Darden Restaurants Inc. is betting on the aggressive growth plans of Yard House USA Inc. and will pay a healthy multiple, up to 13 times Ebitda, to bring it into the fold.
The Red Lobster and Olive Garden operator said late Thursday, July 12, that it will pay TSG Consumer Partners LLC $585 million for the American-style casual dining chain.
TSG began an auction process in early 2012 for Yard House, with J.P. Morgan Securities LLC as its adviser, according to industry sources. During the process, TSG also considered taking Yard House public, sources said, before it opted to sell it instead.
After Darden acquired Rare Hospitality International Inc. for $1.4 billion in 2007, it didn't do much on the acquisition front until, in October, it made a small $59 million cash deal for two restaurant chains/brands owned by Eddie V's Restaurants Inc.: Eddie V's Prime Seafood and Wildfish Seafood Grille restaurants. At the time of its Eddie V's buy, Darden said it was going to look for additional deals.
This time around, industry watchers expect it be a while again before Darden makes its next purchase so it can focus on digesting Yard House.
Yard House operates only 39 restaurants across 13 states, with 17 of them in California. In addition to its American-style fare, the Irvine, Calif.-based target serves up 130 different types of beer. Darden is planning on expanding Yard House by up to 200 restaurants over the next few years.
"We like the strategic move of including the highly differentiated bar and grill brand in the [Darden] portfolio and expect the company's plans to aggressively grow the concept across the country to work," wrote Stephens Inc. analyst Will Slabaugh in a July 13 research note.
The nearly 13 times Ebitda multiple that Darden is paying is much higher than the 8 times Ebitda that buyers have recently paid for restaurant chains. For instance, in May, Thomas H. Lee Partners LP paid around 8 times Ebitda, or $400 million, for Brazilian steakhouse chain Fogo de Chão Holdings Churrascaria LLC. Also in May, Centerbridge Partners LP took P.F. Chang's China Bistro Inc. private for about $1.1 billion, or around 8.5 times Ebitda.
Yard House has around $44 million in trailing 12-month Ebitda on $368 million in sales. Its management team, led by CEO Harald Herrmann, is expected to remain in place.
As a result of the Yard House deal, Darden said it is going to scale back its share repurchase program from $250 million down to $50 million.
Darden expects to complete the acquisition by year's end. The deal agreement does not allow Yard House to seek higher bids.
J.P. Morgan's Peter Engel is advising TSG, which is being represented by Sidley Austin LLP's Mark Metts, Tom Leslie and John Papini.
Darden is receiving financial advice from David Friedland and Roger Matthews at Goldman, Sachs & Co. Gary Thompson, Steve Haas, Mike Goldman and Lawton Way of Hunton & Williams LLP is Darden's legal team.
A Darden spokesman declined comment while TSG did not return calls on Friday.
Darden shares were trading 1 cent lower, to $50.19, late Friday afternoon, giving it a market capitalization of around $6.4 billion.