Darden's acquisition of Cheddar's is bad news for smaller restaurants that are looking for a buyout

Darden Restaurants, the owner of popular chains such as Olive Garden and Longhorn Steakhouse, announced on Monday that it is buying Texas-based restaurant chain Cheddar’s Scratch Kitchen for $US780 million.

In a note sent out to clients on Tuesday, a team of Morgan Stanley analysts led by John Glass said that the deal is bad news for small cap restaurants looking for a buyout.

“The acquisition of a privately held brand is probably a modest negative for other small cap public casual diners, as they are now effectively ruled out as DRI targets in the short-term.”

However, the deal will be good for Darden, the analysts said.

“The Cheddar’s buy adds a brand to the portfolio that is differentiated (varied menu, scratch cooking, and value focus) and adds growth (165 units, 28 states, last three year unit growth CARG of ~4%).”

The bank expects the acquisition will contribute about $US70-75 million in EBITDA, a measure that gauges a firm’s operating performance.

The acquisition also follows a solid 3Q earnings per share that beat on industry-leading comps.

“3Q EPS of $US1.32 came in ahead of our $US1.29 and consensus at $US1.27,” Morgan Stanley said,”Driven in part by better than expected blended [same-store sales] of +.9%.”

As such, the bank has a price target of $US77 per share, above its previous close at $US75. 58 per share.

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