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Tickers in this Article: WEN, CAKE, HNZ, CSG
Rumor has it that billionaire shareholder activist Nelson Peltz may be interested in purchasing a significant stake in the casual dining establishment, Cheesecake Factory (Nasdaq:CAKE).

In short, if these rumors are true, or even if Peltz were only to take a small position in the casual dining chain, I think it could have a very positive effect on the stock. (For related reading, see Activist Hedge Funds.)

Peltz's Influence
For those unaware, Peltz has extensive experience in the restaurant and beverage industries. He's owned the well-known beverage company Snapple, and heads investment entities that own or have owned high profile, sizable stakes in a variety of other big name companies such as Arby's, Cadbury Schweppes (NYSE:CSG), H.J. Heinz (NYSE:HNZ), and Wendy's (NYSE: WEN).

Peltz's traditional modus operandi is pretty simple. He and his firm take a stake in a public company, then lobby its board of directors for some sort of change that should drives shareholder value, and the stock price higher. Then he moves onto his next target.

From the time he launched his efforts to obtain seats on Heinz's board (in March 2006) to the time he landed seats (in August) the stock was up 10%. Since August of 2006, the stock is up roughly another 10%.

Peltz's Interest in Cheesecake Factory
In late December news reports suggested that entities controlled by Peltz received an antitrust approval for some type of transaction; the type of transaction was not disclosed. However, naturally, because of Peltz's reputation and penchant for investing in restaurant chains the the rumor is that he's about to take some sort of big stake.

A recent Wall Street Journal article cites a source which claims that Peltz has taken a 14% stake in Cheesecake Factory; however, I don't believe that has been proved yet, and I haven't seen any documents which confirm or deny this. (To read the article see, "Cheesecake Factory Stake Bought by Peltz Affiliate".)

Here's why I think that an investment in Cheesecake Factory is a natural fit for Peltz's investment style and what might make him interested in the shares:

1) Cheesecake Factory is a growing chain that's trading right near its 52-week low. Peltz likes bargains. For example, shares of Heinz floundered in the mid $30s for about two years prior to his investment.

2) According to the company's 10-Q, for the 39 weeks end October 2, the company had about $38 million in cash and short term securities on its balance sheet. It also recorded roughly $86.4 million in cash from operations on its cash flow statement. Peltz might think that the money could be better spent on things such as stock buybacks, or on new menu introductions. I sense there's some value to be unlocked there. (for related reading, see Show And Tell: The Importance Of Transparency.)

3) I think Peltz believes that he can get support from other shareholders who may be frustrated by the stock's overall performance over the past couple of years.

Why Peltz would good for the Common Shareholder
1) If you check out a 12-month chart for Cadbury, you'll note how the stock has fared since Peltz's involvement was announced back in March. Large jumps were also seen when Peltz took a stake in Heinz. He has a solid history of getting results.

2) By accumulating the common stock, Peltz's interests seem in line with other common shareholders. Any drive by him to enhance value would, I think, lift all boats.

In short, be on the lookout for news that Peltz is indeed taking a stake in the company and/ or any communications he may have with the board through the press. Also watch the stock price and the options activity, as significant buying may signal that a transaction is near or that Peltz is accumulating the shares.


Bottom Line
Rumors are swirling that billionaire investor Nelson Peltz has or is about to take a sizable stake Cheesecake Factory. I think that Peltz's involvement would be terrific for the common shareholder both because of his knack for driving stock prices higher and because he has a reputation for pushing boards of directors to find ways to enhance shareholder value.

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