Carrols: No Meat Left On This Bone, Sell

Carrols Restaurant Group, Inc. (NASDAQ:TAST) is set to be acquired by Restaurant Brands International, the parent company of Burger King, with the goal of accelerating the rate of remodeling and driving sales growth for Burger King. The transaction, which is expected to be completed in the second quarter of 2024, is subject to anti-trust regulations and shareholder approval. While investors who purchased Carrols shares may have seen a quick return on their investment, it is now recommended for them to sell and consider investing their funds elsewhere, as the merger arbitrage spread is not attractive.

Strategic Rationale For Transaction

Carrols Restaurant Group, Inc. (TAST) is set to be acquired by Restaurant Brands International in order to accelerate the rate of remodeling and drive sales growth for Burger King. The strategic rationale behind this transaction is clear: Carrols’ participation in the modernization efforts is crucial for Restaurant Brands’ Reclaim the Flame strategic plan to succeed. With over 1,000 Burger King restaurants, Carrols is the largest Burger King franchisee and its remodeled restaurants will play a vital role in driving franchisee profitability.

To support this remodelling effort, Restaurant Brands plans to invest $500 million over the next 5 years to remodel 600 of Carrols’ acquired restaurants that are not up to modern Burger King standards. It is important for Carrols to be part of this modernization effort to ensure sales growth and franchisee profitability.

No Superior Proposal Has Come Forward

Under the terms of the merger agreement, Carrols shareholders will be acquired by Restaurant Brands for $9.55 per share in an all-cash transaction. The financing for this transaction will come from cash on hand at Restaurant Brands and a term loan. As part of the agreement, Carrols had a 30-day “go shop” period to solicit superior proposals, but this period expired without any alternative deals being announced.

The completion of the transaction is subject to anti-trust regulations and approval by a majority of shareholders, excluding Restaurant Brands and its affiliates. However, given the expiration of the “go shop” period and the lack of announcement regarding superior proposals, it is likely that the transaction will be completed in the second quarter of 2024.

Merger Spread Looks Like A Done Deal

The proposed transaction price of $9.55 per share compared to Carrols’ latest price of $9.50 indicates that investors believe the merger is a done deal and that anti-trust concerns are not significant. This is further supported by Restaurant Brands locking up Cambridge Franchise Holdings, LLC, which owns or controls approximately 20% of outstanding Carrols shares unaffiliated with Restaurant Brands, to vote in support of the transaction. This level of investor belief in the deal completion suggests a high likelihood of its success.

Investors Should Look To Tender

For investors who purchased Carrols shares, it is recommended to sell their shares and consider redeploying their funds elsewhere. The merger arbitrage spread is not attractive, with the current spread implying a rate of return of only 3.9%. In contrast, a one-month treasury bill is currently yielding 5.5%, offering a higher return. Therefore, it would be more beneficial for investors to consider treasury bills or a treasury bill fund as an alternative investment option.

Where To Redeploy?

It is important for investors to stay liquid and avoid rushing to redeploy their funds after selling Carrols shares. In the short-term, stocks are overbought and valuations appear to be rich, indicating that bargains may be hard to come by. Holding treasury bills or a treasury bill fund, such as the iShares 0-3 Month Treasury Bond ETF, would allow investors to earn a 5.3% SEC-yield while waiting for more attractive investment opportunities.

Conclusion

The agreement for Carrols to sell itself to Restaurant Brands is a significant development for both companies. As the parent company of Burger King, Restaurant Brands aims to drive sales growth and franchisee profitability through the remodelling of Carrols’ Burger King restaurants. The market’s belief in the completion of the merger is evident, and it is recommended for investors to sell their Carrols shares and consider redeploying their funds elsewhere. This strategic move by Carrols has implications for the company’s share price and future prospects, making it a suitable time to exit the position.

Author’s Background

The author of this article has extensive experience as a hedge fund manager and has a background in writing articles to aid due diligence. The author has no position in the mentioned companies, ensuring unbiased analysis and recommendations for investors.

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About TAST Stock

Carrols Restaurant Group, Inc. is a well-known company within the restaurant industry. With its focus on Burger King restaurants, Carrols has established itself as the largest Burger King franchisee. The stock’s performance and market value indicate its significance in the market and potential for investors to capitalize on its growth.

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