Darden seeks growth with steakhouses

Darden seeks growth with steakhouses

	Published : Fri, 17 Aug 2007 18:55 By : Agencies Print this Story

MIAMI (AP) - Darden Restaurants Inc. said Friday its $1.19 billion purchase of the owner of the LongHorn Steakhouse and Capital Grille restaurant chains can make it a more significant player in the competitive steakhouse segment of the dining industry.

Orlando-based Darden, the world's biggest casual dining operator, announced a deal Thursday to acquire all Rare Hospitality Inc.'s outstanding shares in a tender offer with a price of $38.15 per share.

Darden, which operates the Italian chain Olive Garden and seafood chain Red Lobster, said Friday that the new additions will help it challenge Outback Steakhouse in the steakhouse segment.

'It is a huge category, reflecting the fact that Americans eat a lot of steak,' said Clarence Otis, Darden chairman and chief executive. 'We know that it is competitive, but Italian is competitive. We weren't always No. 1 in Italian.'

Competition is fierce in casual dining, where affordability and consistency are key, and fluctuations in food costs and factors that affect consumer behavior, such as high gas prices, can affect profits. For the fiscal year that ended in June, Darden sales were up 4 percent to $5.57 billion.

Darden has 1,400 restaurants, with more than 600 Olive Gardens and Red Lobsters each. Atlanta-based Rare Hospitality has 317 restaurants, including 287 LongHorn Steakhouse restaurants and 28 Capital Grille restaurants.

Outback, meanwhile, has more than 900 restaurants worldwide.

Otis said there was plenty of room for new unit growth at LongHorn and enough infrastructure to add the two chains to a lineup that also includes Caribbean-themed Bahama Breeze and Seasons 52, a grill and wine bar with seasonal menus.

'We are now better able to sustain 7 to 9 percent total sales growth even if a specific concept experiences some shortfalls to its growth plan,' Otis said.

Phil Hickey, chairman and chief executive of Rare Hospitality, said LongHorn was growing at a rate of about 30 restaurants per year, and Capital Grille was adding about five restaurants per year.

Otis said consumers seek variety for their casual dining and generally have a rotation of five restaurants where they eat out. The goal has been for Olive Garden and Red Lobster to be among those five restaurants, Otis said.

'Now we have got the opportunity to capture more of those occasions, to be the top three restaurants in somebody's rotation,' Otis said.

The purchase price is a 39 percent premium to Rare Hospitality's closing price Thursday of $27.51. The deal value is based on 31.1 million shares outstanding. Darden valued the deal at $1.4 billion, which includes outstanding debt and capital lease obligations.

Darden said it would finance the deal through cash, a new $1.2 billion senior interim credit facility and a $700 million senior revolving credit facility.

In a research note, Bear Stearns analyst Joseph Buckley lowered the rating on Darden shares to 'peer perform' from 'outperform,' expressing concern that the purchase price may be too high.

'Darden management has been clear about their desire to make a significant acquisition, but we thought Darden would be more value-conscious and patient given current market turmoil,' he wrote.

Darden shares were down $1.55 to $38.41 in afternoon trading. Rare Hospitality's shares rose $9.78, or 35 percent, to $37.29.

Darden's and Rare Hospitality's boards both have already approved the deal. The tender offer is expected to close in October. Hickey said Darden's offer was unsolicited.

In May, Darden closed nearly half its 129 Smokey Bones locations and put the other 73 on the sales block because stores weren't selling enough.