Ruby Tuesday, Inc. (NYSE: RT) owns and franchises Ruby Tuesday brand restaurants. As of September 5, 2017, there were 599 Ruby Tuesday restaurants in 41 states, 14 foreign countries, and Guam. Of those restaurants, the company owned and operated 541 Ruby Tuesday restaurants and franchised 58 Ruby Tuesday restaurants, comprised of 17 domestic and 41 international restaurants.
The company recently announced an agreement to be acquired by a fund managed by NRD Capital (“NRD”), an Atlanta-based private equity firm that specializes in franchised and multi-location business investments.
Faced with steadily declining revenue and constrained operational profile, including the adverse effects of closing 103 poorly performing restaurants, Ruby Tuesday executives agreed on selling the company. Aziz Hashim founded NRD Capital in 2014, specializing in restaurants with franchise operations. In the purchase announcement, he said the private capital firm could take a long-term view and invest in Ruby Tuesday without the constraint of stockholder demands.
The transaction has been unanimously approved by Ruby Tuesday’s Board of Directors and NRD and is subject to shareholder approval and other customary closing conditions. The acquisition is expected to be completed during the first calendar quarter of 2018. UBS Investment Bank is serving as financial advisor to Ruby Tuesday and provided a fairness opinion to the Ruby Tuesday Board of Directors.
Under the terms of the agreement, NRD will acquire all Ruby Tuesday’s common stock for $2.40 per share in cash and will assume or retire all debt obligations for a total enterprise value of approximately $335 million, excluding transaction expense. The purchase price represents a premium of approximately 37% over Ruby Tuesday’s closing share price on March 13, 2017, the day before the Company announced its intention to explore strategic alternatives.
Subsequently, several law firms are investigating possible breaches of fiduciary duty and other violations of law by the Board of Directors of Ruby, in connection with the proposed acquisition of the Company by NRD. These investigations focus on whether Ruby Tuesday and its Board of Directors violated securities laws and/or breached their fiduciary duties to the Company by failing to conduct a fair process, and whether and by how much, this proposed transaction undervalues the company.
On the flip side, as per management, they have thoroughly evaluated all options available to the Company and are confident that this agreement will provide the most promising opportunity to realize the highest value for stockholders while providing the best path forward for the Ruby Tuesday brand. Per them, NRD Capital has a distinguished track record of achieving and maintaining profitable growth for restaurant concepts and will be an excellent partner to lead Ruby Tuesday going forward.
NRD’s focus is on investing in quality restaurant companies and providing strategic and operational expertise to create sustainable value. With a well-established brand, differentiated from other casual dining restaurants by its Garden Bar, the acquirer sees significant opportunities to drive value for Ruby Tuesday,
Considering all the factors, the overly optimistic case behind going long on RT was based on real estate/brand values and not the current operating business of the company. Therefore, theoretically, RT could have fetched something closer to $3.00. But that doesn’t mean an acquirer would be interested in taking over the company in that price range. In that context, $2.40 isn’t an extremely conservative deal.
Furthermore, the considerable headwinds in the casual dining sector would continue to impinge the business and financial profile of companies like “Ruby Tuesday.” In such a case, striking a deal with high net worth owners like NRD, who have relatively more balance sheet strength and a larger store base, gives a relatively higher flexibility to companies like RT.
About the Company: Ruby Tuesday, Inc. owns and franchises Ruby Tuesday brand restaurants. As of September 5, 2017, there were 599 Ruby Tuesday restaurants system-wide, of which 541 were Company-owned. During the first quarter, two Company-owned Ruby Tuesday restaurants were closed. Company-owned and operated restaurants are concentrated primarily in the Southeast, Northeast, Mid-Atlantic, and Midwest of the United States, which it considers to be its core markets.
Fiscal First Quarter 2018 Highlights (13 weeks ended September 5, 2017, compared to the 13 weeks ended August 30, 2016):
Revenues: total revenue was $217.3 million, a decrease of 15.3% or $39.4 million from the first quarter of the prior fiscal year. This decrease was due to a net reduction of seven Company-owned restaurants as compared to the end of the first quarter of the prior fiscal year and a same-restaurant sales decline of 5.8% at Company-owned restaurants. Year-over-year guest counts fell 9.4% while average check amount rose 3.6%. The reduction in guest counts reflects ongoing weakness within the casual dining industry, a preponderance of competitive discounting, and the Company’s decision to run one fewer promotional window and reduce coupon placement. The increase in average check was due to the expanded Garden Bar, coupled with menu pricing and less aggressive discounting.
Net Loss was $9.8 million, or ($0.16) per diluted share, compared to Net Loss of $39.7 million, or ($0.66) per diluted share, in the first quarter of the prior fiscal year.
Liquidity: The Company ended the fiscal 2018 first quarter with cash and cash equivalents totalling $48.1 million and debt of $213.6 million.
Key risk factors and potential stock drivers:
Exposed to risk related to investing in cyclical stocks such as restaurants.
Any future positive announcement from the company and or the outcome of potential lawsuits will continue to remain a critical stock sensitivity factor for the company.
Also, the future direction of the company’s stock is subject to shareholder approval and other customary closing conditions.
The continuity in cost control and any improvement in the profitability could strengthen the financial flexibility of the company.
On Friday, October 20th, 2017, RT closed at $2.39 on an above average volume of 1.26 million shares exchanging hands. Market capitalization is $146.24 million. The current RSI is 64.89
In the past 52 weeks, shares of RT have traded as low as $1.69 and as high as 3.68
At $2.39, shares of RT are trading above its 50-day moving average (MA) at $2.12 and above its 200-day MA at $2.19
The present support and resistance levels for the stock are at $2.37 & $2.40 respectively.
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