Is Nathan's Famous Going To Be Taken Private?

| About: Nathan's Famous, (NATH)

I should start this post by first giving a little background on my history with Nathan's Famous (NASDAQ:NATH). For those of you who don't know, Nathan's is a part of New York history. Started 1916 in Coney Island, it was immortalized in the quintessential New York show, Seinfeld ("The Subway" episode). As it currently stands, Nathan's has 268 restaurants (5 of them being company owned) as well as branded products and licensing programs which distribute Nathan's products to food retailers in all 50 states.

Growing up in the tri-state area, Nathan's is a part of the experience. So it is a company that I always followed in my relatively short time as an investor. I read all the annual reports that I could get my hands on, followed the quarterly announcements and even made several trips to Nathan's Famous restaurants around my area to do some on-site research (delicious work indeed!). After all this was over, I understood Nathan's, as well as the "fast food" restaurant business, better than any other company or industry. So when the stock hit $11.75 on March 2, 2009, I invested over 80% of my portfolio in Nathan's. Now I wish I could claim great foresight to having 95% of my portfolio in cash during 2008-2009 and investing in a stock 7 days before the markets hit bottom on March 9. It just so happens that it was sheer dumb luck. A few costly mis-steps in my early days of investing, because I had absolutely no clue what I was doing, left me extremely timid to commit any money to a stock until I understood what "investing" really meant. The 2006-2009 period just happened to coincide with my total immersion in learning about all things investing (and the learning never stops). Noticing Nathan's at $11.75? Not really luck considering I looked at it almost everyday.

A Lesson Learned

Now that I had 80% of my (modest) portfolio assets in one stock, most investment "professionals" would call me crazy. They would say I am taking on too much risk, that diversification is key, blah blah blah. If only I knew then what I know now. I knew the Nathan's story. I knew the company inside and out (it was from Nathan's reports that I learned about accounting). Yet, it still weighed on me the fact that I wasn't diversified. I was probably reading too much about investing and absorbing too much information and not filtering out the junk. As a result, I checked the stock daily and almost sold it several times. Ultimately, I held out till November 16, 2009 when I sold all my shares for $14.85. As of Fri, April 12, 2012, Nathan's is $21/share. And although I made money (even more than I would have just by holding Nathan's) on the stocks that I purchased with the principal and gain from Nathan's, if I am honest, I never fully understood some businesses that I subsequently invested in but saw gains due to the rising market. So what is the lesson? Be honest and never fool yourself into thinking you know more than you do, especially when it comes to investing. Fooling yourself will almost never result in investing success (I happened to be lucky that time).

What Is Going On Now?

There is a saying that good things come to those who wait. Well, it looks like some good things are going on at Nathan's. I won't get too into detail on the numbers and prospects of the business. That work is for you to do. What I think is happening is that Nathan's management may be preparing to take the company private. Insiders currently own about 45% of the outstanding shares. Share buybacks have been an integral part of management creating value for shareholders and since 2001 until the fiscal year 2011 annual report, over 3.75 million shares were repurchased. More recently, Nathan's announced a dutch tender offer (Dec 6. 2011) which resulted in Nathan's agreeing to purchase 598,959 shares at a price of $22.00/share.

Although making predictions is futile and I try to make as few as possible, I believe that in the next 3-5 years, Nathan's will be taken private by management at a price of $30-$35 (possibly more) a share. If we assume an offer of $32.50 for ease of analysis, that represents approximately a 55% gain at the current price of $21. On a firm valuation basis, $32.50 would mean a take over price of approximately $110 million for the owners after deducting the cash on the balance sheet (Nathan's has no debt). This look to be a very reasonable price for this stable, long-term cash generating business. I wouldn't be surprised if shareholders held out for more than that in the event of an offer.

So Will I Be Buying?

I should be buying shares of Nathan's. Maybe I will. However, I seem to suffer from the "it was cheaper" syndrome. This is the investing mistake that one makes when they know they should purchase shares of a company but find it impossible to pull the trigger because they own or owned shares that were purchased at a lower price. If you suffer from this as I do, don't feel too bad. Warren Buffett has mentioned that he has made this mistake numerous times, especially with regards to Citigroup (C) in the early 1990's. Maybe I will learn the lesson this time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.