Why Ignite Restaurant Shares Imploded


Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Ignite Restaurant Group were self-destructing today, falling as much as 14%, after announcing it would acquire Romano's Macaroni Grill for $55 million in cash.

So what: The parent of Joe's Crab Shack and Brickhouse Tavern + Tap added a third casual dining chain to its portfolio with the move. Romano's Macaroni Grill owns 186 restaurants and franchises two dozen more, for a total annual revenue of $385 million. To fund the purchase, Ignite took on $50 million in debt, and opened a $100 million revolving credit line. Wall Street, however, seemed to think the deal was a stinker, and Robert Baird downgraded Ignite to neutral.

Now what: Based on a sales multiple, the acquisition price looks pretty good, as Ignite is getting $1 in new revenue for just $0.14. Management has promised "synergies" from the acquisition, but is only projecting a companywide 1% comparable sales increase for the year. The deal is expected to close late in the second quarter and will more than double the company's total number of locations. It looks like the market sees this as an example of "diworseficiation," as Ignite has only been public for about nine months. Shares finished down 7.8%.

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The article Why Ignite Restaurant Shares Imploded originally appeared on Fool.com.

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