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Contributors: Douglas McIntyre Jon C. Ogg

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Friday, August 18, 2006

Lone Star Steakhouse Going Private; How Do Competitors Look If Any Are Next?

So Lone Star Steakhouse (STAR) is going private at a 15% premium. This looks like an acquisition through an affiliate of Lone Star Funds, a private equity group out of Dallas. The company is being acquired for a $27.10, compared to its $23.70 price today. To be frank, it has been somewhat surprising that there haven't been any other steakhouse acquisitions since they have proven to have steady cash flows (the well run ones that is). Other restaurants fall in the same boat, and the brief economic blips that the companies face have proven time after time to be temporary and something that a private company can easily endure.

Earlier this month it released its 6 week same store Sales: Lone Star Steakhouse & Saloon Inc. said Wednesday same-store sales declined 5.5 percent at the company's namesake chain in the six weeks ending July 25; +0.9% at the company's Texas Land & Cattle Steak House chains, +4.4% at Sullivan's Steakhouse restaurants and +11.8% at Del Frisco's Double Eagle Steak House restaurants.

See how this pairs up with other restaurants. We eliminated the high growth and high beta names, and most are either steakhouse or theme restaurants. We eliminated any that didn't have some degree of predictability and ease of transition. The only exception to the rules was Smith & Wollensky, but they have been so poorly run that anyone could do a better job. We also tried to eliminate those that have not been regularly profitable and those that can have a huge business disruption merely because of one event, although that is pretty difficult to stand up to.

Here is the comparison list:

Chain Name (Ticker) Mkt Cap P/E ROE % Debt/Equity Px/Book
Darden (DRI) 5.35B 16.993 27.025 0.56 4.377
Brinker Int'l (EAT) 3.16B 15.298 19.663 0.465 2.936
OSI Restraurant (OSI) 2.23B 18.951 10.172 0.243 1.832
Ruby Tuesday (RI) 1.46B 15.282 18.521 0.715 2.778
Papa John's Pizza (PZZA) 1.08B 20.564 34.012 0.288 6.898
RARE Hospitality (RARE) 970.94M 18.243 12.114 0.087 2.075
Landry's (LNY) 628.57M 17.17 7.062 1.603 1.177
Lone Star Steakhouse & Saloon 501.55M 22.493 3.49 NA 1.197
Ruth's Chris (RUTH) 458.73M 29.819 N/A 0.538 8.818
Morton's (MRT) 250.80M N/A -15.778 0.358 1.82
Smith & Wollensky (SWRG) 39.86M N/A -5.328 0.249 0.899

Jon C. Ogg
August 18, 2006

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