Chickens can fly, right? Buffalo Wild Wings (NASDAQ:BWLD) stock is roaring higher today after reports leaked that private equity firm Roark Capital has made an offer of more than $150 per share to buy the struggling restaurant chain.
BWLD stock is up about 25% to $146 on the news.
Have you missed the rally? Not entirely. I think there is more upside in this name.
Roark Capital Is Hungry for Chicken
The PE firm which made the takeover offer, Roark Capital, is heavily concentrated in the restaurant sector. Roark Capital’s restaurant portfolio is very diverse and includes quick-casual burger chains (Carl’s Jr/Hardee’s), formal dining chains (Il Fornaio), sandwich shops (Jimmy John’s), and BBQ restaurants (Jim ‘N Nick’s BBQ).
But one notable hole in the portfolio since the private equity firm exited its position in Wingstop Inc (NASDAQ:WING) is chicken. That is why Roark Capital tried to acquire Popeyes Louisiana Kitchen Inc (NASDAQ:PLKI) last year. They lost that bid to Restaurant Brands International Inc (TSE:QSR).
Consequently, I think Roark Capital is really hungry for some chicken.
And why shouldn’t they be? Wingstop was a really good investment for them. Roark Capital acquired Wingstop for somewhere between $80 and $90 million in 2010. The fast-growing chicken wing chain continued its robust growth trajectory, had a big IPO in 2015, and Roark Capital exited its position for somewhere north of $550 million in 2015-16.
That is more than 6.5-times return in 5-6 years.
Long story short: after a big run with Wingstop, Roark is looking for its next big chicken play. The Popeyes acquisition didn’t come through because Roark got outbid by Restaurant Brands. I don’t think Roark will let that happen again. Thus, it looks like a higher bid for Buffalo Wild Wings is in the cards.
Why Stick With BWLD Stock?
The $150 takeover offer was made on October 13 at a 48% premium to the stock price at the time.
But on October 26, BWLD stock rallied big all on its own thanks to better-than-expected quarterly numbers. The company successfully migrated customers to boneless wings during the quarter, and that was a big win for margins. Earnings roared higher and the earnings outlook got a big boost.
BWLD stock ran from $100 to $120.
It is likely BWLD will demand a takeover price that values them on the $120 quote, not the $100 quote. That is especially true considering this stock hung out around $200 just 2 years ago.
A 50% premium on the $120 quote implies a revised takeover offer of $180. I think Roark has enough appetite for a chicken restaurant to make a $180 offer.
Consequently, I see 3 outcomes for BWLD stock: 1) a higher bid comes in at $180 per share, 2) no higher bid comes in, and the company gets taken out at $150 per share, or 3) all M&A chatter fades and the stock drops back to $120.
At this point in time, I think all 3 outcomes are equally likely. Multiplying each outcome by one-third and then summing the products, I get to a fair value of $150.
Bottom Line on BWLD Stock
BWLD stock has run from about $95 to above $145 in 2 months. There is nothing wrong with profit-taking after that big 50%-plus run in 2 months.
But BWLD stock also traded near $200 just 2 years ago. Since 2015, it has spent most of its time trading above Roark Capital’s $150 takeover offer. Plus, Roark Capital really wants a chicken restaurant after failing to acquire Popeyes last year.
Put it all together, and it looks likely that a higher bid is in the cards. If that higher bid comes in around $180, BWLD stock will rocket way above $150.
As of this writing, Luke Lango was long BWLD.