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Investor may stir up Cheesecake

Billionaire Nelson Peltz wins antitrust approval to buy a major stake.

December 20, 2007|Jerry Hirsch | Times Staff Writer

Oversize portions are a hallmark of Cheesecake Factory Inc., and billionaire corporate activist investor Nelson Peltz has his eye on a big slice.

The Federal Trade Commission on Wednesday gave Peltz permission to make a major investment in Cheesecake Factory, the Calabasas-based restaurant chain known for its large portions and long waits for a table.

News of Peltz's interest sent Cheesecake shares soaring $2.37, or 11%, to $24.54. The one-day gain was its biggest in years and erased nearly all of the stock's year-to-date decline.

Investors were jumping in, hoping to piggyback on Peltz's ability to create short-term jumps in the value of other companies he has made a move on, analysts said.

"Typically, Nelson Peltz's pattern has been to agitate for financial restructuring to enhance the share price," said Brian Elliott, an analyst with Raymond James & Associates in St. Petersburg, Fla.

Through a spokesperson, Peltz declined to discuss his involvement with Cheesecake Factory. But there's no doubt that any investment could be unsettling for current management, said Brian Moore, an analyst with Wedbush Morgan Securities Inc. in Los Angeles.

Just last month, Kraft Foods Inc. agreed to add two board members backed by Peltz after the billionaire agreed not to seek control of the company.

One admirer, Harvard Business School professor John A. Deighton, was more blunt in describing Peltz to The Times last year. "He likes to throw gasoline and then light a match," Deighton said.

Peltz is no stranger to restaurants. He controls the corporate parent of Arby's and is a major investor in the Wendy's chain. He also has pushed for changes in the management of H.J. Heinz Co.

Once a Wall Street darling, Cheesecake Factory has struggled to excite investors in recent years. Its stock was down for the year until news of Peltz's interest surfaced Wednesday. And the shares plunged 34% in 2006. The company is in the middle of an aggressive stock repurchase plan in an effort to bolster its share price.

It continues to do an average of about $11 million in business annually at each of its 139 Cheesecake Factory outlets and 12 Grand Lux Cafe restaurants. But its shares have sagged because of rising food costs and a general slump in casual dining caused by high gasoline prices and declining consumer sentiment.

Last year, the chain, which said it is known by diners for its generously sized portions, revamped its menu to also offer more "lunch-size portions" and some smaller salads.

Cheesecake Factory's overall sales jumped 15.4% to $376 million in the third quarter from a year earlier, boosted by the opening of new stores. But sales at stores open at least one year rose a modest 1.2%, and the company's net income also just inched up, rising 2% to $18.5 million.

Moore, the Wedbush analyst, said the company could be more aggressive in raising prices in the face of higher food expenses, especially because its eateries continued to have long lines of customers.

Peltz's name surfaced in association with Cheesecake Factory in a Federal Trade Commission filing Wednesday.

His actions came under FTC review because of his investments in other restaurant companies.

The commission did not provide details of the proposed investment but disclosed that it had completed an antitrust review to make sure that it was not anti-competitive. The FTC said it granted permission for Peltz's Trian Star Trust to purchase Cheesecake Factory shares.

Such review is required for initial investments of at least $59.6 million, an FTC spokesman said. After Wednesday's run-up, Cheesecake Factory has a market value of $1.75 billion.

Cheesecake Factory confirmed that it had spoken with Trian executives.

In a Securities and Exchange Commission filing Wednesday, the company said only that it "strives to have an open dialogue with its shareholders and looks forward to talking with Trian in that regard. The company has had a preliminary conversation with Trian already and looks forward to continuing that dialogue."

Bloomberg News reported that Peltz acquired a 10% stake in the eatery but did not identify the source of the information. The restaurant chain could not confirm the size of Trian's position, which has not been publicly disclosed.

jerry.hirsch@latimes.com

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