Earlier this week, Panera Bread Co. announced plans to take on new debt to help finance share buybacks after some dialogue with an activist investor, Luxor Capital Group LP, as my colleague Ron Ruggless reported yesterday.
Welcome to the new era of restaurant board strategy in the post-Darden-Starboard proxy era.
Last fall, Starboard Value, LP won all 12 seats to the board of directors at Darden Restaurants in an unprecedented proxy victory. It was a clear sign that restaurant management teams ignore activist investors at their own risk.
Shareholders nowadays are far more likely to listen to the presentations of activist investors. According to the Wall Street Journal, 73 percent of activists won at least a partial victory in board fights last year.
Restaurant stocks are currently trading at record valuations. When restaurant stocks can’t keep up, shareholders get antsy, and activists sense opportunity. This makes almost any restaurant stock that is underperforming on Wall Street a potential target for activists.
“Success brings more success,” Adam Werner, managing director at the consulting firm AlixPartners, told me recently. “A few activists out there have done really well. They’ve developed a fairly public playbook. And many restaurant chains fall into the mid-cap space. It isn’t as expensive to get in and have influence on the board of directors in one of these types of chains.”
Panera might as well have had a giant bull’s eye painted right outside company headquarters. It’s a strong brand that has been underperforming the market in recent years. At a time when other restaurant valuations have soared — with fellow big fast casual chain Chipotle Mexican Grill trading in the $600s — Panera stock has been basically unchanged for more than two years.
It also has plenty of low hanging fruit that an activist can latch onto in a push to increase value. And Panera is picking some of that fruit, refranchising as many as 150 locations and increasing leverage to buy back shares.
Similarly, Jamba Juice quickly announced plans for more aggressive refranchising and share buybacks after activist investors targeted that company last year.
To be sure, such moves are hardly company-shifting demands. Share buybacks, leverage and refranchising are common moves for publicly traded franchises, especially those in need of a stock boost.
Still, the company’s quick response perhaps shows that companies are less likely to outright resist activists.
Directors of public companies are like everybody else, they prefer keeping their jobs. The same goes with management, which is often changed during or shortly after a proxy fight — even in cases where an activist wins only a small number of seats.
Resisting recommendations from activists last year proved futile at Darden and Bob Evans Farms Inc. So more restaurant companies could take a cooperative approach in the future, wary of meeting the same fate.
The bigger question could be how bigger companies like McDonald’s Corp. and Yum Brands respond, should activist investors target those companies like many people think they will. Both are considerably bigger than Darden and would be much harder for an activist to take down.
In addition, the proposals being bandied about — a spinoff of McDonald’s much-beloved real estate; some form of spinoff of Yum China, for instance — would be much tougher pills for management teams at both companies to swallow.
That said, both companies seem to be taking a more engaged stance. McDonald’s has aggressively worked on its sales problem, hired a new CEO in Steve Easterbrook and recently seemed more open to the idea of a real estate spinoff.
“We’re constantly challenging our thinking on the REIT,” Chief Administrative Officer Pete Bensen said at an investors’ conference earlier this year.
Yum Brands, meanwhile, in February amended board nominations rules so shareholders owning at least 3 percent of Yum’s shares for at least three years could nominate directors to the company’s board. As a result, Marco Consulting Group, which provides investment advice to public benefit plans, agreed to withdraw a shareholder proposal.