P.F. Chang's Buys True Food Stake

P.F. Chang's China Bistro Inc. (PFCB - Snapshot Report) recently inked a definitive agreement to obtain a majority equity ownership position in True Food Kitchen – a Fox Restaurant Concept (“FRC”) specializing in healthy, locally sourced and globally inspired meals.

In 2009, the company entered into an agreement with FRC to provide debt capital for the early-stage development of True Food Kitchen restaurants. Per the agreement, P.F. Chang's obtained a right to convert its loan into a majority equity ownership position.

In February 2012, the partners of P.F. Chang’s and True Food Kitchen mutually agreed to exercise the company’s conversion option. The action is expected to be completed in the second quarter of 2012.

Upon completion, P.F. Chang’s will hold 51% of True Food Kitchen. Further, P.F. Chang will have rights to increase its ownership to 90% or more in the future. Future unit development of True Food Kitchen will be funded through a combination of cash flow from the existing True Food Kitchen restaurant and P.F. Chang's cash. P.F. Chang's does not expect any significant accretion or dilution to earnings this year from this conversion.

Founded in August 2010, there are currently four True Food Kitchen units with two restaurants in Arizona and two in California. Two more units are slated to open in 2012. The True Food Kitchen concept supports the rising demand for healthier menu options that Americans essentially look for these days while dining out.

The brand has already created a solid customer base within such a short span with strong unit economics. Current average unit volumes are about $6 million with industry-leading cash margins. These attributes made True Food Kitchen a lucrative acquisition target.  

The deal is in sync with P.F. Chang's strategy to emerge as a global brand. Citing an enormous potential in True Food Kitchen, P.F. Chang’s sought to deploy its capital in this growth vehicle and earn solid return-on-investment. P.F. Chang's, which owns and operates two restaurant concepts namely P.F. Chang's China Bistro and Pei Wei Asian Diner, is successfully operating restaurants in the domestic market while many of its international locations are being operated by franchise partners.

P.F. Chang's 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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