One of the Top Spinoffs in 2012

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Finalized on May 7, 2012, the Carrols Restaurant Group's (NASDAQ: TAST) spin-off of the Fiesta Restaurant Group (NASDAQ: FRGI) has produced impressive returns for investors who jumped on board within the first few weeks of the new ticker symbol's life. As of January 8, the spin-off's stock price has increased from a first-day trading price of $11.20 per share to its current three-month high above $16. This represents a return of about 43.8 percent.

Carrols's performance has not lagged Fiesta's by very much. From its initial low of $4.44 per share on the day of the spin-off, the company's stock price has climbed above $6 and currently sits near $6.20. This equates to a return of 39.6 percent in approximately eight months. However, it should be noted that Carrols's stock recovered much of its value during the first few trading sessions that followed the spin-off. Investors who purchased the stock between late May of 2012 and January of 2013 were forced to pay between $5.20 and $6 per share for it.

The terms of the spin-off were straightforward. Every Carrols common shareholder received a single share of Fiesta stock for each Carrols share that he or she owned. Although the offering was priced at $12.50 per share, the lowest quoted price on Fiesta's initial trading day was $11.20. As noted, the company's stock quickly recovered much of its value.

Syracuse, New York-based Carrols Restaurant Group is a major Burger King (NYSE: BKW) franchisee and was the majority owner of two Latin American-themed restaurants. Known as Pollo Tropical and Taco Cabana, these two brands collectively exist in about 300 locations in the United States and the Caribbean. Before the spin-off, the company owned or franchised approximately 550 restaurant locations in the Western Hemisphere. Following the spin-off, Fiesta Restaurant Group assumed control of the Pollo Tropical and Taco Cabana brands. However, Carrols subsequently inked an agreement with Miami-based Burger King to double its Burger King franchise count by 2015. Carrols earned $880,000 in income on $980 million in total revenues during the 2011 fiscal year.

Also based in Syracuse, Fiesta Restaurant Group is now the sole owner of the Pollo Tropical and Taco Cabana franchise brands. After the spin-off, it was wholly owned by Carrols shareholders. The company currently employs about 8,000 people and is valued at about $575 million. Although full-year earnings data is not yet available, the company enjoys a stable operating margin of nearly 9 percent and was responsible for bringing in about 57 percent of Carrols's total revenues prior to the spin-off.

Burger King is one of the world's largest fast-food hamburger chains. The company operates about 800 corporately-owned restaurants and nearly 12,000 franchised locations, which gives it a presence on every continent. It directly employs about 34,000 people and is responsible for employing hundreds of thousands more around the world. After years of slumping sales due to growing competition from a raft of affordable fast-casual restaurants that consumers widely perceive as healthier and tastier, Burger King has launched a major turnaround effort. The company is currently in the midst of revamping its menu and remodeling the majority of its high-volume locations. According to the terms of its 2012 re-franchising deal, Carrols Restaurant Group will spearhead the remodeling effort at 300 recently-purchased U.S. locations.

Inked in the aftermath of the Fiesta spin-off, the re-franchising agreement also gave Burger King an important minority stake in Carrols. The agreement involved the transfer to Burger King of a 28.9 percent ownership stake in Carrols and about $16 million in cash. This ownership stake came in the form of convertible shares of preferred stock. In exchange, Carrols received "first preference" rights on any proposed sales of existing Burger King franchises in all of the two dozen U.S. states in which Carrols operates franchise locations. The company will finance the pending remodeling program with a revolving credit facility.

In retrospect, the Fiesta spin-off made sense for all of the parties involved. It freed Carrols to focus exclusively on building its Burger King franchising operation and become a dominant and potentially trend-setting force within the hamburger giant's restaurant ecosystem. Once the company has completed its remodel, it appears likely to embark on a continued program of new franchising operations. In conjunction with Burger King's ongoing turnaround plan, this puts Carrols in a potentially lucrative position. Likewise, the spin-off enables Burger King to form a symbiotic relationship with its largest franchisee and increase the consistency of its branding across its sprawling patchwork of independent operators. Meanwhile, Fiesta is now free to develop its international brands.

Despite these favorable outcomes for all three of the publicly-traded companies involved in the deal, the biggest winners of all might be the Carrols shareholders who have stuck with Fiesta in the aftermath of its spin-off. With returns of more than 40 percent in the eight months since the deal's finalization, this gambit has paid off handsomely for a crop of savvy small-cap investors. 2013 promises to produce a number of similar opportunities for keen merger and arbitrage investors. 


mthiessen has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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