Restaurant Chains Being Presured by Investors to Monetize Property Portfolios

New York Times - February 10, 2006

Hedge fund activists have redirected their recent interest in fast food to casual dining and are focusing beyond high margins in the kitchen to finding value in the land beneath it.

This week, Pirate Capital, an aptly named $1.5 billion activist fund, indicated in a regulatory filing that it had paid $58.8 million for a 7 percent stake in CKE Restaurants, parent of Carl's Jr. and Hardee's, among other holdings.

Late last month, Michael Woodhouse, the chairman and chief executive of Cracker Barrel, said his company had hired Wachovia to explore ways to enhance shareholder value. This came after Cracker Barrel was approached by an unnamed shareholder who wanted changes. That shareholder is Nelson Peltz, who runs Trian Partners, a new private investment fund, say people briefed on Mr. Peltz's investment. A spokeswoman for Mr. Peltz declined to comment.

These restaurant franchises, slightly more sophisticated than fast-food chains, have something in common with their bigger brethren other than some menu items: the restaurants in both types of chains own a lot of real estate. The hedge fund investors believe that real estate has value that, once unlocked, could go to the company's owners — the activists — in the form of share buybacks.

Here's how the activists want to unlock real estate value: sell the real estate under the stores and lease it back, using the proceeds to buy back stock. If such a move would incur a large tax bill — which it would if the real estate was cheap — the restaurant companies could create a real estate holding company and borrow, heavily, against it.

Cracker Barrel and CKE Restaurants will not be alone: other targets are expected to include Outback Steakhouse, Bob Evans and Brinker International, say managers who do not want to be identified because they are buying shares. Sphere: Related Content