Bill Ack­man is work­ing with Chipo­tle to re­make the board and re­verse a roughly 50 per­cent stock drop af­ter a food-safety cri­sis last year.

Poor per­for­mance by restau­rant chains spurring deals

The Denver Post - - FRONT PAGE - By Les­lie Pat­ton

When ex­ec­u­tives from Chipo­tle Mex­i­can Grill de­liv­ered a bleak outlook for the chain dur­ing an in­vest­ment con­fer­ence Tues­day, at­ten­dees steered the dis­cus­sion to­ward a would-be sav­ior: Bill Ack­man.

The ac­tivist in­vestor, who runs hedge fund Per­sh­ing Square Cap­i­tal Man­age­ment, be­came Den­ver-based Chipo­tle’s largest share­holder in Septem­ber with an al­most 10 per­cent stake. He’s work­ing with the com­pany to re­make the board and re­verse a roughly 50 per­cent stock drop af­ter a food­safety cri­sis last year.

In step­ping in to help turn around a restau­rant brand, Ack­man is fol­low­ing an in­creas­ingly com­mon script. About 14 per­cent of the in­dus­try’s pub­licly traded com­pa­nies with a mar­ket value of at least $100 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. U.S. same­store sales dropped 0.6 per­cent at res­tau­rants in Oc­to­ber, af­ter 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 $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 per­cent 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 per­cent this year be­fore the stake was an­nounced, re­bounded and was up 6.2 per­cent for the year through 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 $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 sep-

arate its strug­gling China unit to fo­cus on im­prov­ing U.S. 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 Inc. and Cracker Bar­rel Old Coun­try Store Inc. are also cur­rently deal­ing with ac­tivist share­hold­ers.

Green­wood Vil­lage­based Red Robin Gourmet Burgers, whose stock has tum­bled 24 per­cent 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 fast-ca­sual 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,” although the com­pany’s rel­a­tively small mar­ket cap may be a draw­back for some ac­tivists, he said.

Other U.S. din­ing chains have seen their stock slide in value dur­ing the past 12 months, in­clud­ing Broom­field-based Noo­dles & Co., Papa Mur­phy’s Hold­ings and Ruby Tues­day. Fast­food and ca­sual-din­ing eater­ies re­ported slow­ing sales last quar­ter, with many cit­ing anxiety over the U.S. 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 five-year term on their in­vest­ments, of­ten look for a dis­tressed com- pany that has sta­bi­lized, “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.

3G strove to boost profit by shak­ing up man­age­ment, fran­chis­ing res­tau­rants and belt tightening. When the chain re­turned to the pub­lic mar­ket it handed 3G $1.4 bil­lion. The buy­out firm’s funds cur­rent stake of about 218 mil­lion shares is worth about $10 bil­lion. Ack­man’s Per­sh­ing Square is the largest share­holder af­ter 3G in Burger King’s cur­rent par­ent com­pany, Restau­rant Brands In­ter­na­tional Inc.

Restau­rant Brands has sold al­most all its lo­ca­tions to fran­chisees, a strat­egy pushed more and more by ac­tivist share­hold­ers. The com­pany, which bought the Cana­dian dough­nut chain Tim Hor­tons in 2014 for about $11 bil­lion, counted just 100 com­pany lo­ca­tions at the end of last year. More than 19,000 res­tau­rants of the two brands are fran­chised. 3G ar­gued that in­de­pen­dent own­ers would run the stores bet­ter than cor­po­rate.

Oth­ers chains have fol­lowed suit. As a part of a turn­around plan, McDon­ald’s said a year ago that it plans to re­duce its own­er­ship of res­tau­rants to about 5 per­cent glob­ally from about 18 per­cent at that time. Yum is tak­ing its com­pany-owned stores down to 2 per­cent or less.

Mar­cato is push­ing Buf­falo Wild Wings to do the same. The beer-and-chicken com­pany should sell hun­dreds of lo­ca­tions with a 90 per­cent fran­chised goal, com­pared with 49 per­cent now, Mar­cato said in a state­ment this week. Do­ing so would lead to higher mar­gins and cash flow, while also en­abling stock buy­backs, the firm said. This would re­verse the com­pany’s re­cent moves to buy out fran­chisees.

That strat­egy may not fly for Chipo­tle be­cause it doesn’t fran­chise its res­tau­rants. Co-CEO Steve Ells said at the in­vest­ment con­fer­ence Tues­day that Ack­man asked for a role on the board, which has been crit­i­cized for its slow re­sponse to the food-poi­son­ing out­break that sick­ened hun­dreds.

It will take time to re­build trust and loy­alty from cus­tomers, said Joe Den­ni­son, a port­fo­lio man­ager at Zeven­ber­gen Cap­i­tal In­vest­ments, which owned about 99,800 Chipo­tle shares as of Septem­ber.

Bill Ack­man, an ac­tivist in­vestor who runs hedge fund Per­sh­ing Square Cap­i­tal Man­age­ment, be­came Den­ver-based Chipo­tle’s largest share­holder in Septem­ber with an al­most 10 per­cent stake. Pawel Dwulit, The Cana­dian Press

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