The roller-coaster ride for Buffalo Wild Wings (NASDAQ:BWLD) stock continues. The latest BWLD news is the reported takeover offer from private equity fund Roark Capital, which has offered over $150 per share for BWLD stock.
That news came after a blowout Q3 report sent Buffalo Wild Wings stock soaring 20%. As a result, BWLD stock has gained roughly 50% since hitting a four-year low in early September.
It seems time to lock in those gains. There is some potential upside here if Marcato Capital, which now controls three board seats, decides to accept the current bid or a higher one. But there’s also huge risk if Marcato — whose stake was built at levels around the current price — decides Buffalo Wild Wings would be best off going it alone.
Recent developments aside, this remains a struggling company. The recent gains have allowed investors to exit at a better, if still somewhat disappointing, price. They should take that opportunity.
Will Roark Take Out Buffalo Wild Wings Stock?
With Marcato controlling three of nine board seats, the fund will at least control the direction of internal discussions surrounding the takeover bid. And it will have a tough decision to make.
From a long-term standpoint, a decision to sell would be a bit of a capitulation and would represent a notable change in Marcato’s attitude toward the Buffalo Wild Wings business. Marcato acquired its initial stake at prices in the low $140s, according to its initial Schedule 13D filed last summer. And as an analyst pointed out last week, its thesis at the time was that BWLD stock was worth as much as $400 per share.
For Marcato to take the deal, it would be accepting a rather slim profit — a return below the broad market, even before the costs of last year’s proxy fight — and essentially admitting that its initial valuation of the business was far too optimistic.
Buffalo Wild Wings already has initiated some of the changes the fund sought, including refranchising company-owned restaurants in an effort to get to 90% franchise ownership by 2020. (A similar strategy has helped push McDonald’s Corporation (NYSE:MCD) to all-time highs.)
But it’s going to be a reasonably long slog to turn this business around. And it may be that Marcato won’t have the patience required.
Should Investors Wait on BWLD News?
The problem with BWLD stock at the moment is that upside looks reasonably capped, at least in the near term. It’s possible Roark could raise its bid; something in the $170-$175 range would represent a rather healthy ~20% upside.
But the downside in the near term remains significant. Again, this isn’t a business that’s running all that well at the moment. Even in the above-expectations Q3, company-owned same-restaurant sales still declined 2.3%. That’s now six of seven quarters in which comps have fallen year-over-year. The only exception was Q1 2017, when the figure rose a paltry 0.5%.
Higher wages and higher chicken wing prices are pressuring margins as adjusted net income fell 11% in Q3. And the refranchising efforts did little to help higher-margin franchisee fees. BWLD increased its franchised restaurant count by over 5% YOY, but saw just a 1% bump in franchise-related revenue.
Meanwhile, the current BWLD price implies a 29x multiple to FY18 EPS estimates. This is a struggling business, and BWLD stock is expensive. It’s a dangerous combination if M&A falls through.
Take the Profits in BWLD Stock
At this point, BWLD stock really is an M&A trade. Investors who believe in the long-term story only will get an opportunity to participate in that story if BWLD turns Roark down, in which case BWLD stock will be available much cheaper relatively soon.
And as far as that M&A trade goes, the odds don’t seem particularly favorable. It’s not like there are a bunch of funds in line to buy struggling restaurants.
Major chain operators like Brinker International, Inc. (NYSE:EAT), which owns Chili’s, and DineEquity Inc (NYSE:DIN), which owns Applebee’s and IHOP, are trading near multiyear lows and for low double-digit and even single-digit EPS multiples.
One would think that a rejection of Roark would send BWLD stock back toward the ~$120 level at which it traded before the bid was made, which is about 15% downside from current levels.
In contrast, a bid above $150 suggests maybe 10% upside, with a raised bid (from Roark or another buyer) far from guaranteed. On this site last week, Luke Lango made the argument for a higher bid, pointing out that Roark took Wingstop Inc (NASDAQ:WING) public and tried to outbid Restaurant Brands International Inc (NYSE:QSR) for Popeye’s earlier this year.
Lango makes a good case, and indeed a higher bid is possible. But to make the trade, an investor needs to believe that the odds of a deal are at least 50%, and probably higher, depending on the estimate of how much, and how likely, a raised bid would be.
I’m simply not that confident given the U-turn required from Marcato to accept a buyout. And while I’m intrigued about BWLD’s turnaround potential, long-term investors don’t have a place in the stock at the moment. Either BLWD sells for incremental upside, or it almost certainly drops should it formally reject the bid.
For traders who think they have a read on the situation, BWLD might be interesting. For the rest of us, it seems wisest to let the situation play out.
As of this writing, Vince Martin has no positions in any securities mentioned.