Will California Pizza Kitchen Deliver for Private Equity?

Like a phoenix, the California Pizza Kitchen auction has apparently risen from near death.

American Securities Capital Partners is in advanced talks to buy the restaurant chain, as first reported by the NY Post and later confirmed by Reuters. Barclays and GE are providing financing.

CPK, which operates 260 restaurants across the U.S., went on the block in April with Moelis & Co. acting as advisor. Earlier this month, the NY Post lumped CPK in with other companies up for sale (iPayment Inc. and Visant Corp.) and said these auctions were “foundering” and appeared close to collapsing.

“That was the biggest red herring,” says one source about the July 1 report. The story was meant to dissuade opponents in the process, the person says.

Los Angeles-based CPK now appears to have a buyer in American Securities Capital, which currently owns Pot Belly Sandwich Works. The PE firm sold El Pollo Loco in 2005 to Trimaran Capital Partners.

“CPK is a good company,” says Brad Ludington, an analyst with Keybanc Capital Markets. “There is a lot of reason to believe, if you are PE firm, that in three to five years [CPK’s] margins could improve quite a bit.”

Bryan Elliot, an analyst with Raymond James, agrees that a PE firm could find upside with CPK, which has above average sales per square foot but below industry average cash flow per square foot. For a PE firm, CPK provides an opportunity to “normalize cash flow,” he says.

Los Angeles-based CPK, a casual dining chain that is known for its creative pizzas, appeals to upscale consumers, Elliot says. The median average income for a CPK customer is $100,000. “They are a niche brand with high income consumer base,” he says. “They’ve done reasonably well during the recession.”

Shares of CPK have been very volatile. In December, the stock dropped to a 52-week low of $12.29 a share. Merger speculation,in April, caused the stock to rocket to a high of $24. On Thursday, shares trading at $18.50 a share.

Earlier this month, CPK reported preliminary second quarter revenues had dropped 4.6% to $163.1 million. The company, in May, predicted second quarter results of 24 to 26 cents a share, which it then cut to 10 to 15 cents a month later. Then, on July 13, CPK boosted second quarter guidance to 15 to 17 cents a share. CPK plans to announce second quarter results on Aug. 5.

“CPK earnings have been strained for a while now,” Ludington says. “Guidance for Q2 has been up and down.”

A fair price for CPK is $18 a share although the company could go for $20 a share in an LBO, Ludington says.

With CPK poised for a sale, the restaurant industry appears to be finally rebounding from the recession. Restaurants hit the low point of their margins from 2008 to 2009, says Ludington. “Restaurants are cyclical and there is reason to believe we are coming out the cycle at this point,” he says.

The industry has seen a spate of PE deals in 2010. In May, Rubio’s Restaurants was sold to Mill Road Capital for roughly $91 million. Oak Hill Capital Partners closed its $570 million buy of Dave & Buster’s in June. Apollo Management, this month, completed its $694 million buy of CKE Restaurants, which runs the Carl’s Jr. and Hardee’s chains, while Golden Gate Capital closed its $180 million buy of On The Border. In April, Papa Murphy’s was sold to Lee Equity Partners while Roark Capital Group bought Wingstop Restaurants.

CPK and American Securities could not be reached for comment.