All of a sudden, Dave & Buster’s stock is cheap. Investors are buying. And the company is worried about a quiet takeover.
The Dallas-based food and games chain Thursday swallowed a poison pill, capping the percentage of shares investors can purchase at 15%.
The “shareholder rights plan” was adopted Wednesday, and is “intended to promote the fair and equal treatment of all Dave & Buster’s shareholders and ensure no person or group can gain control of Dave & Buster’s through open-market accumulation or other tactics potentially disadvantaging the interest of all shareholders,” the company said in announcing the plan.
Dave & Buster’s shares have taken a beating in recent weeks, and especially the past week, as investors have panicked over the impact of the coronavirus on a chain that almost purely relies on the dine-in customer. The chain gets more than half of its revenues from its amusements, which, unlike meals, cannot be delivered.
Entering trading Thursday, Dave & Buster’s stock had lost 90% of its value since Feb. 21, before the coronavirus shock.
That kind of stock price decline, and the company’s enterprise value multiple, are levels only seen in distressed companies. That means investors were convinced the company was in trouble.
But it could also be something of a lottery ticket for investors who ride out the bumpy months and get to the other side, when restaurants reopen to game-playing customers. With private-equity firms still holding a lot of dry powder, it’s possible one or more could see this as a takeover opportunity.
“It’s entirely conceivable that an opportunistic fund could try to take over at what are clearly liquidation-level prices,” said Nick Mazing, director of research with financial services provider Sentieo.
A poison pill is a somewhat controversial corporate defense strategy companies use to prevent a quiet takeover. An investor could theoretically start gobbling up shares on the open market at these low prices without one, meaning existing shareholders wouldn’t get any sort of premium for their stock.
So companies cap those shares. That way, management can focus on the operation issue at hand, not on whether the company will get sold.
“In restaurants, we saw it during the Papa John’s situation when the new management needed the stability to ensure 100% operational focus,” Mazing said. “And that’s what Dave & Buster’s needs now.”
Even with the poison pill, Dave & Buster’s has suddenly piqued investor interest: Its stock price was up more than 90% at one point on Thursday morning and was up 65% through late-morning trading, even with the poison pill provision.
Yet such volatility can be expected for a company suddenly trading at distressed levels.