Are activist offers for Red Robin and J. Alexander’s fair?

RB’s The Bottom Line compares proposals for the two casual-dining operators to previous restaurant chain transactions.
Photograph courtesy of J. Alexander's

the bottom line

In recent months, two activist investors have each tried to take private casual-dining chains in very public processes.

In April, investor Ancora Advisors offered to pay $11.75 per share for J. Alexander’s.

In June, Vintage Capital said it is willing to pay $40 per share for Red Robin if the company were to run a sale process.

Both companies are putting up resistance. J. Alexander’s board rebuffed Ancora and then subsequently lost a proxy vote in which a majority of the Nashville-based company’s shareholders withheld votes from a pair of directors.

Red Robin’s board, meanwhile, is girding for a potentially difficult battle with Vintage, turning back the investor’s request for a special meeting.

In both cases, the boards are essentially arguing that it doesn’t make sense to sell at this point because they are worth a lot more.

It’s a legitimate argument: Selling any company when its value is at its nadir doesn’t make much sense, really. But public stock investors frequently get impatient with struggling companies and frequently prefer the safety of a liquidity event rather than take the risk that the company can’t emerge out of whatever mire in which it is stuck.

Still, it is reasonable to ask whether the offer prices from the activists are fair, particularly when compared to other recent take-private deals.

A Restaurant Business analysis of recent restaurant chain deals provides a better defense for the position taken by J. Alexander’s board than the one taken by Red Robin’s.

On average, seven recent take-private deals, including the recently announced Del Frisco’s Restaurant Group deal, provided investors with a 23% premium over the companies’ stock price the day before.

Ancora offered a 13%, one-day premium. Vintage’s proposal would give Red Robin a 57% premium.

One-day premiums for restaurant acquisitions

Source: Restaurant Business analysis and SEC filings

To be sure, stock price is only one element in a company’s true valuation. Debt is another, and buyers of companies with a lot of debt, such as Del Frisco’s, in reality pay far more than their market capitalization. But that’s typically factored into stock price.

In addition, stock price is fluid, providing a picture of a company’s valuation at a particular point in time. Media reports about sale processes can inflate prices, which is why we didn’t consider the Bojangles’ deal, given that prior reports on the process led to a tiny one-day premium.

In J. Alexander’s case, Ancora’s 13% premium was lower than any of the other offers we analyzed (outside of Bojangles’). The price was a 24% premium to the price before Ancora filed its activist investment documents with federal regulators.

That said, J. Alexander’s the year before agreed to a merger with Ninety Nine Restaurants in a deal that would have handed over control of the company to Fidelity National Financial at a valuation of $11 per share.

And J. Alexander’s stock has not had much of a range since its spinoff from Fidelity in 2015, and the $11.75 offer was close to its all-time high. All of that probably gave Ancora some confidence its offer was a good one.

Red Robin’s situation is different.

Vintage is not technically making an offer here, just an indication of one as part of pressure on the company to run a sale process. Red Robin said it would consider any offer the investor makes, but nor does it appear to be all that eager to run a sale process.

We can, however, analyze that $40, which would be a 57%, one-day premium.

Vintage's proposal would give Red Robin investors a premium that easily bests any of the other offers, at least on a one-day basis.

The price also easily bests the premium received by companies that went through public sale processes: Del Frisco’s investors are receiving just 22% more cash for their shares than if they sold them the day before that company announced its sale process last December.

Papa Murphy’s investors received a 46% premium. And Bojangles’ investors received 39% premiums from the day before public speculation began about its potential sale process. Public sale processes tend to drive up stock prices.

The offer is likely high because Red Robin’s stock has fallen far more than has J. Alexander’s. While Vintage’s offer is still 29% higher than its trading price today (about $31 per share), it is still 22% lower than the casual-dining chain’s 52-week high.

That has enabled Vintage to price its offer high enough to potentially entice investors frustrated with that decline but still low enough compared to historic valuation that it could be getting a deal.

The activist here is trying to thread a needle, and Red Robin is pushing back.

None of this is to say that Red Robin should run a sale process and sell to Vintage, or that J. Alexander’s is wise to keep Ancora at arm’s length.

But, in looking at the offers, Red Robin has a lot to do to convince shareholders that its strategy would offer a better overall valuation than the cash Vintage currently has on the table. And J. Alexander’s board should push for a higher offer from Ancora, or anybody else interested in a purchase.

UPDATE: This post has been updated to clarify throughout that Vintage’s $40-per-share indication of interest was not technically an offer to purchase Red Robin.

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