Why Cara Operations Ltd. Is up Over 6%

Cara Operations Ltd. (TSX:CARA) is up over 6% following its announcement that it will merge with Keg Restaurants Ltd. What should you do now? Let’s find out.

| More on:

What?

Full-service restaurant company Cara Operations Ltd. (TSX:CARA) is up over 6% in early trading on Tuesday following its announcement that it has agreed to merge with Keg Restaurants Ltd.

So what?

Cara will pay Keg Restaurant Ltd.’s shareholders, Fairfax Financial Holdings Ltd. and David Aisenstat, an aggregate purchase price of $200 million, $105 million of which will be in cash, and the remainder of which will be paid using approximately 3.8 million of Cara’s subordinate voting shares. Fairfax and Mr. Aisenstat may also earn an addition $30 million of cash considerations if certain milestones are met within the first three fiscal years of the completion of the merger.

Here are six other important notes to make about the merger:

  1. The Keg Steakhouse & Bar restaurants generate approximately $612.1 million in annual system sales, so when the merger is completed, Cara’s pro-forma system sales for the 12-month period ended September 24, 2017 will increase to $3.4 billion.
  2. The merger is expected to immediately be accretive to Cara’s adjusted diluted earnings per share (EPS).
  3. The addition of 106 The Keg Steakhouse & Bar restaurants will bring Cara’s total restaurant count to 1,365.
  4. Cara expects the merger to be completed in the current reporting quarter.
  5. Cara intends to change its corporate name upon completion of the merger to reflect its new business composition.
  6. The Keg Royalties Income Fund (TSX:KEG.UN) will continue to receive royalty payments from Keg restaurants following the completion of the merger.

Now what?

Prior to the announcement of this merger, Cara was already Canada’s largest operator and franchisor of full-service restaurants and the third largest of all restaurant groups in Canada, so this merger will simply grow its market share.

I think The Keg Steakhouse & Bar brand will fit perfectly into Cara’s portfolio, because of the brand’s reputation and its massive expansion potential, and the fact that this merger will immediately be accretive to Cara’s adjusted diluted EPS is icing on the cake. It’s also important to note that this is the second notable acquisition Cara has made in the last four months, showing that the company is dedicated to growth.

I think the market has responded correctly by sending Cara’s stock higher in today’s trading session, and I would still be a long-term buyer, because it trades at just 16 times fiscal 2018’s estimated EPS of $1.66 and has a solid 1.5% dividend yield, making it very attractive from a fundamental standpoint.

With all of the information provided above in mind, I think Foolish investors seeking exposure to the restaurant industry should strongly consider beginning to scale in to long-term positions in Cara Operations.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned. Fairfax Financial is a recommendation of Stock Advisor Canada.

More on Investing

Canadian dollars in a magnifying glass
Dividend Stocks

Here Are My Top 3 Dividend Stocks to Buy Now

These top dividends stocks have consistently paid and increased their dividends. Further, this trend will continue.

Read more »

Lights glow in a cityscape at night.
Investing

Canadian Infrastructure Stocks to Buy Now

These two Canadian infrastructure stocks offer interesting investment opportunities whether you’re focused on income or price appreciation.

Read more »

A plant grows from coins.
Tech Stocks

3 Growth Stocks Wall Street Might Be Sleeping on, But I’m Not

Don’t miss your chance to load up on these three beaten-down stocks.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Tuesday, November 5

Updates related to the U.S. presidential election will remain on TSX investors’ radar today as the third-quarter corporate earnings season…

Read more »

think thought consider
Tech Stocks

Is CGI Stock a Buy Even With No Dividend Yield?

CGI stock may not have a dividend to speak of. But does that necessarily mean you should ignore this top…

Read more »

A robotic hand interacting with a visual AI touchscreen display.
Tech Stocks

Why Now Is the Time to Invest in Canadian AI Stocks

Are you looking for one of the most solid Canadian AI stocks out there? This one is probably your best…

Read more »

The letters AI glowing on a circuit board processor.
Tech Stocks

Why AI Stocks Should Be in Every Canadian Investor’s Portfolio

AI stocks continue to be one of the best options out there for long-term investing, especially when considering Canadian options.

Read more »

stock research, analyze data
Bank Stocks

Canadian Bank Stocks: Buy, Sell, or Hold?

There are opportunities and risks on the horizon for the Canadian banks.

Read more »