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Red Robin bidder blasts board for its handling of offer

Vintage Capital contends in a public letter that negotiations would have brought a higher offer, but Red Robin wasn’t willing. It also alleges that the incoming CEO is getting too rich of a deal.
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The investor that was rebuffed last week in its effort to buy Red Robin Gourmet Burgers has ripped into the chain’s leadership, charging in a public letter that the board of directors has misled shareholders with assertions their best interests were pursued during negotiations.

There were essentially no negotiations, Vintage Capital Management says in the communication, stopping just short of calling the directors liars. Had there been substantive discussions, Vintage would likely have sweetened its $40-a-share offer for the 88% of Red Robin it doesn’t currently own. “We were optimistic that we could increase our offer, potentially materially, following due diligence,” as the board had been informed “several times,” the letter states. 

Instead of agreeing to a substantive meeting after receiving the bid, the letter alleges, the board stonewalled until Aug. 27, days before revealing in press releases that it was rejecting the offer as “inadequate” and hiring a new CEO to pursue a turnaround plan that Vintage has criticized. “While both of these actions are profoundly disappointing, given the board’s prior actions, neither is remotely surprising,” the communication says.

The letter’s assertions are contradicted by an earlier communication from Vintage. When the investor resubmitted its bid in mid-July, Vintage Manager Brian Kahn commented in a securities filing, “We are pleased we have begun a constructive dialogue. We hope that this dialogue continues.”

Red Robin issued a statement this morning that also contradicts Vintage’s assertions. 

“As previously announced, the Red Robin board carefully reviewed and considered Vintage’s proposal, consistent with its fiduciary duties and in consultation with its legal and financial advisors,” the statement reads. “The board unanimously determined that the proposal undervalues Red Robin and is not in the best interests of all shareholders.”

Yesterday’s letter was signed by Kahn, who also criticized the employment package Red Robin awarded its new CEO, former Noodles & Co. chairman and onetime Del Taco CEO Paul Murphy.

Vintage had requested that it be involved in the selection of a new CEO, indicating in past communications that it lacked confidence in the board’s ability to find and hire an “A+” candidate. Yesterday’s letter suggests the investor was not consulted about the appointment of Murphy, who starts the job on Oct. 3.

“While it remains to be seen whether Mr. Murphy will be an A+ chief executive, the board was more than happy to reward him with an A+ compensation package that does not align with creating stockholder value,” states the letter.  

Murphy was hired at an annual salary of $900,000 with  incentive bonuses that could earn him an additional $1 million. He was also awarded a signing bonus of $500,000, with $275,000 payable upon approval of Red Robin’s 2020 budget and the remaining funds presented on Murphy’s one-year anniversary in the job.

Vintage focused in Tuesday’s letter on the severance component of Murphy’s employment contract. It says in the communication that Murphy will be entitled to an exit package of $9 million in cash and stock if he is terminated because of a sale of the company or a shakeup of its board—both things that Vintage has demanded.

“We question whether other senior company employees were similarly granted outsized severance packages after we made our initial offer,” Vintage said in an apparent swipe at Chairman and acting CEO Pattye Moore. Red Robin had announced months ago that Moore would step down once a new CEO was hired and that its board would be configured with the addition of three outside directors with deep restaurant experience: G.J. Hart, Dave Pace and Tom Conforti.

Vintage demanded in the letter that Red Robin’s leadership disclose any other severance deals that may have been struck, as well as the reasoning behind Murphy’s severance package. 

Red Robin defended its selection of Murphy as CEO, saying in its statement, “Mr. Murphy is a proven restaurant industry executive with more than 30 years of operational, brand-positioning and turnaround expertise, as well as an extensive track record of creating significant shareholder value. We are excited about the Company’s potential to improve customer experience, significantly improve cash flow and increase profitability.”

Vintage ended its letter with a warning: “The board will be called to answer for its campaign of delay, obfuscation, and fiduciary duty breach.” 

The communication continues, “We intend to investigate these actions for the benefit of the company’s stockholders, including through a thorough review of the company’s books and records as permitted by applicable law. 

“We intend to further assess our options as to the replacement of all or a portion of the board following the completion of (or during the pendency of) our review.”

Red Robin countered in its statement, “The board appreciates input from all shareholders toward our shared goal of enhancing value and will continue to review the Company’s strategic priorities against all potential opportunities to create shareholder value.”

The chain has been unable to snap a traffic decline that was triggered by operational changes intended to save on labor. Same-store sales for the second quarter slipped 1.5% on a 6.4% drop in transactions. 

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