In the last two hours of yesterday's trading, the shares of Luby's (LUB) saw a surge in volume as the stock price shot up 12% to $4.30. The reason: The company won an auction for most of the assets of burger chain Fuddruckers and Koo-Koo-Roo. The parent of these operations, Magic Brands, filed for bankruptcy in April.
But cafeteria chain Luby's definitely sees value in the assets -- and so do shareholders. And the valuation appears to be fairly reasonable. Luby's winning bid was $61 million, although the price tag could increase by $2.45 million if certain contacts and liabilities are not assumed.
Entrepreneur Philip Romano founded Fuddruckers in 1980, with the first location in San Antonio, Tex. While the burger industry was saturated, he saw a big opportunity to differentiate his offering with one-pound patties and self-service toppings at the bar, which included sauteed onions and guacamole. Other nice touches included fresh ground beef and buns made from scratch.
It was enough to stand out from the noise, and Fuddruckers grew quickly. Then, in the late 1980s, Romano sold the operation and went on to start Romano's Macaroni Grill.
While the growth continued, Fuddruckers began to face more competition, and the novelty was starting to fade. After reaching a peak of 240 locations in 2006, the company began to deteriorate, a slide that accelerated during the brutal recession of 2008 to 2010.
Now, Fuddruckers has 62 restaurants as well a three Koo-Koo-Roo locations. There are also 135 franchisees.
A Good Fit
Luby's, which operates cafeteria-style, continues to languish. In the latest quarter, the company closed down 25 underperforming locations, and restaurant revenues fell by $3.5 million to $53.9. There are now 96 locations.
So a deal for Fuddruckers will certainly boost the operation, and Luby's will have access to sufficient financing to get the deal done. But for the most part, the economic recovery will need to expand more -- and unemployment especially needs to fall -- for revenues to pick up. Then again, at least Luby's will be poised for a return with the added scale from Fuddruckers.
Introduction to Preferred Shares
Learn the difference between preferred and common shares.View Course »