Speculation Heats Up For A Panera Buyout Of COSI

Includes: COSI, PNRA
by: Steve Andrew

In an interview on CNBC's Mad Money with Jim Cramer on Tuesday, Panera's (NASDAQ:PNRA) co-founder and executive chairman, Ron Shalch, did not quell the possibility of a Panera-COSI (NASDAQ:COSI) tie-up when asked directly by Cramer. The interview took place in Panera's first Manhattan store and mostly focused on how Panera could continue to deliver outstanding results for shareholders.

When asked about how the company can continue to grow their footprint, Shalch pointed to the company's current balance sheet. He said that the company has no debt and "hundreds of millions of dollars in cash" ($222 million to be exact) and said "when we can deploy that cash properly, we will." He listed 3 ways they will deploy the cash:

  1. Buy out franchisees at attractive multiples
  2. Buy similar flag restaurant chains that are like Panera
  3. Buy back stock

Here's the specific section of the interview regarding COSI (5:30 mark of the interview:

Cramer: In your second of those three variables you said, "buy someone". Manhattan, very crowded real estate. There is an outfit called COSI, now I know you can't reveal any particular strategy, but if something like that were to come up for sale, would that be an opportunity to jump start Manhattan?

Shalch :Well, I would say it this way. I'll tell you what we have done, not what we might hypothetically do. We bought Paradise Bakery in Phoenix. We bought it because they were the strongest player in the Phoenix market, and we have great respect for the leadership and the culture of the company. You know, we are open to that, but obviously it's got to be the right deal for Panera, and we are never ever going to be doing anything that's silly.

This answer was not a yes, but more importantly for COSI shareholders, it was clearly not a no. So the question would be: Does a tie up with COSI make sense for PNRA? The PNRA standard stores are slightly larger than the average COSI (4,000-5,000sqft vs. 2,500-3,000sqft). PNRAs are primarily in suburban locations, where COSIs stores are primarily in urban areas. The main markets for COSI are New York City, Philadelphia, and DC. These are all places where PNRA lacks an urban presence. COSI has very strong brand loyalty among an active following of customers. This strong brand loyalty, lack of overlap, and urban locations where PRNA wants to grow may drive PNRA to consider the purchase.

COSI currently has a market cap of around $50 million, and any suitor would have to pay somewhere in the neighborhood of 1x-2x revenue ($100 million is COSIs current sales). That makes the take out number somewhere between $2-$4 per share.

This is all speculation, but driven by some key facts and innuendo on PNRA's side.

Of course this is all happening in the background of a turnaround at COSI headed by new CEO Carin Stutz. Stutz is expected to lay out the turnaround plan to the Board of Directors later this month. Investors hope, and expect, it to be aggressive, bold, and centered on getting the company to profitability this year.

Many previous management teams have failed to deliver on the big promise of the COSI brand, but this time may be different under Stutz. Her expertise is in restaurant operation and this company was clearly in need of a leader and operator.

COSI reports Q4 2011 earnings on March 29th.

Disclosure: I am long COSI.