CPKI California Pizza Kitchen, Inc. (MM)

California Pizza Kitchen Inc (CPKI), a leading casual dining restaurant chain recently signed a definitive agreement with San Francisco-based private investment firm, Golden Gate Capital. As per the deal, Golden Gate will acquire the company for approximately $470 million or $18.50 per share in cash.

The Los Angeles-based pizza chain began exploring strategic and financial alternatives in February 2010 and took more than a year to find a suitor. The offer price is at a 32% premium to the 30-day average price of the share before the search for a prospective buyer began and 10.7% higher to the closing share price prior to the day of acquisition announcement. The tender offer is scheduled to commence by June 8 and the transaction is expected to be completed in the third quarter of 2011.

However, the completion of the deal is subject to regulatory as well as shareholders’ approvals and other customary closing conditions. Moreover, possibility of a higher bid emerging is low and based on the extended length of the company’s strategic review; we believe completion of the deal is imminent.

Post acquisition, the private equity firm, which has a track record of investments in the restaurant industry will focus on the overall growth of the company. Earlier, Golden Gate had purchased Romano’s Macaroni Grill in 2008 and On the Border Mexican Grill in March 2010.

Moelis & Company is acting as the financial advisor to California Pizza Kitchenand Kirkland & Ellis LLP are acting as Golden Gate’s legal advisers with regard to the transaction.

Two lawyers, Richard Rosenfield and Larry Flax, founded California Pizza Kitchen in 1985. The company currently operates 265 restaurants, of which 205 are company-owned and 60 are either franchised or licensed in 32 states and 11 foreign countries. The company serves pizzas, pastas, soups, sandwiches and other food items.

California Pizza Kitchen reported earnings of 9 cents per share in the first quarter of 2011, which was above the Zacks Consensus Estimate of 6 cents, but was below the prior-year quarter’s earnings by a penny.  The above expectation results were driven by menu optimization program, focusing on higher margin menu items and cost control, offsetting lower sales. 

For the second quarter of 2011, the company expects earnings in the range of 20 cents to 21 cents. Comparable-store sales are forecasted between flat to up 1.0%.

We view the deal as strategically positive, its sagging same-store sales and declining traffic are adversely affecting the company’s growth as consumers with lower disposable income are dining out less or looking for cheaper alternatives such as fast food centers. Furthermore, like all restaurant companies, California Pizza Kitchen is susceptible to higher input costs, which will lessen the magnitude of margin rebound. The company expects commodity cost inflation in 2011 to be in the range of 3% to 3.5%, up from previous expectation of 2.5%. Moreover, the company faces stiff competition from other restaurants like Chipotle Mexican Grill, Inc (CMG) and The Cheesecake Factory Incorporated (CAKE).  However, we are disappointed with the price offered in the transaction as it is less than the company’s 52-week high stock price of $20.

 
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