Chipotle, Buffalo Wild Wings at heart of activist feeding frenzy
WHEN executives from Chipotle Mexican Grill delivered a bleak outlook for the chain during an investment conference last Tuesday, attendees steered the discussion toward a would-be saviour: Bill Ackman.
The activist investor, who runs hedge fund Pershing Square Capital Management, became Chipotle’s largest shareholder in September with an almost 10 per cent stake. He’s working with the company to remake the board and reverse a roughly 50 per cent stock drop following a food-safety crisis last year.
In stepping in to help turn around a restaurant brand, Ackman is following an increasingly common script. About 14 per cent of the industry’s publicly traded companies with a market value of at least US$ 100 million ( RM450 million) have attracted an activist shareholder, according to data compiled by Bloomberg. That group includes Buffalo Wild Wings, Yum Brands and Bob Evans Farms.
Poor performance has given activists a problem they think they can fix. US same- store sales dropped 0.6 per cent at restaurants in October, following the worst third quarter in six years, according to MillerPulse data.
“Activists get involved in the restaurant space because, in many cases, there’s a playbook that’s been written on creating value,” said Peter Saleh, an analyst at BTIG in New York. Dining companies are easy to understand, and a lot of them have seen their value decline, he said. Such investors typically buy a large number of a public company’s shares and pressure management to make changes they believe will boost shareholder returns. Globally, activist hedge funds managed about US$ 123 billion last year, almost double the amount in 2012, according to Hedge Fund Research Inc. Several see promise in restaurants:
• Marcato Capital Management, a hedge fund run by Mick McGuire, has a stake of about 5.2 per cent in Buffalo Wild Wings. The firm reiterated this week that it would push for changes at the eatery, which has suffered declining same- store sales. The stock, down 12 per cent this year before the stake was announced, rebounded and was up 6.2 per cent for the year through last Tuesday.
• Sandell Asset Management has called for Bob Evans to split off its packaged-foods business. Sandell, which won a proxy fight with the company in 2014 leading to a board and management shake-up, said the unit could be worth US$ 1.2 billion and selling it would let Bob Evans focus on core assets. Bob Evans said this week that it is working with JPMorgan Chase to evaluate opportunities.
• Keith Meister’s Corvex Management successfully campaigned Yum Brands to separate its struggling China unit to focus on improving US operations. At the end of October, the owner of KFC spun off the new company, Yum China Holdings Inc., which trades on the New York Stock Exchange under the ticker YUMC.
• Engaged Capital, which along with JCP Investment Management pushed smoothie maker Jamba almost two years ago to cut expenses and find more franchisees, increased its stake over the summer. Fiesta Restaurant Group
Activists get involved in the restaurant space because, in many cases, there’s a playbook that’s been written on creating value,” said Peter Saleh, an analyst at BTIG
Inc. and Cracker Barrel Old Country Store Inc. are also currently dealing with activist shareholders.
Red Robin Gourmet Burgers, whose stock has tumbled 24 per cent in the past year, may be the next target, BTIG’s Saleh said. Denny Marie Post was named CEO in August, and the company more recently said it’s either closing or rebranding its fastcasual locations, after failing to keep pace with peers.
“It’s definitely a possibility,” Saleh said. “It’s so cheap that it would make sense from a valuation standpoint,” though the company’s relatively small market cap may be a drawback for some activists, he said.
Other US dining chains have seen their stock slide in value during the past 12 months including Noodles & Co., Papa Murphy’s Holdings and Ruby Tuesday.
Fast-food and casual- dining eateries reported slowing sales last quarter, with many citing anxiety over the US presidential election and cheaper prices at the supermarket.
That may spark more activist interest, according to Jim Sanderson, managing director and analyst at Arthur W. Wood Co. “You’ve got grocery price deflation and a lot more choice in packaged foods,” Sanderson said. “It really replaces a lot of meals consumers might have turned to restaurants in the past for.”
Private equity firms, which typically have a three- to fiveyear term on their investments, often look for a distressed company that has stabilised, “so you’re not bleeding cash dramatically” and there’s a “core business that’s still viable,” he said.
Ackman is no stranger to the restaurant business. In 2012, two years after Brazilian billionaire Jorge Paulo Lemann’s 3G Capital took the struggling Burger King chain private, Ackman helped it go public again.