Activist shareholder pushes for Del Frisco’s sale

Engaged Capital said the restaurant group has “destroyed substantial shareholder value.”
Photograph: Shutterstock

Del Frisco’s Restaurant Group’s board approved a shareholder rights plan Wednesday, also known as a “poison pill,” in the wake of an activist investor urging the restaurant company to put itself up for sale.

Hedge fund Engaged Capital LLC, which owns nearly 10% of Del Frisco’s shares, said the brand has “destroyed substantial shareholder value” and cited the company’s “short- and long-term underperformance, checkered operational execution, and high financial leverage” in a letter sent Thursday to the Del Frisco’s board and filed with the Securities and Exchange Commission.

Despite what Engaged Capital sees as Del Frisco’s poor performance, the investors say the company’s concepts, including Double Eagle Steak House, Del Frisco’s Grille, Barcelona Wine Bar and Bartaco, would be attractive to buyers.

“Simply put, DFRG’s (Del Frisco Restaurant Group’s) performance as a public company has been abysmal,” the letter says.

Del Frisco’s purchased the 31-unit Barteca Restaurant Group, parent company of Barcelona Wine Bar and Bartaco, in May for $325 million. It’s a move Engaged Capital said was done hastily, without proper financing, and as a stop-gap measure to avoid being acquired.

“Approving a large acquisition to stave off a potential sale of a company is one of the most shareholder-unfriendly actions a board can take and causes us and all other shareholders to question whether this Board understands its fiduciary duties,” the investors wrote.

Calling it a “seller’s market,” Engaged Capital urged Del Frisco’s board to form a strategic review committee to pursue potential buyers “immediately.”

Engaged Capital, which was founded in 2012, frequently pushes for board seats or sales in its investment companies. In 2014, it pushed Jamba Inc. to appoint two activist shareholders to the smoothie chain’s board and to close underperforming stores.

Del Frisco’s did not respond to a Restaurant Business request for comment on the letter.

The company’s board Wednesday unanimously approved a shareholder rights plan after it “recently observed unusual and substantial activity in the company’s shares,” according to a Del Frisco’s press release. The rights plan, commonly known as a poison pill, is designed to reduce the likelihood of a hostile takeover, the company said, but it would not keep the board from selling if the move is deemed to be in the best interest of shareholders.

The poison pill, which dilutes the company’s stock, goes into effect if any person or group acquires 10% or more of Del Frisco’s stock. Engaged Capital currently holds 9.99% of the company’s shares.

Del Frisco’s stock was up about 12% on the news by midday Thursday, though the company has seen shares drop more than 55% this year.

In September, Del Frisco’s sold off its struggling Sullivan’s Steakhouse brand to Romano’s Macaroni Grill for $32 million.

Del Frisco’s same-store sales for the quarter ended in September dropped 1.9% year over year, including a 7% nosedive for Bartaco.

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