Einsteins Worth A Look

Einstein Noah Restaurant Group Logo

Einstein Noah Restaurant Group (BAGL) owns, operates, franchises, and licenses bagel specialty restaurants under the names Einstein Bros. Bagels, Noah’s New York Bagels, and Manhattan Bagel brands. It is also a long term holding of famed investor David Einhorn. Greenlight Capital, the firm run by Einhorn, holds over 10 million shares or over 63% of the outstanding shares of BAGL. He has held this position in BAGL for over 5 years. Unlike some of his other investments, BAGL has not been a big success. So, he has been pushing management to increase shareholder value.

In May, management announced that it is exploring strategic alternatives such as a merger or a sale to increase shareholder value. The stock shot up from $14 to over $16+.

In mid October, it provided a peek at third quarter results, and updated investors on the progress of the strategic alternative initiatives  In addition to selling or merging the company, BAGL is thinking about recapitalizing the company and giving a special dividend of $154 million or $9 dividend. Third quarter results were below expectations and investors sent the stock down about 10% from $17.81 to $16.10.

The company also shared the presentation it made to public lenders to secure the recapitalization loan. See the full presentation below.

 

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Recapitalization summary

Here are the details of the recapitalization summary:

  • $265 million in senior secured credit facility.
    • $240 million of that is 1st lien term loan
      • $154 million dividend to shareholders
      • $70 million Refinance existing debt
      • $13 million Transaction expenses
      • $2 million OID
    • $25 million revolving credit facility

The company will be highly leveraged. With a $53 million adjusted EBITDA for 2012, the company will have a pro forma leverage ratio of ~4.5 ($240/$53) . As I mentioned, the dividend will be $9/share.

The transaction was supposed to be completed by November 5th. However, nothing has happened. So, there might be some issues with the recapitalization.

Why worth a look?

The stock has recently dropped from $17.81 in October 16th to $14.37 as of yesterday. It now trades at pre strategic alternatives announcement price. At this price, the company trades at a fair valuation and still has upside if the company is sold or recapitalized.

Valuation

For 2012, the company is on target to earn $.95/share or $16 million. It will have depreciation expense of around $20 million. About $10 million of capitalization expenditures is maintenance capitalization. So, BAGL has about $26 million in FCF. A rough multiple of 10 gives a market capitalization of $260 million. At $14.37, BAGL trades under a market capitalization of $250 million. It is by no means cheap, but it is not expensive here.

It also has other things going for it:

  • David Einhorn holds a majority stake. So, he is going to do everything in his power to increase value.
  • $.50 dividend or ~3.5% yield. 
  • Revenue and earnings have been steadily increasing over last couple of years.
  • Bagels are good and store concept is bright and clean.
  • Growing through not only company store expansion, but also through licensing and franchising.
  • Opportunity for growth. Only 783 restaurants nationwide.

Recapitalization Valuation

 Einstein Noah Restaurant Group Post Recapitalization Earnings

Based on my calculations, there is up to a $5 upside if the company is recapitalized. $9 divided and a $10/share post recapitalization value based on 10 times FCF of $17.5 million.

I want to get in at below $14.5 for an initial small position and add to the position if it goes below $14.

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Disclosure: I do not own BAGL. 

3 thoughts on “Einsteins Worth A Look

  1. One thing to note that I just found out is that Greenlight holds 60% because it owned BAGL debt when it went bankrupt. That does change things from them directly buying shares because it is not as bullish. Either way, around $14-$15 is a fair value for this company.

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