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Tickers in this Article: DRI, WEN, KONA
In order to further enhance its Specialty Restaurant Group (SRG), Darden Restaurants Inc. (DRI) recently struck a deal with private equity firm TSG Consumer Partners to purchase Yard House USA Inc. San Francisco based firm TSG is the majority shareholder in Yard House. The all-cash $ 585 million transaction is expected to be sealed by early second-quarter 2013. The total purchase consideration already takes into account approximately $30 million of cash tax benefits that Darden will likely enjoy in fiscal 2013 and 2014.

Post acquisition, the chain will come under Darden's Specialty Restaurant Group, which includes Capital Grille, Bahama Breeze, Seasons 52 and Eddie V's Restaurants. Higher officials of Yard House will continue to play a pivotal managerial role. Harald Herrmann, president and CEO of Yard House, will hold his position and report to the president of Darden's Specialty Restaurant Group.

First appeared in 1996, Yard House is one of the leading upscale chains operating 39 restaurants in 13 states and offering present-day American cuisine. Its distinctive concept, expertise in crafted beers, huge guest response in several markets, strong average unit volumes and industry leading return-on-invested capital make it a lucrative acquisition target.

Darden anticipates the transaction to be 3-5 cents dilutive to its current fiscal year's earnings per share after considering acquisition-related costs of 7-10 cents and projected operating results at the newly acquired brand. Darden also amended its fiscal 2013 outlook to reflect the impact of the acquisition.

Although the company maintains its comps and unit opening guidance, it boosted total sales growth guidance to the range of 9-10% from the previous outlook of 6-7% for fiscal 2013 and slashed earnings per share growth guidance to 5-9% from the 8-12% range. Darden also trimmed its share repurchase goal to fund the acquisition.

The deal supports Darden's strategy to provide an impetus to SRG as a meaningful long-term growth story is building up with the concept. With continued anemic performance by one of its core brands Olive Garden, Darden is shifting its focus toward relatively newer concepts. The company also strives for a balance between different cuisines to cater to guests across all taste buds. This Florida-based company is on an acquisition spree. Darden's another recent addition to SRG was Eddie V's Restaurants which it took over last year.

Collectively, SRG brands are gaining solid acceptance, thanks to strong unit volumes. In the fourth quarter of 2012, revenue at SRG was $179.0 million, up 26.9% year over year on the back of same-restaurant sales growth of 2.7%. Now, the concept has got one new arm called Yard House. We believe operating all these brands under one roof will also provide Darden with economies of scale. Darden management believes that, going ahead, this latest acquisition will allow SRG to garner nearly $1 billion in annual sales and record annual sales growth of 15% to 20%.

Yard House also sees this as an opportunity to be associated with a national chain and explore new horizons. Also, the deal holds immediate cash value for Yard House. Darden, which competes with Kona Grill Inc. (KONA) and The Wendy's Company (WEN), currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We also maintain our long-term Neutral recommendation on the stock.

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