Buffalo Wild Wings Sale Hints Some Other Big Restaurant Deals Are Lurking

 | Nov 29, 2017 | 12:03 PM EST
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It has been quite a year for restaurant stocks in terms of acquisitions.

After a couple weeks of speculation, Buffalo Wild Wings (BWLD) announced on Tuesday that it would be acquired by Arby's Restaurant Group. While the deal prices Buffalo Wild Wings at $157 a share, which is 34% above where shares traded just prior to the buyout rumors, it is 7% below where BWLD shares traded one year ago.

Just last month, struggling casual dining chain Ruby Tuesday Inc.  (RT) accepted a buyout deal of $2.40 per share from NRD Capital. This disappointing deal priced Ruby Tuesday shares 21% below the year-ago price. On a brighter note, in January, Bob Evans Farms Inc.  (BOBE) unloaded its restaurant business to focus on prepared foods. Then in September, BOBE agreed to be acquired by Post Holdings Inc. (POST) for $1.5 billion. BOBE shares doubled between September 2016 and September 2017. In April, Panera Bread was taken out by JAB Holdings for $315 a share; it's the same JAB that has taken out Krispy Kreme and several others.

The four acquisitions involve four very different restaurant chains: one newer and facing growth struggles (BWLD), one rich in real estate but struggling miserably from an operating perspective (RT), one older brand that was doing OK but was lost in a sea of other chains (BOBE), and one highly successful growth story (PNRA). One thing they all had in common, though, was that there were activist investors involved to varying degrees pushing for change. In the cases of Ruby Tuesday and Buffalo Wild Wings, the share prices had fallen, making them potentially cheap targets.

The question now is, "What are other restaurant chains might be ripe for a deal?" I preface the following observations by noting that this exercise is pure speculation on my part. I'd also note that I've been predicting consolidation in the industry for a couple years and in some cases have taken positions in restaurants because I believed they may be acquired (I owned both Bob Evans and Ruby Tuesday, for example). However, I believe there will be more deals; the sector is at an inflection point for consolidation, but there is still a lot of guesswork here.

I can see someone, perhaps private equity, taking a run at newcomer Zoe's Kitchen Inc. (ZOES) . Though Zoe's is one of the freshest restaurant concepts in my view, its stock has been very disappointing to investors, many of whom have fled. From January to August the shares fell nearly 60% as growth investors, including some institutions, threw in the towel. That's when I took a position, after a couple years of watching.

Zoe's shares since have rebounded about 30%. However, for someone with deep pockets that sees potential for the concept of fresh, Mediterranean food and knows how to run a restaurant chain profitably, the name is still a potentially cheap target, with an enterprise value of less than $300 million. Activist investor Legion Partners Asset Management recently took a 2.9% in ZOES, and COO Jeremy Hartley left last month, which may mean that the planets are aligning for change.

Cracker Barrel Old Country Store Inc. (CBRL) is another interesting possibility. An iconic brand name with a loyal customer base, Cracker Barrel has been the target of an activist, Biglari Holdings Inc. (BH) , which owns nearly 20% of the company. Biglari CEO Sardar Biglari failed in his attempts to exact change at Cracker Barrel, but has held on to that stake.

Cracker Barrel's stock has done very well over the years -- ironically, much better than shares of Biglari Holdings, which wanted to force change. However, it has flattened somewhat over the past two years. Cracker Barrel also is rich with real estate, which adds interest and intrigue to the name as a potential target. It does not appear that Biglari Holdings has deep enough pockets to take out the entire company, but at some point it may want to monetize its Cracker Barrel holdings, which could factor into a deal. Flattish stock performance by Cracker Barrel also may reawaken Biglari's activist activity. We'll see.

Another potentially interesting situation involves Fiesta Restaurant Group Inc. (FRGI) , shares of which have tumbled more than 70% over the past three years. Fiesta has drawn the ire of activist JCP Investment Management, which along with affiliates and other participants in a recent proxy fight owns about 9% of the company. While the proxy fight was seemingly unsuccessful in that Fiesta's board of directors was re-elected in June, JCP has made an impact with some of its "suggestions" to company management.  Activist involvement certainly does not always lead to the sale of the target company, but it can. If nothing else, this could be an interesting one to monitor.

Of course, there are a few other names that could be interesting targets in my view; I'll save those for a future column.

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