Will activist pressure force a Del Frisco's sale?
UPDATE: Dec. 21, 2018: Del Frisco’s Restaurant Group said Thursday that it is exploring a possible sale in addition to other strategies to improve shareholder value. The company formed a transaction committee, but made no guarantees that these efforts would result in a sale.
- Activist investor Engaged Capital has acquired nearly 10% of Del Frisco's Restaurant Group shares to force the company’s hand to sell itself. The hedge fund believes Del Frisco's is poorly managing its steakhouses, the Wall Street Journal reports.
- Engaged Capital also is asking Del Frisco's to add new directors and form a strategic review committee to consider selling its brands, including Double Eagle steakhouses and Del Frisco's Grilles. In response, Del Frisco's board adopted a poison pill to dilute the stock if a shareholder owns 10% or more.
- Del Frisco's stock prices were up over 16% at the end of trading on Thursday to $7.90, but are still half of what they were at the start of the year.
In addition to believing Del Frisco’s has management issues, Engaged Capital also views the company's $325 million acquisition of Barteca Restaurant Group as ill-conceived, according to the Wall Street Journal. Del Frisco's said the purchase would help with growth and protect the company through an economic downturn, but Engaged believes the acquisition was done to avoid being acquired.
Investors seem to agree that the addition of wine and tapas concepts were not a fit. Del Frisco's has missed Wall Street sales estimates for the past six out of the last eight quarters and its same-store sales have fallen throughout the past two years. During its most recent quarter, comp sales fell 3.6% while customer counts were down more than 9%. Further, stock is down more than 55% this year and its market value has dropped to $226 million, according to The Wall Street Journal.
Engaged also believes Del Frisco's has failed to innovate and manage labor effectively compared to its steakhouse competitors. As Del Frisco’s value has dropped, competitor Ruth’s Hospitality Group’s have thrived, for example. Upscale steakhouses tend to do well in a strong economy, so Del Frisco’s is missing something somewhere.
While a sale is a viable option to fix Del Frisco’s woes, the company's Barteca acquisition is still too new to gauge how it will impact the company's balance sheet. Engaged, however, is seeking a change so investors can avoid additional declines in both traffic and sales that Del Frisco's Double Eagle and Grille have experienced.
The restaurant industry has been of interest to activist investors recently, especially as the rise of e-commerce in retail has limited investor options, according to Nation’s Restaurant News. In the past few months alone, activist investors have targeted Starbucks and Papa John's.
Engaged has had success pressuring restaurant brands. It convinced smoothie brand Jamba to slim down in 2014 and struck settlements for board seats in nearly half of its campaigns. And earlier this year, Jamba agreed to sell itself to Focus Brands for $200 million.
- Wall Street Journal Activist Investor to Push Del Frisco’s to Sell Itself
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