Amid activist pressure, Del Frisco's Restaurant Group said it has “commenced a comprehensive review of strategic alternatives.” This review will consider a full range of options, the company said, including a possible sale of DFRG or any of its dining concepts. There’s no guarantee a deal will take place, however.
“The board believes that conducting a strategic review process is in the best interests of shareholders,” Ian R. Carter, Del Frisco’s chairman of the board said in a statement. “The board continues to support the company’s existing strategic priorities and believes that Del Frisco’s exceptional collection of dining concepts will serve as the foundation for continued growth. We believe that pursuing these complementary paths is in the best interests of our shareholders and is designed to maximize value.”
DFRG said it is “proceeding expeditiously” on the process, which includes Piper Jaffray & Co. as financial advisers and Kirkland & Ellis LLP as legal advisers. The company has also formed a transaction committee to assist in its evaluation of strategic alternatives.
The company operates 73 restaurants across 16 states, including Del Frisco's Double Eagle Steakhouse, Barcelona Wine Bar, bartaco, and Del Frisco's Grille.
“While the board conducts its review, Del Frisco’s management team and employees will continue delivering world-class dining experiences, executing our ongoing initiatives, increasing operational efficiencies, improving financial performance, and attracting and retaining extraordinary talent,” DFRG chief executive officer Norman J. Abdallah added in a statement.
Activist investor Engaged Capital LLC, which at the time owned just under 10 percent of the company’s shares, sent a December 6 letter to DFRG urging the company to consider a sale, either of the entire DFRG or of its individual concepts.
A day earlier, Del Frisco’s board of directors unanimously adopted a shareholders rights plan “to protect the best interests of all Del Frisco’s shareholders.”
“The environment for M&A in the restaurant industry has rarely been more active than it is today,” Engaged principal and chief investment officer Glenn W. Welling wrote. “… It is imperative that the board takes advantage of this window by forming a strategic review committee of the independent directors, hiring advisors, and beginning a process to explore strategic alternatives immediately.”
That process is now underway.
Del Frisco’s shareholders rights plan, or “poison pill,” is designed to allow, “Del Frisco’s shareholders to realize the long-term value of their investment by reducing the likelihood that any person or group would gain control of Del Frisco’s through open market accumulation without appropriately compensating the company's shareholders for such control or providing the board sufficient time to make informed judgments.” It would come into play if a shareholder accumulated 10 percent of more of Del Frisco’s common stock. It’s set to expire on December 4, 2019.
Engaged had no shortage of criticism considering DFRG’s recent performance, calling its sales “abysmal,” since its IPO in 2012. The company said DFRG declined 47 percent in the six years that followed, while its closest peer (Ruth’s Chris) has nearly quadrupled in value.
“Over any reasonable short- or long-term time frame, DFRG has underperformed its peers, the restaurant industry, and the broader market,” Engaged wrote.
Even with that said, Engaged saw shareholder potential in DFRG’s concepts. Double Eagle it called “one of the premiere high-end dining concepts in the U.S. with [average-unit volumes] in excess of $14 million per restaurant, restaurant-level EBITDA margins of 25 percent, and the potential to triple its unit count.
Of its newest restaurants, Barcelona and bartaco, which were closed June 27 for $325 million, Engaged said the first’s beverage mix of 46 percent and consistently positive same-store sales “provide the foundation for an extended runway of profitable growth.”
The company labeled bartaco as a brand with the potential to be a “blockbuster concept.”
Engaged also claimed that DFRG had “multiple parties interested in acquiring DFRG today, either in pieces or in its entirety.”
In the third quarter, Del Frisco’s came out with a quarterly loss of $0.07 per share compared to last year’s loss of $0.03. Del Frisco’s posted revenues of $105.30 million compared to the year-ago figure of $73.34 million.
On a concept-by-concept basis, three of the four chains in Del Frisco’s lineup reported red same-store sales. The same was true of customer counts.
It broke down as follows:
- Double Eagle: –2.4 percent comps/–4.7 percent traffic/average check 2.3 percent
- Barcelona Wine Bar: 2.5 percent comps/1 percent traffic/average check 2.3 percent (the lone brand to report positive)
- Bartaco: –7 percent comps/–5.9 percent traffic/average check 1.5 percent/average check –1.1 percent
- Del Frisco’s Grille: –0.4 percent comps/–9 percent traffic/average check 8.6 percent