Red Robin said it is carefully reviewing a proposal from Vintage Capital Management, LLC to acquire all of the burger chain’s outstanding stock for $40 per share in cash. The activist investor already owns roughly 12 percent of Red Robin. In June, Vintage Capital suggested a similar $461.4 million deal. But this offer came across a lot less hostile.
Vintage Managing Partner Brian Kahn sent a letter to Red Robin chairman and acting chief executive officer Pattye Moore, dated July 18 per a securities filing, saying the company was “pleased to submit this non-binding proposal” following recent discussions, “pursuant to which Vintage would acquire 100 percent of Red Robin Gourmet Burgers, Inc.”
The company said it was also happy to “have begun a constructive dialogue.”
“We hope that this dialogue continues, as we are confident that our proposal is in the best interest of the company’s stockholders,” it wrote.
Red Robin confirmed the letter later in the day. However, it called it an “unsolicited conditional proposal.” Shares of Red Robin Gourmet Burgers jumped 17 percent in extended trading following the news.
“Red Robin’s Board of Directors and management team are committed to acting in the best interests of the company and all shareholders,” the chain said in a statement. “Consistent with its fiduciary duties and in consultation with its independent legal and financial advisors, the Red Robin Board will carefully review and consider the proposal to determine the course of action it believes is in the best interests of the company’s shareholders.”
Evercore is serving as financial adviser to Red Robin and Paul, Weiss, Rifkind, Wharton & Garrison LLP is serving as its legal counsel.
Vintage said the deal would be structured as a merger of a newly formed entity controlled by Vintage, with Red Robin surviving as a wholly owned subsidiary of the company. The price, which is based on Vintage’s 12,966,146 shares and the employee equity incentives disclosed in Red Robin’s most recent quarterly report, represents a premium of 57 percent of its unaffected share price of $25.46 on June 12, 2019—before the bid talks began. It values Red Robin and its 562 units at about $519 million.
Despite recent struggles, Vintage said it believes Red Robin “is well-positioned for future growth, and we believe that many members of the company’s existing management are critical partners in the future success of the business. We intend to discuss the future roles and responsibilities of the company’s senior management team with each of them individually at the appropriate time.”
Red Robin’s guest traffic declined 5.5 percent in the first quarter of fiscal 2019 as same same-store sales fell 3.3 percent. Net income sank 85.4 percent, year-over-year, to $639,000. Revenues of $409.87 million compared to last year’s $421.52 million figure. According to Zacks Consensus Estimate, Red Robin has underperformed revenue estimates for four consecutive quarters. The chain also announced May 30 it was closing 10 underperforming restaurants, including seven enclosed mall units.
Vintage would fund the deal through a mix of debt and equity, it said. This would include an $450 million term loan, a revolving line of credit to provide liquidity to Red Robin on a post-closing basis, and about $250 million of equity (inclusive of the stake already owned by Vintage).
Vintage added that it separately sent Red Robin a letter from “a premier international financial institution,” expressing high confidence that they will be able to support sufficient financing in respect to the debt portion of the offer. “The transaction will not be conditioned on financing, and in the unlikely event that our debt financing is not available, Vintage would be prepared to pay a customary reverse termination fee in an amount to be discussed,” the company wrote.
The June bid was presented with harsher tones from Vintage. It came only a week after Red Robin adopted a short-term Shareholder Rights Plan, or a so-called "poison pill" to investors.
Vintage said at the time Red Robin should consider the offer or else be challenged for four of its nine board seats. The company also criticized Red Robin’s handling of its CEO search to replace Denny Marie Post, who retired in April. “Our sincere hope, as explained to members of the board on a number of occasions, was to work collaboratively to recruit an ‘A-plus’ operator to accept the CEO role and lead Red Robin back to greatness,” Vintage Capital said in a letter in a filing with the SEC. “It is clear that many such quality candidates are refusing to entertain the opportunity due to a lack of confidence in the board’s leadership and Red Robin’s disastrous operating and market performance.”
Red Robin responded by saying, “Given our dialogue to date, we were surprised by the content of the letter we received today, as Vintage has not been willing to propose any CEO candidates.”