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Who Moved My (Chuck E.) Cheese?

Stocks in this article: CEC RT BH CBRL COSI DRI

NEW YORK (TheStreet) -- Things got a bit more interesting in restaurant land yesterday, when CEC Entertainment (CEC - Get Report), operator of the infamous Chuck E. Cheese's stores, agreed to sell the company to the private equity firm Apollo Global Management for $1.3 billion, or $54 a share. That's a 25% premium on the preannouncement stock price to buy the chain of 577 restaurants.

For years, Chuck E. Cheese's has perhaps been best known as a hosting site for kid's birthday parties. I've personally been to many such parties that our children attended there over the years. In fact, the whole notion of "another party at Chuck E. Cheese's" became cliche in our area, and it became apparent that some children did not want to go to those parties, because the Chuck E. Cheese character frightened them.

The sale of Chuck E. Cheese's is not a great surprise, because the company had recently announced it was seeking "strategic alternatives." That's code for "we've stagnated, and it's time to sell."

But interestingly, the time between that initial "strategic alternatives" announcement and the sale announcement was just one week. I've owned companies that have been seeking strategic alternatives for years. That makes me wonder whether a deal was already in the works.

I've seen some characterizations that the company was struggling, but that may be a bit of a strong word. CEC has been pretty darn profitable over the years, averaging a 7% net profit margin over the past seven years. If there was any struggle, it was that the profit margin was declining. It was 8.8% in 2006, 7.5% in 2010, 6.7% in 2011 and 5.4% in 2012. Furthermore, revenue had stagnated, flattening out to the $800 million level for five consecutive years.

That is not an optimal situation, especially in an environment where restaurants have been going gangbusters for the past several years. It's still not my definition of "struggling." Restaurant chain Cosi (COSI), which has had just one profitable quarter in its entire history, is struggling; CEC is stagnating.

CEC Revenue (TTM) ChartCEC Revenue (TTM) data by YCharts


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