As the market considers a potential deal to take Buffalo Wild Wings (NASDAQ: BWLD) private, our analysts discuss the ways in which private equity firm Roark Capital might improve performance at the fast-casual wing chain -- and justify a reported $150 per share buyout price tag.
A full transcript follows the video.
This video was recorded on Nov. 14, 2017.
Vincent Shen: So, Roark Capital throwing its hat in the ring -- this is a private equity firm that has a lot of experience in the restaurant industry. They've had previous or current investments in Arby's, Jimmy John's, Auntie Anne's, among many other dining chains. In the past month, the bid it's made is supposedly at over $150 per share. So, though the two companies, I don't believe they've come to the negotiating table yet. Even at $150 even for the offer, that would be a 28% premium for yesterday's closing price for Buffalo Wild Wings' stock. Marcato Capital spent months trying to get their directors on the board. Now, they're finally beginning to execute on their turnaround plan, and they get this buyout offer. Asit, do you think this is a deal that management is or should be seriously considering at that approximately $150, if the reports are accurate?
Asit Sharma: I think they should. That much of a premium implies that Roark Capital Group sees that it can do a lot on the execution front to improve margins and keep increasing price per share. Otherwise, why would they go in with such a hefty offer, only to see share price continue to be stagnant or fall further? So, management understands that this is a well-disciplined company which will come in. In in my opinion, I think Roark Capital Group will attack restaurant margin. Restaurant margin is when you take your total revenue and all of your stores. On the cost side, you take your occupancy, your labor cost, your food cost, and a few other operating expenses, then get that bottom figure. It's relative to the restaurant industry.
I did a quick thumbnail calculation this morning. Buffalo Wild Wings' restaurant margin is 20.5%. And that's sort of low. I think any good private equity group, like Roark Capital, could come in there, and we could see 3% to 5% improvement, which, those dollars add up given the company's top line. And I think management doesn't have a lot of other options. Sally Smith has mentioned, she's going to retire at year end. So, there's been a little bit of confusion, uneasy rudder at the top -- who's going to lead? Marcato has the board seats, but haven't necessarily provided more leadership alternatives. So, I think it's actually in Buffalo's interests to go ahead and take this offer and work with the incoming team to see if, No. 1, they can improve those restaurant margins, and No. 2, get back to basics. Yes, wing costs are rising, but you get people into wings restaurants with that primal promise of watching sports, eating wings and drinking beer. I know this sounds simplistic, but that's the way to increase those comparable sales, which are projected to be at -1.5% this year. So, to reverse those comps trends, you have to get back to making it fun for people like Vince and his brother to come in there on a Tuesday night, watch a basketball game, drink some beer, eat wings. I think Roark understands this, given the pedigree that you mentioned, the companies they've worked with. They know how to get to that core value proposition and emphasize that.
Shen: Yeah. The last thing I'll add to that is, the chains that Roark Capital has had in their portfolio, the franchising and that trend toward greater franchising, is something that could absolutely align with Marcato Capital's views and bring them together, assuming that the offer is enough for shareholders to agree and have the deal go through. Again, we'll provide updates on the show as more details emerge regarding the situation.