Darden Announces Acquisition of Ruth’s Hospitality Group in Curious but Fairly Priced Strategic Move

We’re not entirely sure why narrow-moat Darden Restaurants DRI has elected to purchase 154-unit Ruth’s Hospitality group, but at least it doesn’t appear to be overpaying for the privilege. The acquisitive full-service operator intends to add the upscale steakhouse chain to its lineup at a valuation of $715 million after a planned cash offer of $21.50 per share, representing a 34% premium to the steakhouse’s May 2, 2023, closing price and 9.4 times trailing EBITDA. Given the muted scale of the deal (with Ruth’s clocking in at just shy of 4% of Darden’s intraday market cap and at 5.2% of fiscal 2022 sales) and a reasonable multiple—PitchBook data suggests a median restaurant acquisition multiple of 12.4 times trailing EBITDA over the past five years—we don’t anticipate any consequential changes to our $143 fair value estimate for Darden or to our Standard capital allocation rating. Deal closure is expected in June and without external financing.

To be fair, Darden’s acquisition track record is strong, and $25 million in targeted synergies (5% of Ruth’s company-owned sales) looks attainable, if on the high side of previous results. With high-teens (17%-18%) restaurant margins, the upscale steakhouse’s unit-level cash ROI looks attractive—roughly 26% at the buildout cost midpoint—but the size of the addressable market is unclear, with just 0.8% annualized growth over the past nine years. We’d expect management to address any development aspirations on a May 4 call scheduled to outline the transaction.

Despite a reasonable financial outlook, we’re a bit befuddled by the strategic impetus for the acquisition, given that Darden already has a high-performing steak chain (LongHorn) in its portfolio. While customer occasions don’t perfectly overlap, we can’t think of any other restaurant holding company that features multiple concepts in the same subindustry. Ruth’s also carries the added twist of 23 international franchised stores in a disjointed amalgam of markets.