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Why activists are targeting restaurants

Blog: A group of seemingly underperforming concepts is drawing shareholder ire

This post is part of the On the Margin blog.

2014 was a huge year for activist investors in the restaurant industry. That year, several large shareholders targeted restaurant companies. They won several seats on the Bob Evans Farms Inc. board and most famously took out every board member at Darden Restaurants Inc.

Then activists took a break. There was relatively little on the shareholder activist front in 2015 and in most of 2016. But that dry spell appears to have ended in a major way late last year, and especially in early 2017. 

This week, Marcato Capital Management LP, which has been pointed in its criticism of Buffalo Wild Wings Inc., launched a proxy fight against the chain by nominating four people to its board.

Last week, activists nominated candidates for the board at Fiesta Restaurant Group Inc. Last month, Bob Evans’ still-active activist, Sandell Asset Management, won a major victory when the company proposed selling its restaurant chain. TAC Capital, meanwhile, revealed that it has an activist investment in Bravo Brio Restaurant Group Inc., which revealed that it is exploring strategic alternatives. And in December, Chipotle Mexican Grill Inc. reached a deal with its own activist investor, Bill Ackman, to add people, including Ackman, to its board.

The increase in activist activity should put many companies on notice that shareholders will push for changes if they don’t perform. 

Why are so many activists targeting restaurant companies? Here are a few reasons.

They target restaurants for the same reason other investors do: The industry has growth potential. The restaurant industry is attracting a lot of consumer investors who have nowhere else to put their money as the Internet ravages traditional retail sectors. Activists are no different from other investors in this manner, only they push for changes.

Yet investors turned their back on restaurants for most of 2016. Two thirds of restaurant stocks were down in the first three quarters of the year, before Wall Street got a bout of Trump-related euphoria. The average decline in that time was 8.3 percent. Declining stocks tend to lure activist investors.

Many restaurant companies are having problems. Each of the companies noted above are dealing with sales and profit issues. Chipotle is still dealing with a historically unprecedented sales problem. Bob Evans’ restaurants have struggled for years, as have Bravo Brio’s. Buffalo Wild Wings had its worst year since becoming a public company in 2003. Fiesta Restaurant Group just spent millions to open Pollo Tropical locations in Texas, only to close them again, as its two brands start struggling.

But these chains also have elements that make them attractive. Given the persistent same-store sales weakness industrywide in 2016, lots of companies are having problems. But activists target companies that have some potential value — either through strong brands or because they have assets that could be monetized in some fashion.

Buffalo Wild Wings has hundreds of company restaurants that could be sold to franchisees, and a business that seemingly could turn around in a hurry. Bob Evans has had a vertical business model, with both a food maker and a restaurant company, that is unusual in the industry. Fiesta owns two brands with high potential that could be split or reinvigorated. Chipotle until recently was the most admired brand in the restaurant industry.

Shareholders like activists. They have an almost immediate impact on a company’s stock price. Buffalo Wild Wings’ stock shot up 15 percent last July after Marcato’s investment was first made known. There’s a belief that activists will push companies to more in a more shareholder-friendly way.

And they’re usually right. 

Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.

Contact Jonathan Maze at [email protected]

Follow him on Twitter: @jonathanmaze

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