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Actionable news in DRI: DARDEN RESTAURANTS Inc,

Can Darden Deliver on Cheddar's Acquisition?

Darden Restaurants (DRI) , announced Tuesday that it plans to acquire privately held Cheddar's Scratch Kitchen for $780 million from L Catterton and Oak Investment Partners.

The all-cash deal is expected to be completed by Darden's fiscal 2017 fourth quarter and is subject to customary closing conditions. As a result of the deal, by fiscal 2019, Darden expects between $20 million and $25 million of annualized pre-tax run rate synergies.

Still, analysts are skeptical of the deal, Darden's third-largest deal since 2007.

"We view the merit of the Cheddar's acquisition as a show-me story for several reasons," wrote Jeff Farmer of Wells Fargo in a note Tuesday. "Barring a very quickly growing ToGo sales mix or some other unforeseen competitive advantage with Cheddar's, we believe investors should view the concept as a show-me story."

The deal follows Darden's 2012 acquisition of Yard House for $585 million from TSG Consumer Partners and its 2007 acquisition of LongHorn Steakhouse parent Rare Hospitality International for $1.4 billion. According to Wells Fargo's Farmer, those deals worked out to 12.5 times and 10.4 times Ebitda, respectively. Cheddar works out to about 10.4 times its trailing 12-month adjusted Ebitda ending December 2016.

Both Rare Hospitality and Yard House, "despite their scale, drove little operating margin or SG&A leverage" and "DRI's return on invested...