Darden Restaurants - Acquisition Of Yard House Creates Long Term Potential

Jul. 13, 2012 5:15 AM ETDarden Restaurants, Inc. (DRI)MCD, YUM

Darden Restaurants (DRI) the full service restaurant owner announced Thursday after the close that it has agreed to acquire Yard House USA for a total consideration of $585 million.

The Deal

Darden Restaurants, known for its Red Lobster, Olive Garden and LongHorn Steakhouse franchises announced the acquisition of Yard House USA which is currently owned by private equity firm TSG Consumer Partners LLC. Darden will pay $585 million in cash for the company, a transaction which includes $30 million of expected tax benefits to be realized by Darden in the coming two years.

The deal is expected to dilute full year 2013's earnings by approximately 3 to 5 cents and be accretive to earnings from 2014 and onwards. Darden expects to take acquisition related charges of 7 to 11 cents for its fiscal year of 2013.

Yard House

The 39 restaurants of Yard House offer American style food with some ethnic flavors. Furthermore the extensive range of premium beers offered attracts a young crowd. CEO Otis of Darden is excited about the acquisition: "Yard House is one of the most differentiated and exciting restaurant brands in America today, with average unit volumes and return on capital that are among the highest in the industry."

Yard House will be placed under Darden's Specialty Restaurant Group which includes franchises like The Capital Grill, Bahama Breeze, Seasons 52 and Eddie V's. The unit is expected to generate nearly $1 billion in annual sales and sustain 15-20% sales growth for years to come.

Yard House currently operates 39 locations which on average generate $8.4 million in revenues, for total annual revenues of $327 million. The company reported a 27% year-on-year growth rate for the second quarter and is expected to grow into a nationwide restaurant chain operating over 200 restaurants in the coming years. The $585 million acquisition of Yard House does not come cheap. At this price Darden pays 1.8 times annual revenues, compared to a valuation of 0.8 times for Darden Restaurants itself. However the deal significantly boosts the growth profile of Darden which is struggling to generate meaningful same restaurant growth rates.

Full Year Outlook

Darden makes a slight revision to its full year fiscal 2013 outlook as a result of the transaction. Same restaurant sales growth is expected to be 1-2% for Red Lobster, Olive Garden and LongHorn. Excluding the acquisition of Yard House, the company expects to open between 100 and 110 new restaurants. Total sales are expected to grow between 9 and 10% with diluted earnings per share growing between 5 and 9%.

To partially finance the acquisition the company will cut its share repurchase program back to $50 million for its fiscal 2013. Earlier, the company guided for share repurchases totaling between $200 and $250 million.

Investment Thesis

Shares of Darden Restaurants hardly reacted to the news in after hours trading. So far this year shares have traded up 10%. Shares have traded flat over the last five year period, while many cheaper competitors including McDonalds (MCD) and Yum! Brands (YUM) saw their shares rise significantly. Although Thursday's deal is rather small and expensive, it creates some more long term growth potential and thereby possibly some more excitement among investors.

Over the last years investors have not seen meaningful capital gains. In the meantime they did receive their annual dividends. Currently the dividend yield has risen to 4% and today's acquisition gives a little hope for long term growth and share price appreciation.

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

This article was written by

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Finding value that gets unlocked in M&A, IPOs and other corporate events
The writer is a long term value investor and M.Sc graduate in Financial Markets with over 10 years experience. Value can be found in both long and short ideas and uses options to enhance the risk-return profile of investment ideas. Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice.

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