Buffalo Wild Wings Turns Into Fast Food for Activist

(Bloomberg Gadfly) -- Buffalo Wild Wings Inc., home of chicken wings and beer, is about to become a test case for activist investors' commitment to long-term turnaround campaigns.

The company has reportedly received a takeover offer from private equity firm Roark Capital Group that values it at more than $150 a share, or $2.3 billion not including debt. Buffalo Wild Wings hasn't commented publicly on the proposal yet, but it presents an interesting dilemma for activist investor Marcato Capital Management, led by Bill Ackman protege Mick McGuire. The hedge fun won three board seats in a proxy fight earlier this year as it called for CEO Sally Smith's ouster and pushed for margin improvements and a return to a primarily franchised business model, among other things. 

Buffalo Wild Wings Turns Into Fast Food for Activist

This brand of operational activism has shown up all over the place lately, from Elliott Management Corp.'s campaign at Arconic Inc. to Ackman's failed crusade against Automatic Data Processing Inc. In some ways, activist investors are now acting more like private equity firms, advocating not financial engineering but just their own business acumen as a means to make companies better. There have been mixed results.

Buffalo Wild Wings Turns Into Fast Food for Activist

For instance, in July 2016, when Marcato first announced it was holding talks with Buffalo Wild Wings management over strategic alternatives and operational improvements, the stock rose to just under $150 -- and that was before anything had even been achieved. The shares bounced around as Marcato pushed its proposals, which also included an overhaul of Buffalo Wild Wings' capital allocation strategy and ending bets on other fast-food concepts. They closed at just over $150 after Marcato won its proxy fight this past June, but then started dropping. Before news of Roark's interest, Buffalo Wild Wings had fallen 23 percent since the boardroom victory. 

Marcato's margin-improvement plans might have worked if not for falling chicken-wing prices and depressed customer traffic amid tough competition and cheap groceries. After successfully engineering a commitment from CEO Smith to step down at the end of the year, the board has yet to name her replacement. Wells Fargo & Co. analyst Jeff Farmer recently dubbed Marcato "relatively ineffective." And he's not wrong, at least as far as things stand currently.

Buffalo Wild Wings Turns Into Fast Food for Activist

So now the question is whether Marcato is willing to accept its ineffectiveness or continue slugging it out in the belief that its operational strategy will eventually play out as envisioned. A bid of $150 a share is a 28 percent premium to Buffalo Wild Wings' unaffected share price on Monday and would value the company at about 11 times its trailing-12 month Ebitda, in line with the median for restaurant takeovers of the past five years. But remember, Buffalo Wild Wings shares jumped to about $150 just on the news of Marcato's initial involvement. Analysts are mixed on the prospects for a higher offer given Buffalo Wild Wings' challenges.

Marcato could still be victorious in that it will make money on a sale at $150 a share. Stifel Financial Corp. analyst Chris O'Cull calculates its average purchase price as being in the low $140s. But this kind of capitulation, should it happen, won't do much to help activists' argument that they are in it for the long haul and simply have better ideas on how to run businesses than management teams. Stay tuned. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

To contact the author of this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net.

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