Hedge Fund Adds to CKE Tab

Tables: Buyers | Sellers

A NEW YORK-BASED HEDGE FUND has returned for more helpings of stock at CKE Restaurants, the parent of fast-food brands Hardee's and Carl's Jr.

GSO Capital Partners bought $3 million worth of stock last week. The firm acquired 255,500 shares for $11.87 per share, according to a filing with the Securities and Exchange Commission on Friday.

The transaction boosted GSO's stake in CKE by 16%. The hedge fund, which specializes in leveraged finance but has a small equity portfolio, now owns 1.9 million shares of the fast-food company, or approximately 3.4% of shares outstanding.

Through subsidiaries, CKE franchises, licenses or operates 1,915 Hardee's and 1,121 Carl's Jr. restaurants in 42 U.S. states and 13 countries.

A CKE spokeswoman referred questions on the transaction to another company representative who was traveling and did not return a call for comment.

A GSO director, Matthew Goldfarb, sits on the CKE board. Goldfarb became a CKE board member in 2006 in the wake of his prior employer Pirate Capital's activist interest in the restaurant company.

Goldfarb left Pirate in September 2006, but CKE rejected his subsequent offer to resign from its Board.

A message seeking comment from Goldfarb was not returned. GSO, it's worth noting, agreed to be acquired by private-equity giant Blackstone Group last week for up to $930 million.

Ben Silverman, director of research at InsiderScore.com, says GSO's purchase has added weight thanks to Goldfarb's connection. The transaction is a "good sign of confidence not just from an institutional investor but from somebody with board representation," he says.

Silverman adds that the firm's willingness to stray from its leveraged-finance focus also is of interest. "I think the investment is based on the fact that [Goldfarb] understands the company and has faith in the company."

GSO's confidence, however, is out of step from the institutional trend of late. According to Joshua Hong, director of research at OwnershipAnalyzer.com, institutional owners have been exiting CKE. Between the second and third quarters of 2007, institutional ownership dropped by 15%, or 8.2 million shares, Hong wrote in an e-mail. During that period, the number of institutions owning CKE fell to 131 from 160.

CKE stock reflects those defections. Shares are off 33% over the last 12 months, compared to a 6.3% decline for the DJ U.S. Restaurants & Bars index.

Still, GSO's latest investment is already looking prescient. Since touching a 52-week low of $11.31 last Tuesday, CKE has surged 17%, driven by a same-store sales report and an additional $50 million buyback authorization.

Dean Haskell, who covers CKE for New York-based investment bank Morgan Joseph, said his firm was "pleased" with the December same-store sales growth of 1.2% reported last Wednesday. He reiterated a Buy rating on CKE shares and has a price target of $21.

"Overall, we continue to believe that CKE is well positioned to see a rebound in growth in fiscal 2009, given it should be rolling over easier comparisons on many fronts after a difficult fiscal 2008," Haskell wrote in a research note.

Meanwhile, Wedbush Morgan analyst Brian Moore wrote last week that CKE should continue to benefit as budget-minded consumers drift away from casual dining restaurants for cheaper fast-food options. Moore rates CKE at Buy with a $17 price target.

CKE rose 3.1%, or 40 cents, to close at $13.20 Monday.