This post is part of the On the Margin blog.
Last year, the activist investor Marcato Capital Management began buying up stock in Buffalo Wild Wings Inc., after the stock fell from more than $200 a share to below $150.
The investor nominated four people to the company’s board, and won seats for three of them. Longtime CEO Sally Smith decided to retire, and the stock plunged, to under $100 a share at one point.
Enter Roark Capital, which according to reports on Monday bid $150 per share for the Minneapolis-based chicken wing chain, or about $2.3 billion.
The stock has responded: It’s up more than 25 percent on Tuesday, getting awfully close to that $150 price Roark would apparently pay.
Still, that price seems low.
Sure, the price is about 28 percent over where it was just yesterday, and 50 percent above the company’s low this year. And casual dining chains generally fetch lower prices than do quick-service restaurants or fast-casual chains. Oh, and there is considerable uncertainty with the company, given Smith’s retirement and persistent sales problems.
But it’s still a modest return given where the stock was just last December — when it hit a 52-week high of $175 a share.
Consider this: Marcato paid an average price of about $143 for its Buffalo Wild Wings stock. So $150 is only about 5 percent more — not exactly the type of return that activist investors demand.
Buffalo Wild Wings was not that long ago considered one of the best stocks on Wall Street. The chain had a long string of same-store sales increases, encouraged customers to linger over beer by watching sports and was generally the best-performing name in casual dining.
That at one point drove the stock to more than $200 a share and a valuation on par with companies like Panera Bread Co.
Now it’s being offered a takeout at a valuation multiple of less than 10 times earnings before interest, taxes, depreciation and amortization, or EBITDA. Panera was sold at a multiple of more than 18.
Indeed, Maxim Group Analyst Stephen Anderson, who has a Buy rating on Buffalo Wild Wings stock and a $160 price target, said there is “potential for a competing bid above the $150 level.”
He believes that Smith has laid the groundwork for improved margins and same-store sales growth. Last month, Buffalo Wild Wings stock soared after the company easily bested earnings projections.
Peter Saleh, analyst with BTIG, said that the lack of much return for Marcato could complicate any deal, but he believes lack of progress on a new CEO could lead the activist to agree to a sale.
Indeed, Stifel Analyst Chris O’Cull believes that Buffalo Wild Wings could be a “willing seller” given the CEO transition and the challenges in getting back to same-store sales growth.
We don’t doubt that Buffalo Wild Wings would be a willing seller. The company could likely view a go-private deal as an opportunity to make needed improvements out of the limelight.
And Roark has succeeded with many of its investments. Among other chains, it has acquired Arby’s Restaurant Group, Hardee’s and Carl’s Jr. owner CKE Restaurants and Jimmy John’s. There’s little doubt the private equity group could find a quality CEO to get Buffalo Wild Wings back on its feet.
But we believe that other potential buyers could come in and offer more.
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]
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