Hedge fund objects to Lone Star buyout

Barington Capital says Lone Star Funds’ $600m offer for the Lone Star Steakhouse chain undervalues the company.

A major shareholder has objected to Lone Star Funds’ $600 million (€469 million) buyout offer for the Lone Star Steak House. New York-based hedge fund Barington Capital Group, which owns a 9.4 percent stake in the restaurant chain, said the bid undervalues the company’s extensive real estate holdings and its upscale Sullivan’s and Del Frisco’s restaurant brands.

The Dallas-based private equity investor had offered to buy the flagging Wichita, Kansas-based restaurant chain for $27.10 per share, which represented a 15 percent premium over the stock’s closing price on August 17, the day before the deal was announced. The restaurant company owns and operates 222 of its flagship Lone Star Steakhouse & Saloon eateries across the US, as well as 40 others under different brand names including the Sullivan’s and Del Frisco’s Double Eagle. According to SEC filings, the company owns approximately two-thirds of its restaurant locations.

Barington wants Lone Star Steak House to consider other alternatives and cited bullish share price targets well above Lone Star Funds’ offer. CL King & Associates analyst Michael Gallo and Oppenheimer & Co. analyst Michael Smith both have price targets of more than $30 per share on the steakhouse chain.

“While we are reserving for now our ultimate judgment on the transaction, we do not believe that the company’s valuable assets and brands are being sold for a price that reflects the intrinsic value,” Barington chief executive officer James Mitarotonda said in a statement.

If other investors join Barington’s objections and the deal unravels, it would mark the second time major shareholders scuttled a buyout of the chain. Investment firm Bruckmann, Rosser, Sherrill & Co. offered $579 million for the company in 2002. That deal, which would have led to the exit of founder and chief executive Jamie Coulter, also fell through after major stockholders were critical.

When the deal with Lonestar Funds was announced, Coulter, who also owns a significant stake in the restaurant chain, called the offer “in the best interests” of the company’s shareholders.

Lone Star Funds has previously invested in other troubled restaurant chains – selling off Nashville, Tennessee-based family restaurant chain Shoney’s to Tennessee-based private equity investor Centrum Equities for an undisclosed sum in July. The Dallas-based investor subsequently slashed the number of Shoney’s outlets by nearly a third and sold-off its growing seafood chain brand Captain D’s.

Lone Star Funds have raised more than $13.3 billion in private equity funds since 1995.