This morning, CEC Entertainment Inc. (NYSE-CEC) announced a definitive agreement to be acquired by an affiliate of Apollo Global Management, LLC (NYSE-APO) for $54.00/share cash; CEC may solicit superior proposals until 1/29/14. The offer is conditioned on a minimum of more than 50% S/O tendered, HSR clearance and other customary closing conditions. On 1/7/14, it was reported that CEC was exploring a sale; the share price rose 14% that day at closed at $49.58. The company announced disappointing 3Q13 earnings, primarily due to weak comparable store sales; the CEC CEO/President noted sales had turned positive for the first four weeks of 4Q14. The share price declined only 2% to $45.53 following the earnings announcement, supported in part by a concurrent 13% increase in the quarterly dividend to $0.27. The company reiterated its commitment to its capital expenditure plan of opening 12-15 new company-owned stores in 2014 and expanding both “domestically and internally”.
The CEC deal price is inline with our mid-$50s expectations from a private equity buyer with minimal to no strategic synergies. The valuation multiples ($1.3B EV) using consensus 2014E are 1.5x EV/Revs ($857M, up 3.7% YoY), 7.3x EV/EBITDA ($178M, up 3.1% YoY, 20.7% margin) and 16.9x P/E ($3.19 EPS, up 8.1% YoY). We sense the company was well-shopped given the short two week “go shop” period; the press release noted that the deal concludes an “extensive review of strategic alternatives. Nonetheless, we expect CEC to trade at a small premium to the deal price given the company’s ability to solicit superior proposals, which suggests there were other interested parties and APO may have been the first to be in a position to sign a definitive agreement. A buyer that has some meaningful synergies could pay in the high $50s, which equates to unadjusted multiples of 8x EV/EBITDA and 18x EPS.
CEC has a unique “entertainment” restaurant concept that would not seem to mesh well with corporations that operate a diversified brand of restaurant concepts. The brand is more akin to a juvenile version of Dave and Buster’s Inc. (“DAB”), another Dallas, TX-based company that operates dining and entertainment venues (with a much larger footprint compared to a CEC restaurant) taken private in 2006. DAB was reported in December 2013 to be considering a sale or IPO which would value it at more than $1B; it was sold to Oak Hill Capital in 2010 for $570M. While there could be some interesting synergies between the two brands, the current owner appears to be focused on monetizing its investment rather than expanding its exposure to the restaurant entertainment business.
There have been numerous criticisms of CEC, primarily that the Chuck E. Cheese concept has gotten stale over the years and that the company is overly reliant on children’s birthday parties (~15% of total revenues). However, recognizable brands are hard to create from scratch and there are international franchising opportunities that can possibly reinvigorate growth. The company has tweaked its food costs and game token policy, but making fundamental changes (and taking the associated risks) is probably best done as a private company.