CBRL Group-The Dutch Auction Tender

CBRL Group (CBRL) better known as Cracker Barrel announced back on St. Patrick's Day its restructuring plan which consists of a large repurchase of stock, funded by large borrowings of $800 million and finally the divestiture of Logan's restaurants, perhaps by spin-off.

The company announced this morning that it will be buying back up to 35% of the outstanding stock of the company in a modified Dutch tender auction at a price range of $42-$46.

Some time ago, I had discussed the merits of CBRL and my general lack of enthusiasm for restaurant stocks at current levels. No question, this is an easy entry business.

Value Discipline Restaurant link

CBRL has cleverly chosen to retain its real estate which is a very significant asset. Yet, given the inherent cyclicality in the industry, and the commodity price pressures and wage pressures that seem to be building, the leveraging of this business into a 90% debt to capital ratio seems very brave.

The move will be accretive to earnings, but the risks have expanded dramatically, in my opinion.

Perhaps the ultimate divestiture of Logan's sometime in the fiscal fourth quarter of 2006 (July 06) or fiscal first quarter of 2007 (October 06) will replenish the coffers and pay down some of the debt. But in the interim, shareholders have a far better price than they had prior to Mr. Peltz's "interest" in the stock at its current $42 versus less than $30 prior.

Shareholders do have the opportunity to sell up to 35% of their holdings (assuming everyone tenders) at up to $46. But what's left on the other side of this transaction?

A very highly leveraged, riskier security that in my opinion, is likely to trade for less than the price being paid in the tender.

Logan's is performing well onthe sales front, but CBRL does not break down its profitability separately. Street estimates for the value of Logan's seem to hover between about $7.50 to $9.00 per share.

The use of the Logan's proceeds is also somewhat up in the air-will they be used to buy back additional stock or to pay down the debt.

The downside in the CBRL "residue" stock post tender will be moderated by the perceived real estate value, but the upside will be truncated by the weakened balance sheet. The history of highly leveraged restaurant chains (I think of Shoneys) is pretty scary

Too much uncertainty for me to call...I think I'd rather be on the sidelines than in the midst of this battle.

Who says greenmail is dead???

Disclaimer: I, my family, and clients do not currently have a position in CBRL.