This probably wasn’t the kind of March Madness Buffalo Wild Wings was hoping for.
As the sports-centric chain unrolls its ambitious NCAA Tournament marketing campaign, a battle between its management and an activist investor is unraveling on the public forum.
On Tuesday, Buffalo Wild Wings announced it hired investment-banking firm The Cypress Group, a company with a history of helping restaurant companies, including Wendy’s and TGI Fridays. This would appear to signal progress in Buffalo Wild Wings’ refranchising plan. Currently, more than 600 of the 1,220 locations are company owned.
“Cypress will be engaged in marketing roughly 10 percent of Buffalo Wild Wings company-owned restaurants. This initial sale process represents the first phase of the Company’s ongoing portfolio optimization process,” Buffalo Wild Wings said in a statement.
But, not surprisingly, this did little to appease Marcato Capital Management, the San Francisco-based hedge fund that owns around 5.6 percent of the company. Marcato has long pushed for a dramatic shift in the chain’s business model and its board structure. It has suggested an asset light, 90 percent-franchised plan in the past.
“It is ironic that, despite spending the last nine months resisting all of Marcato's suggestions for financial and operational improvements, Buffalo Wild Wings has now chosen to engage the Cypress Group on its so-called 'portfolio optimization' process. Notably, Marcato retained the Cypress Group last year to study the feasibility of refranchising at Buffalo Wild Wings," Marcato said in a statement.
Marcato’s presentation around Cypress Group’s initial findings took place in October 2016 and included the following statement: “[Cypress is] highly confident BWLD could refranchise their owned stores at a multiple of 6.0x or higher and estimate a refranchising process to 90 percent could take as few as 18—24 months."
“We strongly believe that a shift to a highly franchised business model is not only feasible, but also creates substantial value for Buffalo Wild Wings shareholders over the long term. Even with the Cypress Group's support of the feasibility of Marcato's refranchising proposal, we remain concerned that Buffalo Wild Wings will continue to resist this plan," the company added on Tuesday.
Marcato’s aggressive push has been in high gear since July. The company nominated four directors to the board in February and, in March, unveiled a presentation for investors arguing that executive’s were not aligning their goals with shareholders. This was based on the idea that zero Buffalo Wild Wings executives currently own shares and only one director has purchased the stock on the open market. It was also suggested that some of the chain’s management were leveraging equity incentive plans to purchase low-cost shares and then bank on selling them for profit.
Sally Smith, president and CEO of Buffalo Wild Wings, spoke optimistically about the Cypress move on Tuesday. The company has more than 25 years of multi-unit M&A and corporate refranchising experience in the industry.
“We are excited to partner with The Cypress Group, which has a notable breadth of franchise deal experience and an extensive network of valuable relationships,” she says in a statement. “We anticipate engaging with successful, committed franchisees with the desire, experience and financial ability to build our brand and further strengthen the Buffalo Wild Wings system."
And this whole issue was just the second time Buffalo Wild Wings and Marcato squared off this week. On Monday, the chain revealed its nominees to stand for election at the upcoming annual meeting of shareholders in May.
Of Marcato’s four nominations for the board, only one, Sam Rovit, will stand for election. The other three, including Marcato founder Mick McGuire, will not be considered. Scott Bergren, former CEO of Yum! Brands, and Lee Sanders, formerly of Johnny Rockets and TGI Fridays, were the other suggestions.
Instead, Buffalo Wild Wings nominated a former McDonald’s leader in Janice Fields, who was once vice president and COO of the fast food giant. The two nominees would replace retiring members James Damian and Michael Johnson.
CEO Sally Smith, as well as Cynthia L. Davis, Andre J. Fernandez, Harry A. Lawton, J. Oliver Maggard, Jerry R. Rose, Harmit J. Singh, will stand for reelection.
“Buffalo Wild Wings' desperate actions only confirm that there is substantial deficiency at the Board level and lack of a cohesive plan to create long-term shareholder value,” Marcato’s statement from Tuesday read. “It is deeply troubling that the company would take these steps without consulting us or other major shareholders, as we have continuously endeavored to engage in constructive dialogue with the Board and management on the strategic, operational and financial issues that we believe are plaguing the company. Unfortunately, every attempt we've made has been stymied.”
“In our view these changes do not go far enough and the company's rejection of our proposal to adopt a Universal proxy ballot is clearly designed to thwart shareholder democracy,” it added. “Rather than scrambling to protect the status quo, Buffalo Wild Wings should address our proposed operational improvements and business model modifications, which we believe are the only ways to drive sustainable value for all shareholders."
This is the second time in six months Buffalo Wild Wings has changed the composition of its board of directors.
“We are pleased to nominate Jan Fields and Sam Rovit for election to serve as new independent directors to the Buffalo Wild Wings Board,” says Jerry Rose, chairman of the board of Buffalo Wild Wings. “Jan and Sam are both distinguished and highly respected executives with deep restaurant and food services experience, and we look forward to benefitting from their expertise as we continue to execute on our strategic initiatives to drive growth and create value for all of our shareholders. The nomination of Jan and Sam, respectively, along with the additions of Andre Fernandez, Hal Lawton and Harmit Singh, who joined the Board in October 2016, demonstrates our commitment to enhancing Buffalo Wild Wings’ governance practices through board refreshment.”
Franchise Business Services, a group that represents 90 percent of Buffalo Wild Wings franchisees, came out in support of Buffalo Wild Wings in March. But the question is, naturally, does Marcato have a point?
In February, Smith was optimistic about the brand’s recent initiatives, including Fast Break Lunch, Half Price Wing Tuesday, and the Blazin’ Rewards loyalty program.
The hope is that these moves begin to pay noticeable dividends following a rough Q4 that showed a 38 percent drop in net earnings, a same-store sales decline of 4 percent at company-owned restaurants, and a 3.9 percent drop at franchised units.