The activist investor controlling about 12% of Red Robin Gourmet Burgers’ stock has offered to buy the other 88% of the casual chain for $461.4 million.
The $40 per share offer from Vintage Capital represents a 57% premium over Red Robin’s stock price as of this morning. But the aggregate price of buying all outstanding shares would be jacked significantly above $461.4 million if Red Robin enacts the so-called poison pill it adopted last week.
Unless the franchisor changes hands, it won’t be able to recruit a CEO strong enough to turn around the struggling brand, Vintage contended in a securities filing. “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,” Vintage said in the filing.
In a letter, it called on Red Robin’s board to immediately put the company up for auction or pursue other strategic alternatives, and then noted its willingness to acquire the chain.
Vintage said in its security filing that it had hoped Red Robin would recruit an “A+” CEO to fill the vacancy left by the April retirement of Denny Post and lead the company “back to greatness.” But meetings with Red Robin’s leadership convinced the investor that “management and the board would prefer to maintain the status quo and entrench themselves in their current positions.”
If the board fails to act, Vintage alerted the Securities and Exchange Commission, the investor intends to convene a special shareholders’ meeting at which it will propose replacing the directors with a new slate.
“We have very little confidence that the current board will be able to attract a suitable new leader for the company or initiate or seriously pursue a meaningful sales process,” it said.
Red Robin said it was surprised by Vintage's assertions. "In multiple conversations with Vintage, we have expressed our openness to Vintage’s participation in our ongoing search to identify a world-class CEO, and to maintaining a constructive dialogue," the company said in a statement "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."
It stressed that management would continue to pursue the turnaround strategy that's been aired to investors, but "the board would of course consider any bona fide offer made by Vintage."
Vintage expressed similar misgivings about the direction of another restaurant company in which it had invested, the Papa Murphy’s take-and-bake pizza chain. That operation was subsequently sold to MTY Food Group in a deal valued at about $190 million.
Red Robin’s stock price has fallen by more than half because of a sales decline driven by operational misfires and a souring of its traditional siting strategy. The chain tried to boost in-store efficiencies by cutting two unit-level positions involved with clearing tables. The move slowed the time needed to turn tables, prompting patrons to walk out rather than wait for a seat.
The chain has also been affected by a general downturn in traffic at shopping malls and movie complexes, where the brand had traditionally sought to place its stores. About 76 of the chain’s 572 units were still located in malls when management announced a few weeks ago that it would close 10 stores.
Management also repeated its plans at that time to boost the value of its stock by refranchising a major portion of the chain.