A Wall Street Journal story on an activist investor encouraging The Cheesecake Factory Inc. to spin off three of its restaurant chains didn’t leave much of a mark on its stock price.
The cost of shares in the Calabasas casual restaurant group went down by nearly 1% from a close of $42.45 on Oct. 21, the day the Journal’s story was published, to a close of $42.04 on the following day. It then dropped by almost 1.3% on Oct. 23, when its share price closed at $41.51.
The stock price closed flat at $41.51 on Oct. 24.
The Journal reported that Houston-based JCP Investment Management, which has a 2% stake in the company, is urging it to spin off three of its smaller brands into a separate public company, citing “people familiar with the matter.”
“JCP has privately argued to Cheesecake Factory executives that three of its restaurant brands in particular would be better off as a separate company focused on faster growth: North Italia, an Italian casual-dining concept; Flower Child, a health-focused fast-casual chain; and Culinary Dropout, a gastropub known for its pretzel bites and fried chicken,” the Journal story said. Two out of the three chains are owned by Phoenix-based Fox Restaurant Concepts, which Cheesecake Factory acquired in 2019.
JCP has told Cheesecake Factory that it would be willing to inject capital into the spun-off entity to help with its growth, according to the paper.
By breaking up the company, JCP argues that the separate management teams could better focus on hitting their respective targets.
JCP has also recommended that Cheesecake Factory implement a strategic review for several other smaller concepts the activist thinks have struggled and could be of interest to buyers, the Journal’s sources added.
While the paper did not name those other smaller restaurant chains, they could include Blanco Cocina and Cantina, Zinburger and Doughbird.
Analyst reaction
Nick Setyan and Matt Quigley, analysts with Wedbush Securities in Pasadena, said in a research note from Oct. 21 that while they believed the eventual spinoff of Cheesecake’s emerging brands is viable and would add value to shareholders, they disagree on the urgency shown by JCP.
“They’re simply too small today and are unlikely to be large enough in the foreseeable future,” Setyan and Quigley said in the report.
David E. Tarantino, a senior research analyst with Robert W. Baird & Co. Inc., said in his research note of Oct. 21, that his initial take is that such a move could lead to some positives (e.g., a more focused organization).
“But we have our doubts as to whether the ‘sum of the parts’ would be worth substantially more than the current combined company,” and whether JCP has a track record of successfully challenging companies it invests in.
Although JCP appears to have a history of investing in the restaurants/retail space, the firm’s track record in “activist” campaigns appears somewhat mixed, Tarantino said in his report.
“As such, we suspect their proposals would only gain significant traction if other sizable/influential investors join with JCP in pushing management to take action,” he added.
And Citigroup Global Markets Inc.analyst Jon Tower said in his Oct. 22 research note that “slicing up” Cheesecake Factory may not be in the best interests of investors in his view, but activist overtures are likely to keep shares pushing higher near term.
“Both North Italia and Flower Child are fully integrated into Cheesecake’s systems and a split would likely blunt the benefits each derive from being a part of the larger enterprise (e.g., “purchasing, property, technology),” Tower said in the report.
“We believe Cheesecake is now on its best operating footing in years, with visibility into consistent top-line growth and margin expansion and splitting up the company may prove more cumbersome/less shareholder friendly than leaving it as is,” he added.
