The buyout offer for Fiesta Restaurant Group (FRGI), with cash proceeds of $8.50 per share, values FRGI at approximately 8.0x Adjusted EBITDA for the twelve months ending 3/31/23. The $8.50 per share price is only modestly more than the recent trading level, so there could yet be a discussion in the marketplace whether a higher price is justified.
Fiesta Restaurant Group operates 134 Pollo Tropical restaurants, all in Florida, plus 28 franchised Pollo Tropical restaurants in the U.S., Puerto Rico, Panama, Guyana, and the Bahamas. The brand therefore has yet to prove its appeal beyond Florida. The stores are 2,800 to 3,700 square feet, averaged $2.8M in calendar ’22, cost from $1.6M to $2.0M. The store level EBITDA return was 15.4% in calendar ’22. Based on the midpoint cost of $1.8M and the store level EBITDA return of 15.4% on $2.8M in ’22, that was a 23.9% cash on cash return. The targeted store level return in ’23 is higher, at 18%. G&A was 13.4% of revenues in ’22, targeted at 10%.
Our AUGUST STOCK OF THE MONTH presented last week (the name of which is known to our subscribers) has overr 400 locations system-wide, mostly company operated but with a presence in 31 states and more of a franchised presence, therefore more broadly accepted than Pollo Tropical. While the 2000-2600 square foot stores average about half that of Pollo Tropical, the cash on cash returns are currently similar, both are projected to similarly improve. Both have similar appeal relative to female/male, lunch/dinner and about three quarters of meals consumed off premise with food that travels well. The G&A level, 13.4% in calendar ’22 at FRGI in Q2’23, had improved to 10% in Q2’23 (down from 13%) and is projected to move about a point lower in the next twelve months. At our STOCK OF THE MONTH G&A was already at 9.7% in calendar ’22.
THE BOTTOM LINE
If Fiesta Restaurant Group is an attractive purchase at about 8.0x Adjusted EBITDA in the twelve months ending 3/31/23, our AUGUST STOCK OF THE MONTH is at least as attractive. At the same valuation, our pick would be up about 65% from the current level.