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Red Robin gets more pressure for buyout

Investor groups increase stake, ask company to seek a buyer

A group of investors who successfully pressured Red Robin Gourmet Burgers Inc. to make changes to top management last year now say the restaurant company should actively seek a buyer.

In filings with the U.S. Security and Exchange Commission Friday, the Clinton Group Inc. and Spotlight Advisors LLC, who together hold about 8.95 percent of Red Robin public stock, argued that planned restructuring efforts would be better conducted as a private company. Red Robin currently trades on the Nasdaq exchange with a market capitalization of about $387.7 million.

Greenwood Village, Colo.-based Red Robin, which operates or franchises about 450 namesake casual-dining restaurants, declined comment.

In a letter included in the filing by Clinton and Spotlight Friday, the investors expressed support for Red Robin’s restructuring plans, and its chief executive Steve Carley, but argued that an attempted turnaround would be better done out of public market scrutiny.

Clinton and Spotlight contended that a sale to a “financial sponsor or industry participant that has expertise in restructurings is a better choice: it could provide more certainty and less volatility and, in the case of a strategic buyer, for example, even more value than a successful public turnaround.”

The group also asked the board to eliminate any “poison pill” that would prevent shareholders from acquiring more than a 15-percent stake in Red Robin without board approval.

Numerous restaurant companies have decided leave the public market, especially as private equity capital has returned to the industry. Burger King, Landry’s and CKE Restaurants were just a few of the deals completed in 2010. Outback Steakhouse was one of the largest going-private buyouts — a $3.2 billion deal completed in 2007 — which was done partly to execute a turnaround as a private company and without market or analyst pressures.

Clinton and Spotlight are not the only activist investors interested in Red Robin.
Oak Street Capital and affiliated funds have been increasing their stake in Red Robin in recent weeks. Oak Street was part of the dissident shareholder group that in early 2010 sought management changes at the Spartanburg, S.C.-based Denny’s family-dining chain.

On Friday, filings indicated that Oak Street and affiliates owned 2.04 million shares, or about 13.1 percent of Red Robin’s outstanding shares.

The investor filings follow a letter to shareholders issued last week by Red Robin’s board chair Pattye Moore and CEO Carley, who joined Red Robin from El Pollo Loco in September.

Moore and Carley outlined governance and management changes they undertook in 2010 — including the replacement of numerous directors — as well as strategic initiatives planned for the future.

Dubbed “Project RED,” strategic goals for Red Robin included the driving of guest traffic and average check; improving guest frequency and enhancing sales of new menu items; and optimizing the food and beverage revenue mix.

The letter said the company will focus on cutting expenses as well as opening between 10 and 11 new corporate locations in 2011. Red Robin also will be looking at longer-term capital deployment opportunities, including a revised mix of franchised and corporate restaurants, as well as refinancing existing debt.

More details on the plan are expected during Red Robin’s fourth-quarter earnings report scheduled for mid February.

For its third quarter ended Oct. 3, Red Robin reported a net loss of $4.2 million, or 27 cents per share, compared with a profit of $5.7 million, or 37 cents per share, in the same quarter a year ago. The loss included a $6.1 million non-cash restaurant impairment charge and a $2.3 million in pre-tax executive transition expenses.

Same-store sales during the third quarter swung positive, however. Red Robin reported an increase of 0.9 percent at corporate locations, and a 2.6 percent increase in guest counts, partially offset by a 1.7 percent dip in average check.

At the end of the third quarter, the Red Robin chain totaled 312 corporate and 134 franchised locations.

Contact Lisa Jennings at [email protected].

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