If the Buffalo Wild Wings (NASDAQ: BWLD) acquisition closes, activist shareholder Marcato Capital will reap an approximately 10% return on its investment in the the restaurant chain.
Why would Marcato endorse the company's sale to Roark Capital and Arby's, and accept such a meager return for its efforts? In the following episode of Industry Focus: Consumer Goods, the team discusses the primary reason Marcato is happy to rake in its chips and move on.
A full transcript follows the video.
This video was recorded on Dec. 5, 2017.
Vincent Shen: Asit, I'm going to start this off with an update on a story that we first discussed three weeks ago. On Nov. 14, you and I talked about the buyout offer of Buffalo Wild Wings. They received that from private equity firm, Roark Capital. On that show, we covered some of the challenges that B-Dubs has encountered over the last few years. Things like declining comps and traffic, things that have affected a lot of the restaurant industry.
Over the summer, there was a battle for control between management and activist investor Marcato Capital. CEO Sally Smith would soon be stepping down. Marcato was pushing the company to refranchise its stores. Now, we have details of the official offer from Roark Capital -- or, I should clarify, one of its portfolio restaurant brands, Arby's Restaurant Group. The two companies have agreed to a deal at a cash offer price of $157 per share, which represents a 34% premium to the last closing price of B-Dubs stock before all these deal rumors made the news.
The board of directors at both companies have signed off. Marcato Capital supports the deal. They have a 6.4% stake in Buffalo Wild Wings. Asit, are you surprised at all that Marcato was so quick to hop on board with this deal after they fought with management for almost a year to win board seats, to win greater control of the company's future direction, and now they're just ready to sell out a few months later?
Asit Sharma: I'm not surprised at all, Vince. I think execution is always harder than pointing out what a problem is. When you're growing up and your parents are ferrying you around and you're in the back seat, you can't wait for the day that you get into the driver's seat. But when you're in the driver's seat in traffic, things change, those first few months. I think what Marcato sees is that Roark Capital, which owns Arby's, which is actually going to be the owner of the new company. They are an experienced restaurant operator and have the tools to address some of the problems that we've been talking about, including the traffic, how to deal with soaring wing prices. This is something that is best left in the hands of a company which can execute the day to day and is in the field already. So I'm really not surprised that they're going along with this.
Shen: Part of me wonders, Marcato spent so much time and effort forcing Sally Smith out of the company, overall giving the management team there a lot of grief over the work that they've done and some of the roadblocks that they've hit in terms of challenges and headwinds for this industry. Then, they made promises of some of their operations, stronger financials. Was this all bluster on Marcato Capital's part? Kind of what you mentioned, actually being in the driver's seat, it's a very different situation to find yourself in. Marcato has an average cost basis of $142 per share for their stake, so at $157 per share in this buyout, it's only a 10% return for their investment. I think this really does come down to the fact that, they won the board seats, they started to implement their plan, but maybe realized, to turn around this business, and as they previously mentioned, doubling or tripling the stock price as they believed Buffalo Wild Wings could do in the next few years, would not be nearly as simple as they thought.
Last few details for this deal, Buffalo Wild Wings will operate as an independent subsidiary and brand under Arby's, as you mentioned. That's assuming that Buffalo Wild Wings shareholders approve the deal. The merger is expected to close in early 2018. As a customer, I'm still pretty disappointed. I brought this up before, their wing Tuesday promotion is now Boneless Tuesday. So, if a former B-Dubs customer can dream, the first thing I hope on the to-do list for Roark Capital and Arby's is to bring back their Wing Tuesday promotion, and they will find me back in the stores as a happy customer.