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BWW fight may be done but activists far from it


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CEO Sally Smith

The dust is far from settled, but the Buffalo Wild Wings board is quite different than it was at its last shareholder meeting due to an aggressive activist investor campaign. The shakeup is one of a handful of activist attacks in franchising and part of a trend that is sure to accelerate, analysts say.

Mick McGuire and his hedge fund Marcato Capital Management levied the campaign that changed the board makeup and hastened the exit of longtime CEO Sally Smith.

The culmination of the efforts meant board changes and an awkward shareholder meeting June 2 during which Chairman of the Board Jerry Rose announced that a silent Sally Smith would retire by the end of 2017. McGuire offered a consolatory note as the outcome of the proxy battle became clear.

"We are very pleased that our fellow BWLD shareholders recognize that additional change on the board is warranted to return Buffalo Wild Wings to a path of growth and long-term value creation,” said McGuire in a statement.

Thus far, Marcato’s work hasn’t exactly sent shares into the stratosphere. Since the contentious shareholder vote, shares have shed 12 percent of their value, sinking from $145 to $127 per share as of mid-July.

One key point in the Marcato activism was unloading company restaurants. The company is now refranchising 83 company restaurants across Pennsylvania, Washington, D.C., the Northeast, South Texas and Canada with the help of The Cypress Group. The investment banking firm and refranchising expert is under a strict non-disclosure agreement, but speaking very generally, Cypress founding partner and CEO Dean Zuccarello explained how the opportunity for Marcato came about.

“Casual dining has had some challenges in the last 12 to 18 months,” said Zuccarello. The sector slowdown made Buffalo Wild Wings a target for Marcato, which saw the opportunity to boost value.

It may prove a good thing for franchisees, however it came about. “I personally feel like there’s a great opportunity right now,” said Zuccarello. “The thing I’ve seen time and time again is that the largest brands find a way to survive but they have their ups and downs.”

Regardless how the push at Buffalo Wild Wings goes, activists aren’t going anywhere. According to activist watchdogs at the financial data and software firm FactSet, last year, there were 319 activist campaigns against U.S. companies. That’s down from the record high of 377 set in 2015, but it’s still the third-highest annual count since the recession, according to FactSet’s 2016 Shareholder Activism Review. Board seats were the target of 101 of those campaigns.

The report also noted it wasn’t just massive companies under threat anymore: 75 percent of activist campaigns targeted companies with market caps less than $1 billion—the range in which just over half of public franchise companies sit.

Also according to FactSet, the median cost for a targeted company in 2016 was more than $1 million, up sharply from $550,000 in 2015. That money goes to proxy solicitation (getting shareholders to vote with the board), advisers and all the time spent in meetings, communicating with shareholders via elaborate slide-decks and other costs.

Many shareholders, as seen in the Buffalo Wild Wings fight, are happy to play along with activists if it means a near-term win.

As for the long-term health of target companies, that’s a mixed bag. The outcome for Buffalo Wild Wings remains to be seen. But as a corollary, Darden, the parent company of internationally franchised Olive Garden and Longhorn Steakhouse, lost its own contentious board battle with Starboard Value—the entire board was replaced in 2014. The casual diner’s stock has thrived in a tough segment—it’s up 76 percent from $48 to $90 since then.

And activists can certainly share some of that credit. Company insiders said the shakeup helped propel cost cuts, fostered creativity and got them to focus closely on their core demographic. But not all of their ideas were great, or even new. They wrested control from the board in a time of weakness and change, thus many of the changes were already underway.

Then there is Famous Dave’s. The company’s stock showed the exact opposite of Darden. The stock nearly doubled through 2013 to $20 a share as investors jumped in for the activist bump, but then it sank back to $10. It now sits at $3.60. Overall, the stock is down 67 percent since activist Patrick Walsh joined the board. Walsh, the principal of Atlas Fund, also waged campaigns against Denny’s in 2010 and Red Robin in 2011.

Now activists at Ancora Advisors are banging on Potbelly’s door, calling for smaller locations, a deceleration in development and fewer company-owned restaurants. Just like the Marcato campaign, the latter is the No. 1 push for activists; investors enjoy the regular royalty income compared to operating income and higher costs.

Analysts and investors queried at the 2017 PiperJaffray consumer conference in June said it’s nearly impossible for public companies to guard against activist campaigns At some point, the brand will stumble or the trends will shift as they did for Buffalo Wild Wings. If large investors see a chance to goose the stock, it’s hard to stop them. Companies can adopt a “poison pill” to limit shareholder ownership, but that can shut the door to what might be very valid new ideas.

The onus then is on the target company to prove to shareholders who can actually create value instead of slash a path to short-term profits.

The best protection is working hard to balance shareholder desires and the business operations. If there’s no room for improvement, there’s no room for activists.

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