On Feb. 24, 2016, Fiesta Restaurant Group (FRGI) announced a tax-free spin-off of Taco Cabana into a new publicly traded stock. The split is expected to be completed in 2017 or 2018 through a tax-efficient distribution of 100% of the shares of Taco Cabana to FRGI’s shareholders. Following the spin, FRGI, which has a market cap of $867 million, will adopt the name of Pollo Tropical. The spin-off is likely to create value for shareholders.
FRGI operates and franchises the Taco Cabana and Pollo Tropical brands. It owns and franchises a total of about 315 locations in the United States, the Caribbean, Central America and South America. Most of the restaurants are company operated. Taco Cabana locations, found mostly in Texas, feature Tex-Mex and traditional Mexican food in a quick service atmosphere. Pollo Tropical, found mostly in South Florida and the Caribbean, offer Caribbean-inspired dishes in a fast casual setting. Former parent Carrols Restaurant Group (TAST), Burger King’s largest U.S. franchisee, spun off Fiesta Restaurant Group in 2012 so each company could focus on its target markets. Almost four years ago since separating from its parent, FRGI has developed two robust brands in scale and recognition.
At a time when many professional investors lament that the proliferation of hedge funds and widespread use of screening techniques have made it tougher to find bargains in the stock market, spin-offs continue to pay off handsomely. The Bloomberg U.S. Spin-Off Index (BNSPIN) has generated a total return of 564% since inception on Dec. 31, 2002. The S&P 500 returned 131% in that time. There were 40 spin-offs last year worth about $185 billion.
On May 8, 2012, Carrols distributed one share of FRGI for every share of TAST held. The parent closed at $4.44 per share; the spin-off closed at $11.50. Both stocks have outperformed the stock market and the BNSPIN (see “Beating the benchmark”). Since the split, Carrols is up 225% and FRGI has appreciated 189% through March 31. BNSPIN was up 106% over the same period. The S&P 500 posted a total return just 65%.
We value FRGI at $1.1 billion or $42 per share using a sum-of-the-parts valuation methodology. Based on a peer group median multiple of 10.8x FY16 EBITDA, we value Pollo Tropical enterprise value at $700 million. We value the spin-off, Taco Cabana, at $500 million.