When executives from Chipotle Mexican Grill Inc. delivered a bleak outlook for the chain during an investment conference Tuesday, attendees steered the discussion toward a would-be savior: Bill Ackman.
The activist investor, who runs hedge fund Pershing Square Capital Management, became Chipotle’s largest shareholder in September with an almost 10 percent stake. He’s working with the company to remake the board and reverse a roughly 50 percent stock drop following a food-safety crisis last year.
In stepping in to help turn around a restaurant brand, Ackman is following an increasingly common script. About 14 percent of the industry’s publicly traded companies with a market value of at least $100 million have attracted an activist shareholder, according to data compiled by Bloomberg. That group includes Buffalo Wild Wings Inc., Yum! Brands Inc. and Bob Evans Farms Inc.
Poor performance has given activists a problem they think they can fix. U.S. same-store sales dropped 0.6 percent at restaurants in October, following the worst third quarter in six years, according to MillerPulse data.
“Activists get involved in the restaurant space because, in many cases, there’s a playbook that’s been written on creating value,” said Peter Saleh, an analyst at BTIG LLC in New York. Dining companies are easy to understand, and a lot of them have seen their value decline, he said.
Such investors typically buy a large number of a public company’s shares and pressure management to make changes they believe will boost shareholder returns. Globally, activist hedge funds managed about $123 billion last year, almost double the amount in 2012, according to Hedge Fund Research Inc.
Several see promise in restaurants:
- Marcato Capital Management LP, a hedge fund run by Mick McGuire, has a stake of about 5.2 percent in Buffalo Wild Wings. The firm reiterated this week that it would push for changes at the eatery, which has suffered declining same-store sales. The stock, down 12 percent this year before the stake was announced, rebounded and was up 6.2 percent for the year through Tuesday.
- Sandell Asset Management has called for Bob Evans to split off its packaged-foods business. Sandell, which won a proxy fight with the company in 2014 leading to a board and management shake-up, said the unit could be worth $1.2 billion and selling it would let Bob Evans focus on core assets. Bob Evans said this week that it is working with JPMorgan Chase & Co. to evaluate opportunities.
- Keith Meister’s Corvex Management successfully campaigned Yum Brands to separate its struggling China unit to focus on improving U.S. operations. At the end of October, the owner of KFC spun off the new company, Yum China Holdings Inc., which trades on the New York Stock Exchange under the ticker YUMC.
- Engaged Capital, which along with JCP Investment Management pushed smoothie maker Jamba Inc. almost two years ago to cut expenses and find more franchisees, increased its stake over the summer. Fiesta Restaurant Group Inc. and Cracker Barrel Old Country Store Inc. are also currently dealing with activist shareholders.
Red Robin Gourmet Burgers Inc., whose stock has tumbled 24 percent in the past year, may be the next target, BTIG’s Saleh said. Denny Marie Post was named CEO in August, and the company more recently said it’s either closing or rebranding its fast-casual locations, after failing to keep pace with peers.
“It’s definitely a possibility,” Saleh said. “It’s so cheap that it would make sense from a valuation standpoint,” though the company’s relatively small market cap may be a drawback for some activists, he said.
Other U.S. dining chains have seen their stock slide in value during the past 12 months including Noodles & Co., Papa Murphy’s Holdings Inc. and Ruby Tuesday Inc. Fast-food and casual-dining eateries reported slowing sales last quarter, with many citing anxiety over the U.S. presidential election and cheaper prices at the supermarket.
That may spark more activist interest, according to Jim Sanderson, managing director and analyst at Arthur W. Wood Co.
“You’ve got grocery price deflation and a lot more choice in packaged foods,” Sanderson said. “It really replaces a lot of meals consumers might have turned to restaurants in the past for.”
Private equity firms, which typically have a three- to five-year term on their investments, often look for a distressed company that has stabilized, “so you’re not bleeding cash dramatically” and there’s a “core business that’s still viable,” he said.
Ackman is no stranger to the restaurant business. In 2012, two years after Brazilian billionaire Jorge Paulo Lemann’s 3G Capital took the struggling Burger King chain private, Ackman helped it go public again.
3G strove to boost profit by shaking up management, franchising restaurants and belt tightening. When the chain returned to the public market it handed 3G $1.4 billion. The buyout firm’s funds current stake of about 218 million shares is worth about $10 billion. Ackman’s Pershing Square is the largest shareholder after 3G in Burger King’s current parent company, Restaurant Brands International Inc.
Restaurant Brands has sold almost all its locations to franchisees, a strategy pushed more and more by activist shareholders. The company, which bought the Canadian doughnut chain Tim Hortons in 2014 for about $11 billion, counted just 100 company locations at the end of last year. More than 19,000 restaurants of the two brands are franchised. 3G argued that independent owners would run the stores better than corporate.
Others chains have followed suit. As a part of a turnaround plan, McDonald’s Corp. said a year ago that it plans to reduce its ownership of restaurants to about 5 percent globally from about 18 percent at that time. Yum is taking its company-owned stores down to 2 percent or less.
Marcato is pushing Buffalo Wild Wings to do the same. The beer-and-chicken company should sell hundreds of locations with a 90 percent franchised goal, compared with 49 percent now, Marcato said in a statement this week. Doing so would lead to higher margins and cash flow, while also enabling stock buybacks, the firm said. This would reverse the company’s recent moves to buy out franchisees.
That strategy may not fly for Chipotle because it doesn’t franchise its restaurants. Co-Chief Executive Officer Steve Ells said at the investment conference Tuesday that Ackman asked for a role on the board, which has been criticized for its slow response to the food-poisoning outbreak that sickened hundreds.
It will take time to rebuild trust and loyalty from customers, said Joe Dennison, a portfolio manager at Zevenbergen Capital Investments, which owned about 99,800 Chipotle shares as of September.
“I don’t know if there’s anything an activist or really any investor can do for that,” he said.