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Bojangles' joins the go-private parade

But the company doesn’t get the valuations that some of its competitors have received, says RB’s The Bottom Line.
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The Bottom Line

As my colleague Heather Lalley reported Tuesday, Bojangles' has agreed to sell itself to a pair of New York private-equity firms.

But there’s a big difference between the price Durational Capital Management and The Jordan Company are paying for Bojangles' and the price many on Wall Street thought would be paid for the Charlotte, N.C.-based chicken concept.

The firms are paying $16.10 per share for Bojangles'. That’s a 15% premium to the closing price on Sept. 27, a day before reports emerged that Bojangles' was exploring strategic alternatives. It’s 39% above the share price of Feb. 12, the day before speculation began that Bojangles' would seek a buyer.

Indeed, investors have been expecting a Bojangles' sale all year, and they’ve probably been helped along by a certain restaurant industry blogger.

Going into trading Tuesday, the stock had been up 33% year to date. The first increase came in late February and early March, and then the stock spiked over the past month following the sale process reports.

Bojangles' rose 25% in the days following those reports, to as high as $17 a share. And the stock has been hovering around $16 a share ever since.

Indeed, as Stifel analyst Chris O’Cull said in a note Tuesday, the sale price represented just a 1% premium off the share price on Monday’s close.

In other words, investors had been expecting Bojangles' to go for a higher price than the one the firms are paying.

And they might have had a right to think that. Just a year and a half ago, Bojangles' rival Popeyes Louisiana Kitchen received a multiple of around 20 times earnings before interest, taxes, depreciation and amortization, or EBITDA, which was a record.

Limited-service chains have been receiving strong valuations in recent years, even when they’ve been struggling, as is the case with Cava Group’s acquisition of Zoes Kitchen.

Instead, the sale gives Bojangles' an enterprise valuation of just less than $700 million and a multiple of just more than 10 times EBITDA.

In other words, though Bojangles' is joining the parade of companies going private, it’s not exactly cashing in on the big chain gold rush. Though $700 million is obviously nothing to sneeze at, it’s a clear sign that potential buyers are looking at the chain’s trajectory and are holding off on big offers.

In many respects, a valuation multiple of 10 is probably what you’d expect for a company like Bojangles'.

The company had been generating relatively weak same-store sales, including a decline of 0.2% in the second quarter. Earnings had also been weakening. The company’s new redesign didn’t work as planned, and it was looking to refranchise some restaurants and close some others.

And as Lalley noted in her story, the company’s CEO, Clifton Rutledge, left for personal reasons.

There are also competitive dynamics. While Popeyes is a strong-performing company, and chicken is a popular protein, bone-in chicken remains a more challenged market.

Chick-fil-A, Raising Cane’s and Zaxby’s, among others, are growing strongly by selling boneless chicken products. McDonald’s continues to push innovation around boneless chicken sandwiches and chicken tenders.

So while Chick-fil-A’s system sales rose 14.2% last year, according to Technomic, Bojangles' system sales rose just 3.8%. Popeyes was up 4.5%, and system sales at both KFC and Church’s Chicken fell. That suggests consumers are ditching bone-in chicken.

Still, Bojangles' buyers have plenty to work with. It’s the rare bone-in chain with breakfast. The company operates 325 of its 760 locations, meaning it can potentially franchise hundreds of locations. And it has higher unit volumes and is known for its biscuits, something a savvy new owner could market.

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