Schafer: Activist exits Wild Wings with little gain

It wouldn't take a Mozart of investing to figure out that the cash buyout offer on the table from the owners of Arby's Restaurant Group Inc., might be a good one for shareholders of Buffalo Wild Wings Inc.

Arby's and its majority owner Roark Capital Group have agreed to acquire Buffalo Wild Wings for $157 per share, valuing the equity in the company at about $2.45 billion. Given the headwinds facing the whole fast-casual dining industry and a price that works out to be more than 11 times the last 12 months' cash earnings, this looks to be a deal that shareholders should readily approve.

The announcement came not quite six months after a Wild Wings shareholders meeting that saw the election of three nominees of activist Marcato Capital Management to the Wings board. They included Marcato Managing Partner Richard T. "Mick" McGuire III, "considered something of a prodigy" according to the Wall Street Journal.

Longtime Wings CEO Sally Smith voted with her feet at the meeting by electing to retire, and at the end of that trading day the price of Buffalo Wild Wings stock closed at $152.35 per share.

Provided the deal with Arby's closes early next year as planned, McGuire persevered in a grimly determined proxy fight only to agree to a buyout premium of all of 3 percent once his nominees were elected.

"Let's sell it to the first qualified buyer that comes along" was not what McGuire promised Buffalo Wild Wings shareholders in an ambitious plan first laid out for shareholders in the summer of 2016.

Marcato had a lot of ideas but really hung its hat on a concept called refranchising, which means selling the corporate-owned restaurants to independent operators and collecting franchise royalties and fees. That gets rid of the risk of owning a bunch of restaurants.

The plan called for at least 90 percent of restaurants to be owned by franchisees, freeing up capital to, among other things, buy back shares and boost earnings per share. At the time, the ratio of company-owned restaurants to franchised units stood at about 50/50, roughly 600 each.

Marcato confidently forecast that its refranchising plan could result in the stock price more than tripling to $458 per share by the end of 2020.

In the third-quarter conference call that executives hosted for analysts and investors a little over a month ago, there was barely a peep about any of this. "Yes, a good question, and we don't have any progress to share at this point" on refranchising, company Chief Financial Officer Alexander Ware replied to an analyst.

The company didn't repurchase any of its shares in its third quarter either, without much of an explanation.

Smith, who has stayed on as CEO while the board looks for her successor, said about the search only that she was sure directors had interviewed candidates.

So instead of discussing progress on the Marcato program when there obviously wasn't any, analysts peppered executives on expense reductions, labor cost increases and the like.

Smith and her colleagues got to explain how they had found success with a new promotion for a buy one, get one free offer of boneless chicken wings on Tuesday, supplanting a popular promotion for half-priced genuine chicken wings.

As a result of the switch to much lower-cost, ersatz wings, the company actually managed to bring food costs as a percentage of sales down a bit from earlier this year. Yet even in this better-than-expected quarterly report, same-store sales at company-owned restaurants declined 2.3 percent and declined even more at franchised restaurants.

Buffalo Wild Wings may have problems that others in the industry do not, but getting profitable growth has lately been far more challenging than it was several years ago for many big restaurant companies. The most recent update of the closely watched Restaurant Industry Snapshot finally had a tone of optimism, although the industry's comparable store customer traffic nevertheless had declined once again in October, this time by 1.5 percent.

Given that industry backdrop and the problems at Buffalo Wild Wings, it's not much of a mystery why Marcato has formally agreed to vote the 6.5 percent of Buffalo Wild Wings shares its funds own in favor of the Arby's transaction. The offer on the table is a chance to get out while handing the daunting challenge of refreshing Buffalo Wild Wings to somebody else.

The deal price of $157 will produce a gain for Marcato, as best can be determined from Marcato filings, but nothing like the three times on your money promises McGuire made when he was out stumping for shareholder votes.

So this is what McGuire can confidently tell his investors when the books are finally closed on his investment in Buffalo Wild Wings:

"At least I didn't mess it up."

lee.schafer@startribune.com 612-673-4302