Did Marcato Capital Management cost itself millions of dollars in April by demanding that Sally Smith retire as Buffalo Wild Wings CEO?
Maybe not, but a summertime decline in Buffalo Wild Wings’ stock price following Smith’s resignation could have cost Marcato and other shareholders millions—based on a timeline filed last week detailing negotiations between the Minneapolis-based chicken wing chain and its proposed buyer, the Roark Capital-owned Arby’s Restaurant Group.
Buffalo Wild Wings, which operates nearly 1,300 locations, had once been the hottest casual-dining name on Wall Street, with a stock price of more than $200 a share as recently as 2015.
But sales weakness in 2016 took the stock down to the $140s that year. The activist investor Marcato Capital Management bought up 950,000 shares of the stock, paying an average of about $143 per share, and started agitating for change.
Public-equity investors typically cheer activists, which can light a fire under company management and prompt changes that lead to stock price increases. This was no different. At one point, Buffalo Wild Wings’ stock went past $170 a share but ultimately settled into the $150s in 2017.
That’s where it was in early February, when Marcato’s increasingly aggressive fight led the investor to nominate four people to the company’s board.
Later that month, Roark Capital approached Smith, indicating an interest in a potential offer. Over the next couple of months, Roark would seek information so it would do the proper due diligence on the company. It didn’t make an offer until August.
At the time of Roark’s initial call, however, the company was trading at $154 per share. There’s no guarantee that Roark and Arby’s would bid the price required to take Buffalo Wild Wings private at the time, but private-equity groups don’t cold call publicly traded companies without a willingness to pay what it takes.
In this case, a 20% premium, for example, would have cost Roark $183 per share, or a total deal value of about $3.3 billion.
But in early June, Marcato won three seats to the company’s board. That prompted Smith to resign—unsurprising, given the activist’s April call on the longtime CEO to leave.
CEO changes in company proxy fights are common. Almost every restaurant company proxy fight at some point features a new company CEO. Smith’s resignation would have been unsurprising even with Marcato’s call on her to resign.
Yet investors’ reaction was unusual. The stock began plunging right after Smith’s announcement. And the stock kept falling. At one point, Buffalo Wild Wings stock fell below $100 per share before recovering to near $120.
The decline proved to be fortuitous.
That’s where it was in November, when Roark and Buffalo Wild Wings ultimately agreed upon a $157-per-share price for the chain following months of talks. The $157 price was only about $3 more than when Roark first indicated an interest in the company.
And, Buffalo Wild Wings’ financial adviser asked seven other potential acquirers to bid on the company and all seven declined.
Still, the decline could have cost shareholders millions. If Roark and Arby’s were willing to pay $183 per share, then shareholders lost $400 million with that summertime decline.
Marcato will make about $13.6 million on the sale, not including any costs associated with its proxy fight, and the activist is endorsing the proposal. But it could have made $38.1 million at $183. That’s a $24.5 million difference.
To be sure, plenty of factors played a role in Buffalo Wild Wings’ stock price weakness over the summer—notably the chain’s poor sales, as well as rising wing prices. But uncertainty at the company following Smith’s resignation played a role in the decline.
And again, just because a private-equity firm contacts a company doesn’t mean it would actually make an acquisition. It’s just as likely that the summertime decline in Buffalo Wild Wings’ share price simply made the company a more attractive purchase.
Still, Buffalo Wild Wings’ bad summer cost its shareholders, and Marcato. And in the end, Smith, the one the activist wanted to resign, will walk away once the sale is complete with a $5 million golden parachute payment.
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