NEW YORK (TheStreet) -- Things got a bit more interesting in restaurant land yesterday, when CEC Entertainment (CEC), 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.
This may just be the start of what may be an interesting period in the publicly traded restaurant arena; I suspect other deals, transactions and changes are on the way. Chains such as Ruby Tuesday (RT) are having difficulty. The company just announced the closure of 30 restaurants, and has publicly stated that it's for sale. While it has struggled operationally, it is chock full of company-owned real estate, which might make it interesting to an acquirer.
Some restaurants also face activist investors, including Bob Evans (BOBE), which also happens to own a lot of real estate. There's pressure on Darden (DRI - Get Report) to separate into separate companies, including a REIT that holds the company's vast real estate holdings. Biglari Holdings (BH - Get Report), which owns about 20% of the country food chain Cracker Barrel (CBRL - Get Report), continues to try to make changes at that company, albeit unsuccessfully so far.
The restaurant space is crowded, and restaurant stocks have overall enjoyed a huge run over the past several years. And as a whole, they appear to be getting very expensive. There may not be a whole lot of money to made in buying restaurant stocks as a whole at this point, unless there is some type of major transaction on the horizon for an individual company. That's what has rewarded CEC shareholders the past week, as shares have risen 25%. But absent that transaction, there was probably little money to be made in the stock.
Note to Apollo Global, CEC's prospective new owner: If you want the company to resume growth, perhaps it's time to retire the Chuck E. Cheese character and bring in some new blood to attract the kids.
At the time of publication, the author was long on BH and COSI, but held no positions in any of the other stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.