Here's why you need to pay attention to Cava's acquisition of Zoes Kitchen

Key Points
  • The investment fund offering to help finance Cava's acquisition of Zoes Kitchen is run by restaurant industry veteran Ron Shaich, the founder and former CEO of Panera Bread.
  • Shaich is a proven leader with extensive experience spotting up-and-coming trends.
  • With this deal, Cava is poised to become the dominant player in Mediterranean cuisine and to scale its business.
Zoe's Kitchen Mediterranean starters.
Source: Zoe's Kitchen

The $300 million acquisition of Zoes Kitchen by Cava Group might seem like just another merger in the highly competitive restaurant industry, but the deal has something most don't — the involvement of industry veteran Ron Shaich.

Shaich heads up Act III Holdings, the investment fund that offered to help finance Cava's acquisition of Zoes. Should the deal go through, he will become chairman of the private company. The founder and former CEO of Panera Bread is a well-known pioneer in the restaurant world with a track record of predicting consumer habits and innovating ahead of competitors. His keen eye for spotting trends suggests Mediterranean cuisine is an emerging restaurant style, which is reinforced by consumer's preference for healthy fare.

Shaich modernized Panera's order and pay processes with fast-lane kiosks and mobile order to speed customers through the checkout years before rivals like McDonald's and Taco Bell even began testing the technology. Shaich was also responsible for positioning Panera as a healthy brand by ditching all artificial additives and preservatives in its food and posting caloric and sugar information about its soft drinks. He did this as consumers were starting to shift toward fresh and natural foods.

Shaich is a "proven leader" with "extensive experience in scaling a regional concept into national brand," David Tarantino, analyst at Baird, wrote in a research note Friday.

Act III was formed by Shaich and his partners to make investments in the restaurant industry that "have the potential to dominate significant market niches," Shaich wrote in a LinkedIn post Friday.

For Shaich, the merger between Cava and Zoes meets those qualifications. With this deal, Cava would be poised to become the dominant player among Mediterranean-style restaurant chains and would be able to grow in scale and presence in the U.S.

"Ron Shaich probably understands fast casual better than nearly anyone, and his involvement certainly bodes well for the success of the business," David Henkes, principal at Technomic, told CNBC via email.

Henkes said fast casual chains, where customers can place an order at a counter then seat themselves, are a "bright spot" in the restaurant industry, which as a whole see growth of between 1 to 2 percent since 2010.

Cava is also in a unique position for success because of its cuisine. He said while Mexican, pizza and bakery cafes have become crowded spaces, there is a lot of room in the industry for ethnic cuisines like Mediterranean.

"Cava's growth trajectory certainly lends itself to comparisons to the early days of Panera," Henkes said. "Over the past three years Cava has been growing an average of 72 percent, and it's positioned in a fairly new and underpenetrated segment of Mediterranean."

While Cava's sales have continued to soar, it would scoop up Zoes at a time when other Mediterranean chains are struggling to boost traffic and sales. Competitor Noon Mediterranean, formerly Verts Mediterranean Grill, filed for Chapter 11 bankruptcy protection earlier this week and even Zoes has struggled.

In the first quarter, Zoes posted a net loss of $3.6 million, and saw sales its restaurants open at least one year fall 2.3 percent. Zoes saw a stretch of same-store sales declines throughout 2017, which followed a period of rapid expansion that resulted in high employee turnover at its restaurants and managers who had less experienced than needed.

Cava has been on the radar of restaurant experts for several years, earning top spots on Fishbowl's emerging brands charts in 2017 and 2018. The chain, which serves customizable grain bowls, salads and pitas, has grown quickly since it was spun off from full-service restaurant Cava Mezze about seven years ago.

Adding Zoes to its portfolio would expand Cava's footprint to 327 locations from 66.

Under the terms of the deal, Zoes Kitchen has a 35-day "go-shop" window to seek other acquisition offers. As it stands, Cava is offering to pay $12.75 per share, a 33 percent premium on Thursday's closing price. On Friday, shares of Zoes jumped more than 33 percent.

Zoes stock price fluctuated between $12.74 and $12.88 per share on Friday, indicating that either shareholders were expecting a second offer or short sellers were attempting to recoup their losses.

Analysts seem to agree that another bid is unlikely to occur and believe that going private is the best way for Zoes to recover from a sales and traffic slump that weighed on its stock, dragging it down more than 23 percent since January.

"While a superior bid is possible, we would view one as unlikely when considering the substantial premium that would be required," Tarantino said.

Instead, it appears that short sellers are the reason the share price has exceeded Cava's offer. A short squeeze occurs when a highly shorted stock moves higher and investors who are short the stock have to scramble to buy up shares to cover their positions and avoid further losses. Short sellers borrow shares with the hopes of buying back the stock at a lower price in the future. About 37 percent of Zoes shares were shorted prior to Cava's bid, likely the result of the company's recent sales slump.

"In my view, Cava is likely to make further acquisitions over time and will become a much bigger player in the foodservice market," Neil Saunders, managing director of GlobalData, told CNBC via email.

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