That's not just a cutesy headline. In a filing with the SEC that was made available yesterday, Pirate Capital disclosed that it owns 5.3% of the outstanding shares of OSI Restaurant Partners
In its filing, Pirate also disclosed that it has been attempting to set a meeting with Chris Sullivan, the Chairman of OSI, in order to discuss ways that the company can unlock the value in its shares. Of course this is really just a polite way of saying we own 5.3% of the shares and we want an audience to make some demands.
Pirate has a number of concerns in its filing, and many are concerns that I, as a shareholder in OSI, have as well. Pirate highlights that OSI has invested $1 billion in capital expenditures in the last four years, $800 million of which it estimates are for growth, meaning new restaurants. In that time, OSI's revenue has grown 14% annually, while profits have grown less than 5% annually, largely because the company's operating margins have declined three full percentage points. Pirate notes that this performance has caused OSI's share price to decline 5%, while the Dow Jones Restaurant and Bars Index has increased 40% over the same period.
For its part, OSI has already been looking at ways to unlock the value in its shares. CEO Bill Allen has mentioned that the company will look at selling some of the real estate it owns, spinning off high-growth concepts such as Bonefish and Carrabba's, and increasing leverage to repurchase shares. The company has stated that it is researching all of these possibilities and will make its recommendation to the board. Pirate is happy with the direction the company is moving in, but wants OSI to speed up the process, bring in investment bankers to advise the board and shape the strategy, and remove management from this process so they can focus on operational issues at Outback.
Breaking down OSI into its growth concepts in one group and its mature concepts and developmental concepts in another group, Pirate estimates that OSI is conservatively worth $50 per share, with margin improvements adding additional value. Pirate closes its letter by hinting that if the company chooses to ignore its suggestions or brush them aside, then a proxy battle is likely.
The inefficient spending on growth capital expenditures at OSI is similar to the situation TJX Companies
I agree with the majority of what Pirate Capital has to say in its letter. There is no question that OSI has underperformed the last few years. It's also reasonable to conclude that the company hasn't allocated capital very well the last year or two, but the counterargument there is that a foundation needed to be put in place for the growth concepts to expand properly. I also agree with the conservative valuation that Pirate has outlined, since I outlined a similar valuation in Stocks 2006 when I recommended OSI shares at prices similar to today's.
But I don't agree with Pirate's suggestion to bring in an investment banker to help speed up the process. OSI didn't grow to be as large an enterprise as it is today by accident, and investment bankers (or any form of consultant) have an incentive to do what generates fees, not necessarily what is in the best interest of the business. By all means, get help where needed in analysis or idea generation, and then put the ideas out to bid. Ultimately, however, I think shareholders should be disappointed in a management team that can't figure out a logical strategy with only a little bit of outside assistance.
As we have seen with Income Investor selection HJ Heinz
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At the time of publication Nathan Parmelee owned shares in OSI Restaurant Partners and had a beneficial interest in shares of Heinz. He has no financial interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.