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Dining on Darden

Yesterday, Cramer highlighted a couple of companies he thinks are ripe takeover targets for private equity groups. It’s part of a weeklong series he’s doing. He figures PE is making so much money, Home Gamers might as well get in on the action. His strategy is to find firms that generate lots of cash but suffer from poor management. That equation usually results in an undervalued company, and private equity loves that.



Cramer says Darden just happens to fit the bill. It’s got massive cash flow from its core business, restaurants – namely Olive Garden and Red Lobster – and its decision to expand into new concept restaurants probably wouldn’t impress a private equity firm. When CEO Clarence Otis was on Mad Money, he said he was expanding for the sake of growth, but PE guys could care less about that. They just want cash flow. Another thing PE guys like is a company that has businesses that can be broken off and sold, which Cramer believes Darden does.

If a private equity firm did buy Darden and take it private, Cramer thinks it would close all of Darden’s new restaurants and focus on Red Lobster and Olive Garden. The two are so mutually exclusive that whoever takes the company private could then bring each restaurant public separately after operations improved. There’s also the real estate: Darden owns 60% of the land under its restaurants through privately held REITs. While residential real estate might be suffering these days, commercial is not.

An offer for Darden could bring with it a 20% premium, and that means an eight-point pop from the current quote, Cramer says. If private equity ignores Darden, he still thinks it could be good to own because it's the stock that is broken, not the company. The flaws he sees in Darden, flaws that are attractive to private equity, are fixable even if the company is overlooked.

Bottom Line: Now that we know how to game these private equity fat cats, we can really try to make some money – and Cramer thinks Darden is the stock with which to do it.

You can read about Cramer's other private equity plays here and here.

Questions? Comments? madmoney@cnbc.com

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