An acquirer would probably be attracted to the narrow-moat company's industry-leading loyalty program engagement and digital sales penetration, expanding delivery capabilities, a growing at-home business, and a potential refranchising/leveraged recap play.
By R.J. Hottovy, CFA | 04-03-17 | 02:33 PM | Email Article

Shares of narrow-moat  Panera  are soaring on rumors that the firm is exploring potential strategic alternatives after receiving preliminary takeover interest. While it's difficult to handicap the likelihood of a transaction--and any deal would ultimately depend on CEO and founder Ron Shaich, who holds 13.4% of Panera's voting power--it's not hard to see why a suitor would be interested. In our view, Panera is one of the restaurant operators best equipped to accommodate evolving consumer expectations regarding value, convenience, health, and technology. We believe an acquirer would probably be attracted to Panera's industry-leading loyalty program engagement (51% of transactions) and digital sales penetration (24% of sales), expanding delivery capabilities, a growing at-home business, and a potential refranchising/leveraged recap play (just $630 million in debt and franchisees own 55% of Panera's 2,000 locations).

R.J. Hottovy, CFA, is a consumer strategist for Morningstar.

In addition, there has been an uptick in industry M&A activity the past two months, including Restaurant Brands' $1.8 billion acquisition of Popeyes, Darden's proposed $780 million acquisition of Cheddar's, and a spate of private equity transactions. An April 3 Bloomberg article cited JAB Holdings (the parent company of Peet's, Caribou, Einstein Noah, and Keurig), Starbucks, and Domino's as potential bidders, though there could be additional interest from multibrand restaurant franchise operators like Yum Brands or Restaurant Brands or a restaurant-focused private equity firm, many of which have been engaged in fundraising in recent months.

There is no change to our $260 fair value estimate based on these rumors; our valuation is based strictly on Panera's longer-term stand-alone cash flow, including average top-line growth of 7% and operating margins expanding to around 16%-17% over the next 10 years. That said, we would not be surprised to see M&A speculation keep the stock ahead of our fair value estimate for the foreseeable future.

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R.J. Hottovy, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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