Market Overview

Learn About Private Equity & the Chinese Restaurant

When the restaurant “P.F. Chang’s” (NASDAQ: PFCB) pops up in a conversation what are your initial thoughts?

Is it of an Asian food destination that sort of sells pricey versions of the stuff found at Sum Dum Luck around from your house? Is it those yummy lettuce wraps that are clearly overpriced relative to the amount of food being offered? Or, how about, guys, that total lame-a-zoid move in taking a blind date to P.F. Chang’s in the hopes she overlooks it being a glorified fast food joint?

We dig all of these mental impressions on the largest, most extravagant Chinese food place that any of us are likely to visit in our lifetimes. However, want to really outfox the crew sitting at the table with you doing sake bombs on a Friday night? Then, it’s high time to lace up the $300 Hugo Boss yuppie dress shoes and slip into the role of a private equity hotshot, for P.F. Chang’s received a proposal to go private yesterday.

Decoding Why Private Equity Gobbled Up P.F. Chang’s

• The overall business has struggled post-recession, losing market share in our estimation to Cheesecake Factory, or from simply not having an exciting enough menu at the right price to lure in cost conscious families. Private equity loves companies it could turnaround as it bids strategically (aka low) today in the hopes of making the investment worth considerably more in five years through a new IPO (be smart: initial public offering). Oh yes, P.F. Chang’s will be a public company again, so remember we told you first when the news crosses in 2017.

• P.F. Chang’s has established bar offerings at both its Bistro (the main business attached to malls) and Pei Wei concepts (think Panera Bread, except selling Asian food). Private equity sees liquor, they see profits. Booze only represented 13% and 2%, respectively, of annual sales at Bistro and Pei Wei in 2011. Through more effective tableside marketing (aka the waiter or waitress points out new drinks/specials), liquor sales and by extension profits, could be goosed higher.

• Both chains have opportunities to be known more for lunch than they are currently. Lunch represented 32% and 42%, respectively, of annual 2011 sales for Bistro and Pei Wei.

• Private equity has the funds to bring the brands internationally in a formidable way. Today, Bistro has a couple international locations through license agreements.

Decoding Why P.F. Chang Made the Deal

• The deal is all cash (and cash is king, all or partial stock deals are not as lucrative as getting cash upfront) providing “certainty of value” to shareholders, which so happens to include the CEO.

• Management looks to be staying aboard and could benefit financially if they hang on long enough to see a new IPO.

• As a private company, P.F. Chang’s will have access to greater financial resources to expand (be smart: those resources are from the “sponsor” company, aka the private equity firm) and implement change to how the business is run.

• As a public company, which always has to answer to the quarterly demands of Wall Street (management teams plan initiatives looking out five years or longer), P.F. Chang’s may have been unable to invest in lower prices to drive increased guest traffic and test new menu options (doing so would weigh on short-term profits, a mega no-no on the Street).

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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