After being without a permanent CEO since Aylwin Lewis left earlier this year, fast-casual restaurant brand Potbelly (NASDAQ:PBPB) recently named Alan Johnson as CEO. Now Johnson finds himself leading a struggling company. In August, interim CEO Michael Coyne noted that the company expects 2017 to be a tough year because of the "macro environment" after Potbelly reported a second-quarter same-store-sales decrease of 4.9%.
Under pressure from private equity firm Ancora Advisors, Potbelly hired J.P. Morgan as a financial advisor to evaluate all aspects of the business. In the interim, the company continues to struggle operationally, having reported a comparable-store-sales decrease of 4.8% the following quarter.
Ancora's list of demands includes smaller, kiosk-style locations, a slowdown on unit development, and refranchising. In a letter to the board, Ancora notes: "If the board remains convinced that it now has the appropriate strategy in place, we would strongly urge it to immediately pursue a sale/going private transaction, as we do not believe the current strategy would be attractive for current or potential public/minority shareholders over any investable timeframe."
Potbelly may want to take Ancora's advice to heart: Maybe it's for the best for the company to return to the private markets.
Why would a company go private?
Going private has a few benefits for struggling restaurants. The first is to return the company to a long-term focus. When JAB Holdings took Panera Bread private at $315 per share ($7.5 billion total) in an all-cash deal, CEO and founder Ron Shaich called being private "a competitive advantage." Later the CEO further noted: "When I started 25 years ago, I will tell you that a third of our investors were looking at this for a year longer. Today, I will tell you two-thirds of our investors are thinking literally quarter to quarter."
Another reason is to restructure the company to "unlock value." An example is when Golden Gate Capital paid $2.1 billion to acquire Red Lobster. At the time of the sale, Golden Gate Capital also announced it had sold the real estate assets for $1.5 billion, or 71% of the purchase price. In the Potbelly letter, Ancora recommended Potbelly franchise the business, a common request from private equity firms, as it lowers the amount of capital required and generally results in a higher profit profile.
The last is rather simple: If management or private equity firms feel the public markets are undervaluing the business, then it makes financial sense to take the company private to fully claim the profits and cash flow.
Watch for Roark Capital and JAB Holding
Private equity firm Roark Capital has been aggressive in the restaurant space. The firm purchased Arby's from the then-Wendy's/Arby's group in 2011. The new private company, Arby's Restaurant Group, shook up the industry when it inked a deal to acquire Buffalo Wild Wings (NASDAQ:BWLD) in a $2.4 billion all-cash deal ($2.9 billion including debt). Other restaurants the company has investments in are Jimmy John's, Culver's, Schlotzsky's, and Seattle's Best.
JAB is also an interesting option, as the company specializes in restaurants as well. However, its portfolio companies often are coffee-focused, including Caribou Coffee, Peet's Coffee, Kuerig Green Mountain, and Espresso House. The firm also does own stakes in non-coffee-focused restaurants, including Einstein Bros., Bruegger's Bagels, and the aforementioned Panera Bread.
Leaving the public markets will give the company time to engineer its turnaround without intense pressure from public investors. If high-flying Panera felt going private was best for its path forward, perhaps Potbelly should strongly consider this option.