Restaurant Deals are Hot, But Papa Murphy’s Multiple Unrealistic

The restaurant industry is seeing signs of recovery.

Bob Bielinski, a CIT Group managing director within corporate finance, says there have been more notable deals this year than all of 2009.  “We are not quite at ‘good’ but we are starting to get better,” he says.

The year started off strongly when Papa Murphy’s, which offers take-n-bake pizza, was sold to Lee Equity Partners for about 10x EBITDA in April. That same month, Roark Capital Group bought Wingstop Restaurants. In May, Mill Road Capital acquired Rubio’s Restaurants for roughly $91 million. Oak Hill Capital Partners closed its $570 million buy of Dave & Buster’s in June (7x EBITDA). Apollo Management this month completed its $694 million buy of CKE Restaurants, which runs the Carl’s Jr. and Hardee’s chains (6x EBITDA), while Golden Gate Capital closed its $180 million buy of On The Border.

“The M&A markets in general are very hot but restaurants are on fire,” says Bielinski.

However, the high multiple attained by Papa Murphy isn’t realistic for most restaurant companies. Growth restaurant companies typically can sell for 6x to 8x EBITDA in the current market. But for the vast majority of restaurant companies Papa Murphy’s 10x multiple is not a relevant data point. ”No one is growing as fast as Papa Murphy’s,” Bielinski says. “To be nearly 8x you need real growth in the future.”

Papa Murphy’s is part of the “quick service” segment of the restaurant industry that has struggled a bit in 2010. Many of their typical customers, men aged 18 to 30, are out of work. By contrast, casual dining struggled all through the recession but is now starting to turn, Bielinski says.

The auction of one casual dining chain is currently unclear. California Pizza Kitchen has been up for sale since April. The New York Post has reported that the sale is on, then off, then on and now is off. American Securities Capital Partners recently pulled out of negotiations to buy CPK, the NY Post said.

CPK is suffering because its second quarter same store sales came in below expectations, Bielinski says. In 2009, CPK offered promotional “Thank You” cards which attracted customers by offering money off meals as well as free prizes. The promotion caused CPK’s performance in 2009 to improve, he says. But this year, comparable same store sales dropped by about 5.9% in second quarter compared to 6.5% decrease in 2009.

However CPK in June was expecting a 6% to 7% drop. The confusion has caused some to wonder if there are operational issues.

California Pizza Kitchen is considered less promotional this year, although it has begun offering another “Thank You” card promotion. Bielinski says the promotions make it harder to compare CPK’s performance this year to last year. Many restaurants were offering promotions during the downturn. “It’s very difficult to compare,” he says.

While it’s unclear whether CPK will get sold, casual dining appears to be rebounding, Bielinski says. Many customers of casual dining restaurants are feeling more secure in their jobs. “They’re more likely to take the family out to dinner. That’s key in the recovery right now,” he says.