In the wake of a deal to take specialty restaurant chain Fogo de Chao private at $15.75/ share, just the latest in a mini-wave of restaurant transactions, there's potentially more action on the horizon. This time, it's Bloomin' Brands (BLMN) , parent of Bonefish Grill, Outback Steakhouse, Carrabba's Italian Grill, and Fleming's Prime Steakhouse and Wine Bar, that has found itself in the crosshairs of an activist investor pushing for change.
Earlier this week, Barington Capital, which represents a group of shareholders, sent a letter to BLMN CEO Elizabeth Smith, expressing the opinion that the company should consider spinning off Bonefish Grill, Carrabba's and Fleming's into a separate company leaving Outback as a separate entity.
There is no doubt, which Barington pointed out, that BLMN has underperformed many of its peers since going public in 2012. Both sales growth and EBITDAR (earnings before interest, taxes, depreciation and amortization and rent/restructuring costs) have been lagging, and the stock has done little, over the past three and five year periods.
Barington believes that BLMN's current structure has led to excessive overhead costs, including too many corporate employees which have contributed to G&A costs that are significantly higher than many peers. Barington also hits the company for excessive yet ineffective advertising costs.
The bottom line is that Barington believes that if it its recommendations, which include the spinoff, operating expense reduction, sales of company owned real estate, and improved corporate governance were fully implemented, that BLMN could be worth between $39 and $42 per share. In addition the company would be able to increase its dividend yield (currently 1.5% to 2.5%), and buy back a significant amount of stock over the next three years.
Barington's letter, along with a better than expected fourth quarter earnings report, have pushed BLM shares up about 14% the past two days. Whether the activists' push will go anywhere remains to be seen, but Barington has experience here, having been involved in the Darden Restaurant (DRI) "transformation", which unfolded between 2013 and 2015.
The BLMN situation reminds me of what occurred with Bob Evans over the past several years, when an activist pushed for a separation of the company's prepared food business from its restaurant operations. Ultimately, this situation unfolded favorably, and created shareholder value. However, it did not happen quickly. Company boards of directors are not usually amenable to activist investor "suggestions" initially, and it often takes increasing pressure to force change, including the always interesting proxy fight.
I am intrigued by the BLMN situation; in fact I am a huge fan of the company's Bonefish Grill chain. However, I do not expect Barington's push to yield fruit overnight. I believe their efforts are worthwhile, and if implemented, could provide synergy and enhance value, but it may not be an easy fight.