Did Arby's and Roark Make a Smart Deal for Buffalo Wild Wings?

In this segment of MarketFoolery, host Chris Hill is joined by Hidden Gems' Abi Malin to discuss the deal that will bring Buffalo Wild Wings' (BWLD) days as a public company to a close, as it gets picked up by privately held Arby's Restaurant Group for $2.4 billion, or $157 a share. Private equity firm Roark Capital Group owns the majority of Arby's, and is a specialist in restaurants, which bodes well for its ability to improve the situation at the recently troubled wings-and-beer chain.

A full transcript follows the video.

This video was recorded on Nov. 28, 2017.

Chris Hill: Roark Capital Group, which is a private equity firm that appears to specialize in restaurants. Roark Capital Group is buying Buffalo Wild Wings. The price tag is $2.4 billion. That works out to $157 a share, a number we will come back to in a moment. What did you think when you saw the deal?

Abi Malin: I think it's exciting. We've been talking about this one for a little bit now. There's been rumors of deals off and on. I think this is something that's been a long time coming.

Hill: You were showing me the Roark Capital Group -- private equity firms, because they're private, they will share as much or as little of their business as they want to. And there's some private equity firms that, you go to their website and there's basically a logo and an email address and that's it. Roark Capital Group, they have the people who work there, they have their portfolio, and this appears to be a go-to -- I mean, this is their specialty, right? Restaurants?

Malin: Yeah, they definitely have quite a few restaurants in there. They own Arby's, Auntie Anne's, Carvel, Cinnabon, Carl's Jr., Jimmy John's, quite a few in there.

Hill: Quite a few. Roark isn't a public company, so we don't know how the stock is doing, but the reports, certainly when it comes to Arby's and when you get into trade publications like QSR and that sort of thing, it really does seem like Arby's is doing pretty well, it seems like Jimmy John's is growing, and Cinnabon, I mean, if you don't like Cinnabon you can go ahead and leave the country right now.

Malin: Exactly.

Hill: So, for Buffalo Wild Wings, do you have a sense of what Roark plans to do at this point? Are they looking to expand? Have they shared anything other than "We're buying Buffalo Wild Wings, and this is the price that we're paying"?

Malin: I haven't read anything specific on what they're going to do, but analysts have made some comments that there's a little bit of low-hanging fruit there for them to grab at. So, just continuing to improve financial metrics, get the operations up to standards, improve food quality, things like that. That should be relatively easy for someone as experienced as they are.

Hill: Do you think this is a bad time -- I know restaurants have struggled over the past year or so, and it's something that we've talked about a bunch on this podcast. But you think about, over the past year or so, where Panera Bread gets taken private, I think it was just last month, Ruby Tuesday was taken private, and Krispy Kreme recently went private. But in the case of Ruby Tuesday and Panera Bread, you have two restaurants that are in the same line of work. One of them is struggling, in the case of Ruby Tuesday, so maybe that wasn't as big of a surprise. But Panera Bread was doing well. And I'm wondering if, now that we add Buffalo Wild Wings to the list, if one of the takeaways for investors should be, now is not the time to be invested in restaurants.

Malin: I think generally, when you look at the market right now, things are pretty expensive. We've been talking about that for a while. I wouldn't necessarily take private equity interest as a sign that you shouldn't be investing. If anything, it's probably a good time. Private equity usually goes, with these very aggressive deals, they're going to go after the profits; they're going to go where they see that they can actively make a change. And I think there's been a little bit of pessimism around the restaurant industry, especially in a frothy market, so it's probably a good time to actually be digging into this space.

Hill: Shares of Wendy's, which is publicly traded, are up today. Wendy's somehow has part of this deal as well? How does that work?

Malin: Roark Capital Group bought Arby's from Wendy's in 2011 for about $430 million. Wendy's retained 18.5% ownership of Arby's, which was valued at about $326 million as of Q3. But following this BWLD acquisition, BWLD will become a unit of Roark's Arby's unit. So Wendy's is now gaining that stake, so the Wendy's stake in Arby's, which now includes BWLD, will be about $757 million.

Hill: Nice work for Wendy's there.

Malin: Good day for Wendy's.

Hill: Absolutely. Before we move on, I have to close the books, because it sounds like we're going to be closing the books on Buffalo Wild Wings as a public company. Have to close the books with the little bit of history. The idea that Buffalo Wild Wings would go private has been out there for a while, at least as a possibility. The fact that it's Roark taking them private, and not Marcato Capital Management, may surprise a few people, because Marcato Capital Management, and Mick McGuire, their leader, came out in August of 2016 and ripped Buffalo Wild Wings, and in particular Sally Smith, the longtime CEO. Because at the time, Marcato had a little bit more than a 5% stake, and they just ripped Sally Smith.

It reminds me of the old saying -- do a little bit more than everyone expects, and assume everyone will expect more. Sally Smith and her team did such a good job growing the business and rewarding shareholders year after year after year for Buffalo Wild Wings that I think, certainly, some people at Marcato took that for granted because they hit a slight rough patch. They just went to town. And at the time of this presentation that Mick McGuire did, the stock was at $167 per share, and Marcato was part of the ownership group that signed off on Roark at $157 a share. Which, the last time I checked, is lower than $167.

Malin: It is. Yeah. I mean, it might have something to do with the fact that Roark Capital previously invested in Wingstop, which is a similar concept to BWLD. It could be that Marcato got less interested; it could be maybe there was some tension there with that leadership change. I think it could be a bunch of things.

Hill: It could also be that Marcato decided to essentially push Sally Smith out, and then they realized, you know what? Running a publicly traded restaurant is --

Malin: Really hard.

Hill: -- really, really hard. And I say this as someone who was never invested in Buffalo Wild Wings. I just look at it what a great job Smith did running that company, and think that she was unfairly raked over the coals on that one.