Buffalo Wild Wings (BWLD – Get Report) shares jumped early Monday after activist investor Marcato Capital’s Mick McGuire escalated his insurgency and announced plans to nominate a minority slate of four dissident director candidates to the wing and beer restaurant company’s nine-person board.
The contest shouldn’t be a surprise as the insurgent fund manager in August sent a letter to Buffalo Wild Wings board urging the company to bring on “fresh talent” to its board and management team.
Marcato has been pushing Buffalo Wild Wings to franchise more of its company-owned stores, fix what it sees as business failures and capital allocation problems, all key parts of the activist playbook when it comes to pushing up the stock prices of public restaurant chain targets.
To drive his campaign McGuire is seeking to nominate himself, Scott Bergren, formerly CEO of YUM! Brands’ Pizza Hut, Sam Rovit, president and CEO of CTI Foods and Lee Sanders, managing director of Rocket Chicks LP.
The fund has a 5.2% equity stake, according to FactSet, and is the fourth largest Buffalo Wild Wings shareholder.
Buffalo Wild Wings share price spiked on the launch of the contest, up roughly 1.5% to $152.15 a share in mid-day trading. Nevertheless, the company’s share price is down from the $165.25 a share it was trading at in August after Marcato issued a critical letter to the company’s board.
McGuire launched his public campaign at Buffalo Wild Wings in July, suggesting that the company should consider strategic alternatives to improve shareholder value and the fund has been escalating his efforts ever since.
Buffalo Wild Wings has taken a few steps in recent months as part of an effort to appease disgruntled investors in an ultimately unsuccessful effort to head off a Marcato contest. In August, the company announced a $300 million share repurchase authorization, a key tactic of companies targeted by activists. In October, hoping to head off a proxy contest, the restaurant chain installed three new directors, Andre Fernandez, president of CBS RADIO, Hal Lawton, senior vice president of North America at eBay, Inc., and Harmit Singh, executive vice president and chief financial officer of Levi Strauss & Co. McGuire said Monday that the three new directors “don’t go far enough” to address what he sees as a skill deficiency at Buffalo Wild Wings.
Activists often pressure restaurant chains to reduce the number of their company-owned stores by franchising more locations, as part of an effort to raise capital for stock buybacks. This may be a key goal for Marcato, which has said it wants to see the company move to a predominantly franchised business model. The fund even wrote a letter in December to the company’s franchise owners, noting that based on its approach, franchising will be the top priority and franchisees will receive “equal and immediate” access to new systems, tools and market initiatives.
However, John Gordon, restaurant analyst at Pacific Management Consulting Group, argues that moving to an overly franchised model puts the brand at risk, particularly, with more complicated restaurant chains like Buffalo Wild Wings, which have guest table service and an alcohol component. Gordon notes that Buffalo Wild Wings is currently 51% company-owned and 49% franchisee-owned, with almost no locations outside the U.S.
Marcato chides Buffalo Wild Wings for buying into franchisee units recently at “excessive valuations.” Gordon acknowledges that the company bought some struggling locations from franchisees recently at high multiples. However, he argued that the purchases were made to help improve the company’s overall image and brand and to help revitalize those locations and that they put a spotlight on problems where too much control is ceded to franchise owners.
“You [Marcato] criticizes them for buying back struggling franchise locations and investing a lot of money to bring them back up to par but at the same time recommend that they dump the rest of the company owned stores to other franchisees?” asked Gordon.
He pointed out that Buffalo Wild Wings could receive roughly $1.5 million to $2.2 million per store, depending on each store’s EBITDA, if it were to sell company-owned locations to franchise owners. However, he argued that such spending, which could raise funds in the short-term for stock buybacks, could hurt the overall business and brand over the long term. Gordon suggests that, instead, Buffalo Wild Wings should consider expanding outside the U.S., as means of driving growth.
“Are you making the overall brand and system stronger or weaker?” asked Gordon.
And one of Marcato’s director candidates experience appears to put a spotlight on the franchising goal. Marcato nominee Sanders is described as a “seasoned restaurant and franchise industry executive” who has an “intimate knowledge of the Buffalo Wild Wings franchise system.”
The majority of proxy contests typically settle, with the activist getting one or two director candidate to their target’s board. Nevertheless, it is possible that this proxy contest could go the distance all the way to the annual meeting, which is expected to take place in July.
Marcato has launched 21 campaigns since 2011 but only one director-election proxy contest before this one, according to FactSet. That was at Lear Corp. in 2013 and Marcato’s proxy contest for three of eight board seats was settled for the appointment of one mutually acceptable director and a commitment to hike buybacks. On Thursday, Marcato did reach a deal with Terex Corp. (TEX – Get Report) to add one Marcato recommended nominee to its board. Nevertheless, the lack of a stronger track record when it comes to director election contests suggests that Buffalo Wild Wings might not want to settle early.