Panera Bread Company’s PNRA shares rose 14% in the trading session on Apr 5, after the company announced that it has inked a definitive merger agreement with JAB Holdings Company. Per the agreement, JAB Holdings will acquire Panera for $315 per share in cash, in a transaction valued at roughly $7.5 billion, including $340 million of net debt.

The figure represents a premium of approximately 30% to the 30-day volume-weighted average stock price of Panera, as of Mar 31, 2017. It reflects a premium of about 20% to Panera’s all-time high closing stock price as well, also on the same date.

Inside the Headlines

The buzz around Panera’s acquisition started after a Bloomberg report came out on Mar 31. The report suggested that Panera was exploring a possible sale option after it potentially saw significant takeover interest from a number of companies, including  Starbucks Corporation SBUX, Domino’s Pizza, Inc. DPZ, in addition to JAB Holdings.

Luxembourg-based JAB Holdings is a privately held business group and an investment arm of the Reimann family. It has been focused on acquiring names in the consumer goods and food categories since a long time now.

Last year, JAB Holdings and its partners bought Krispy Kreme Doughnuts in a deal worth $1.35 billion. Additionally, it owns personal beverage system company, Keurig Green Mountain, which it had acquired in 2016 in a deal worth $13.9 billion. The coffee spree started back in 2012 when JAB Holdings acquired Peet’s Coffee & Tea for about $1 billion. In 2013, the company purchased Minnesota-based Caribou Coffee Co. and D.E. Master Blenders 1753 N.V. Notably, one of the world’s biggest coffee companies, Jacobs Douwe Egberts is also under the umbrella of JAB Holdings, in partnership with Mondel??z International, Inc. MDLZ. In 2015, the company also bought Espresso House, a leading coffee chain in Sweden and Norway.

Moreover, JAB Holdings has investments in various top consumer products brands and owns leading makers of high-end brewing products. Thus, among other things, the food conglomerate’s portfolio of brands makes it well-suited to dig into Panera.

What Makes Panera a Good Choice

Amid the ongoing restaurant recession, this bakery café giant is one of the very few who is being able to hold on to its own.

In order to boost its competitive position, Panera has been implementing new strategies, such as the rollout of Panera 2.0. This rollout indicates its operational excellence as well as provides digital access to Panera through mobile, web and kiosk. The program also aims at growing sales as well as earnings, while lowering costs.

Already, the company has removed all artificial ingredients from all of its items, maintaining popularity among health-conscious customers. Additionally, Panera has been working on its store design to enhance customer experience.

All these make the company optimistic about its efforts and it expect considerably strong comps and sustainable double-digit EPS growth in 2017 and beyond.

Meanwhile, Panera’s digitally enabled larger party-sized channels such as delivery, catering, Rapid Pick-Up, along with its Panera At Home business, are driving incremental sales and should turn out to be strong revenue growth drivers in the long term. At the end of 2016, Panera introduced delivery at 15% of its system. Based on the initial success with delivery, plans are in place to have delivery in 35% to 40% of its total system by year-end 2017.

The company’s Panera at Home business has also grown substantially over the past few years and would continue to aid sales, going ahead.

Additionally, the company also pre-announced its comparable bakery-café sales growth for company-owned units, for the first quarter of 2017. Interestingly, these comps grew 5.3% over last year’s quarter and also outperformed the Black Box all-industry composite by 690 basis points.

Thus, while others in the restaurant space have struggled to generate sales owing to cautious consumers, Panera Bread has largely succeeded on its solid sales boosting and diverse growth strategies.

Consequently, the stock has climbed nearly 28% in the one year period ending Mar 31, 2017, outperforming the Zacks classified Retail-Restaurants industry's decrease of 2.2%.

What’s Happening in the Restaurants Space

The ongoing restaurant recession has led many fast-food and fast-casual chains to consolidate in recent months. The acquisition of Panera is the fourth such M&A activity in the restaurants space, year to date.

Notably, Restaurant Brands International, Inc. QSR, the parent company of Burger King and Tim Hortons, recently purchased Popeyes Louisiana Kitchen. Moreover, Darden Restaurants, Inc. DRI, whose portfolio includes the likes of Olive Garden and Longhorn Steakhouse chains, also announced the acquisition of casual dining chain, Cheddars Scratch Kitchen. Meanwhile, Bob Evans Farms, Inc. BOBE announced that it has entered into a definitive agreement for the sale of Bob Evans Restaurants to an affiliate of Golden Gate Capital.

We note that one of the reasons behind these consolidations is the rising labor expenses and other costs. Now that the Affordable Care Act is here to stay, restaurateurs could be looking to increase scale of operations so as to benefit from economies of scale.

Additionally, consolidation is a convenient way for overseas expansion. For instance, the acquisition of Panera by JAB Holdings could provide the bakery café chain with easier expansion opportunities in Europe and beyond. Moreover, federal tax reforms are likely to boost cash flows and therefore it makes sense to pool resources for even stronger returns over time.

Given the various potential benefits of consolidation, we expect to see more of those in the industry in the near future.

Bottom Line

The Panera acquisition deal is slated to close in the third-quarter of 2017, subject to shareholder and regulatory approvals. Following the closure, this company will be privately held and continue to be operated independently by its management team. Currently, Panera carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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