CKE Restaurants: A Burger Bidding War

On Wednesday morning, CKE Restaurants (CKR) disclosed they were in talks with an alternative bidder than they expect should reasonably lead to a “superior proposal” to the $11.05 per share offered by Thomas H. Lee Partners in February. The new entrant into the bidding has remained anonymous to this point, and the amount of the offer remains a point of speculation as well. CKE, which owns fast-food hamburger chains Hardee’s and Carl’s Jr., agreed to be acquired by the private equity firm THL Partners on February 25, but had 40 days to seek out better offers; a “go shop” provision that expired yesterday. How this supposed offer will work legally is unclear at this point, but the stock is trading about 7% higher on the news.

There are number of shareholders who had hoped CKR would reject the bid by THL, chief among them investment manager Porter Olin LLC which holds 2.29 million shares. They wrote a letter to CKE Restaurants’ management saying they believe the offer “substantially undervalues the business.” According to our methodology, we think they have a valid point even with the restaurant’s recent struggles with sluggish same store sales in the last month.

For example, over the last ten years the market has historically been willing to pay between 5.7x and 11.4x cash earnings per share of CKR, but even at the offering price that metric falls short of the historically normal valuation at 5.1x. The price-to-sales metric of .43x at the bid price does not fall below the historical range of price-to-sales, but it is near the low end of the range of .37x to .72x. If we look at the current fundamentals and value the stock more closely in-line with the market’s historical norms, we would expect a price in the range of $11.50 to $17 per share. To be clear, we are not anticipating the new offer to be anywhere near $17 per share; mainly because it does not have to be. However, we do think that a bid of $11.05 per share would be too low.

We will be interested to see how this plays out over the coming days, as the existing bid is below what we would expect given the current fundamentals. However, the 40 day “go shop” period has come and gone, and any attempt to bid for CKR must be made soon. Things are definitely cooking over at CKE Restaurants headquarters.

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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