rest (2) and if the real estate is spun off, what will the rents be, and (3) does the CKE Supply Chain operation become a more significant profit driver or is it outsourced?