After a rough 7 months, Tex-Mex joint Chuy's is being bought by the owner of Olive Garden

Darden Restaurants, the owner of Olive Garden and LongHorn Steakhouse, is buying Tex-Mex chain Chuy’s for $605 million. It’ll take some time to see how well the company digests the deal.

Darden said late Wednesday that it would buy the Austin-based chain, which has over 100 locations in 15 states. At first glance, it looks like Darden is paying a huge premium to buy Chuy’s — the deal is for $37.50 a share, causing Chuy’s stock to jump about 50% today to just below the agreed-upon deal price. 

A stock move like that is typical in M&A, since shareholders are essentially guaranteed to get that cash payout unless the deal falls apart for some reason, and there’s not much risk of that happening with a fairly small restaurant deal like this one.

But if you look more closely, you’ll notice that Chuy’s was trading above the deal price — and even above $39 — as recently as late December. Since then, Chuy’s has reported declining profit and revenue, which it attributed to a squeezed consumer and higher operating costs. For the quarter ended in May, Chuy’s same-store sales slid 5.2%, their first decline since the pandemic. 

Investors have pretty clearly gotten spooked. Before today, Chuy’s stock had fallen nearly 40% from its high point in December, while the S&P 500 rose almost 20% over the same time frame. Investors in companies often hope for M&A deals because they get a big premium, but in Chuy’s case, they’re essentially just flipping the calendar back seven months.

For Darden, Tex-Mex may be a solid bet in the space of casual sit-down restaurants you might go to after a high school graduation or for your 12th birthday. Chili’s, for example, is the best performing brand in Brinker International’s portfolio.

Rick Cardenas, Darden’s chief executive, told analysts on Thursday the “Mexican category is one of the fastest growing dining categories” in the country. “When we look at Mexican (food) generally, there's been a broader appeal and it actually appeals a lot more to the younger people,” he said.

Not everybody’s doing well in the space: Red Lobster (formerly owned by Darden) is fighting its way through bankruptcy, in part because of its ambitious “Ultimate Endless Shrimp” promotion.

Chuy’s is the latest in a string of acquisitions for Darden, which bought Ruth's Chris Steak House for $715 million last year. (Darden hasn’t yet started reporting how that brand is performing.) Not including Chuy’s, Darden has added six brands to its portfolio in the past 15 years.

Beloved regional restaurant chains have been going through a wave of national expansion. It’s unclear exactly what Darden’s plans are for Chuy’s, though in the deal announcement, Chuy’s CEO said it would be bringing the Tex-Mex cuisine to “more guests and communities.”