Archive for June, 2016
There are rumors circulating that RAVE may be in discussions to sell the company or at least a stake in its Pie Five subsidiary to a private equity firm or one of several privately held chains that have expressed an interest over the last few weeks. We have heard from multiple sources of recent meetings of top level RAVE execs in Atlanta regarding partnerships in that market and the gist of the rumor is that the talks emerged from those meetings. We have made multiple attempts through email, phone, twitter, etc. to reach the CEO, CFO or an IR rep over the past two weeks with no reply whatsoever. The silence is deafening with the market cap of the company ($39m) very close to a competitor’s most recent equity raise (MOD Pizza raised $34m two months ago) and one of its other largest competitors (Pieology) clearly stating that they intend to acquire other players in the space after last week’s acquisition of competitor Project Pie. Rave’s sub $40 million market cap is surprisingly low for a firm that has no debt and is still growing fast enough to be closing in on the opening of its 100th Pie Five over the next few weeks. To take down one of the top players in the fast casual pizza space for under $80m sounds like a steal and the 200 unit+ Pizza Inn chain may be in the mix as well since the scuttlebutt is that it is the parent company RAVE getting acquired in the $75m range.
RAVE at its current valuation would be a juicy target for Pieology, Blaze or MOD Pizza. Additionally, we would not be surprised to see significant interest from Private Equity firms whether the rumored suitors (Roark, Sentinel) are involved or not. We do find it an interesting coincidence that Roark was mentioned, as they own multiple chains, they acquired Wingstop in this same price range a few years back and then hired away Rave’s (then called Pizza Inn Holdings) CEO Charlie Morrison before taking Wingstop public last year. As for the three other fast casual chains mentioned above, those three have been battling it out in many of the same markets while Pie Five has been growing in other geographies, so its footprint has much less overlap. For instance, Pieology is opening its first Atlanta area restaurant this week, at ground zero for where these meetings with potential suitors have supposedly taken place.
We also think the timing for acquisition overtures makes sense. RAVE stock is down over 70% since this time last year, as the company closes in on its 100th Pie Five store over the next few weeks and the company is making some changes starting next week that could boost key metrics. Pie Five has always been the lowest cost build your own pizza option among the “big four” and that will not be changing, but the company will be instituting a price increase starting next week that will not just bring them closer to what their competitors charge, but likely will call more attention to their lowest cost status while boosting revenue. The company is also increasing the size of its basic offering to 11″ from 9″, which will put their size up there with the largest among the big three while maintaining the lowest cost.
Fast Casual Pizza – Base Prices of the Big Four
Blaze – $8.45 (any toppings)
MOD Pizza – $8.29 (any toppings)
Uncle Maddios – $7.99 (up to 3 toppings)
Pieology – $7.65 (any toppings)
Pie Five $6.99 (any toppings)
Pie Five purportedly moving up to $7.49 and slightly larger pizza over the next few days
The increased cost associated with this change for Pie Five will be negligible at just a few cents per pie and the rest of that price increase should do much to boost the top and bottom lines if sales remain near constant or improve. While some may posit that an increase in the price will cause some consumers to balk, we note that the #1 Pie Five franchise store in the entire chain by revenue production has been charging $7.99 per pie since it opened a little over a year ago vs. the standard $6.99, so it has been even higher than the $7.49 that will be charged by the others after the price increase. From a timing standpoint, we think potential acquirors might do well to make their moves before the company starts seeing improvements in the store level metrics or other catalysts emerge to move the stock price higher. Regardless whether the sale rumors turn out to be accurate, we believe that Pie Five is worth at least 2x the current market cap of RAVE restaurant group and Pizza Inn has considerable value that is being overlooked as well.