CKE Restaurants Enacts 'Poison Pill' Defense: Takeover Brewing?

The destruction of CKE Restaurants' (CKR) share price has made it an interesting acquisition target. Triarc's (TRY) (owner of Arby's) recent acquisition of Wendy's (WEN) 6,600 locations at $2.3 billion, equates to a purchase price of about $348,000 per store, while CKR's current market cap values each of its 3,083 locations at a deep 50% discount to that figure, or about $181,000 per location.

CKR's long term debt position of $333 million is 40% lower than Wendy's $570 million debt load, while CKR owns and operates 31% of its locations with its franchisees operating the balance. WEN has ownership and operation of 27% of the stores within its system. Since the mixes of debt and percentage's of company owned stores are similar, it could be deduced that CKR's value in a takeover scenario would also be similar, and if you do the math, you'll discover that based on Triarc's offer, CKR shares could fetch as much as $20 - nearly double its current share price.

YUM Brands (YUM) (owner of Taco Bell, Pizza Hut, KFC) could be a potential suitor, as its 35,000 units make it the largest restaurant chain in the world. It's quite ironic that this chain, that sells almost everything, is not a purveyor of hamburgers, so entering this segment would allow them to quickly increase their overall market share. Other possible suitors could include, Jack in the Box (JBX) and Burger King (BKC).

CKR is attractive due to many of its favorable long term leases as well as its real estate holdings, CKR owns the land and buildings on approximately 310 of its locations, and also owns the buildings exclusively on 243 locations that also include long term land leases.

The company is expanding at a nice clip, as it has opened 50 international and 71 domestic locations within fiscal year 2008, while closing 47 underperforming stores, prompting a net gain of 74 units. The re-franchising efforts at Hardee's are almost complete with the remaining 60 locations slated for sale, currently in purchase agreements. The company has nearly completed its $400 million stock repurchase plan, and will probably not pursue further purchases in the near term, instead, using its resources to pay down debt and accelerate its remodeling efforts.

Is CKR a target for acquisition? It just might be, because why else would management have recently enacted a 'poison pill' plan to combat a potential hostile takeover attempt? There must be a perception of vulnerability that influenced them to take this action. CKR's low valuation makes it an attractive opportunity, as it is selling at only .33 of annual sales. The lower the share price sinks, the more susceptible it becomes as a takeover target.

Management does need to rely on a 'Poison Pill' to thwart off unwanted suitors , it just simply needs to improve operations at a level appropriate enough to get the share price back up to more realistic levels. Easier said than done.

Disclosure: Long CKR

Comments

[selene:]

Only improvement I can suggest to this good article is that I had to go look up who the Sam Hill is CKE Restaurants. They run Carl's Jr. hamburger fast-food chain and Hardee's (I think this is also hamburgers, I'm pretty sure it's regional chain in the South).

2008 Apr 30 09:43 AM

[Don V.:]

CKR restaurants is a 5 star stock for the longest time yet the stock price just keeps declining. It would be great if someone would buy it out so the shareholders could get something out of this stock.

2008 Apr 30 04:50 PM

[OscarBullFrog:]

i don;t eat at carls jr., and i don;t eat at hardees ... and i won;t buy their stock because i don;t like their food. ymmv

2008 May 02 12:20 AM

[Totem Pole:]

mr. krutger, it looks to me like you are a drinker, am i right? this is a weak statement of a soulful descrepency to the big picture. LOOK AT THE BIG PICTURE KRUTGER!tHE sTOcK IS SPIRAlinG DOWN tHe tOaSTER so to speak.

2008 May 14 11:50 AM