The news came down recently that a private equity firm called Mercato Capital was considering a buyout of Buffalo Wild Wings (NASDAQ:BWLD). All of a sudden, however, there was a twist in the story. A different private equity group, Roark Capital, which owns Arby’s, jumped to the table and bid for BWLD stock at around $155 per share.
Is it too late to cash in on the buyout? Is there some way to play BWLD stock to juice something out of the deal? Perhaps. In order to determine what you should do — if anything — you should think about the deal as a whole.
First, what about BWLD stock makes it attractive?
The Case for BWLD Stock
The wings and beer chain was a hit, and BWLD stock did very well for quite some time, because it accomplished the one thing that all lasting businesses do: it solved a problem. The problem was that all of us sports enthusiasts didn’t have a central and consistent location we could go to to watch sports, guzzle brew and chomp on wings.
Local sports bars were a sort-of solution. The problem was that one never knew if a particular place was any good as far as the menu, the food and the beer were concerned. Plus, they were often run-down and gross. BWLD stock was a success because it did what Starbucks Corporation (NASDAQ:SBUX) did. It wasn’t about the coffee, but offering consumers a location to meet, eat and watch sports.
Recently, however, BWLD stock had fallen on hard times, mostly due to a big uptick in prices for chicken wings and labor costs. This has made BWLD ripe for a private equity take-out. That’s because private equity firms will often specialize in certain areas, find a distressed business in that area, buy it, and then work to make it efficient. They will make changes, streamline processes, alter menus and do whatever it takes to enhance cash flow. Private equity groups love cash flow. They want to earn their money back from both cash flow and by fixing up all the problems and spinning the company off again in an IPO.
Is There a Way to Profit From BWLD Stock?
Okay, so with BWLD trading at $155.95, is there any way to get something out of the deal?
There might be. The first is to sell naked puts against BWLD stock. Naked puts are a form of options trading that are generally used if you are neutral to bullish on a stock. With these trades, you sell the right, but not the obligation, to another investor, to “put,” or sell, a stock to you at a given strike price on or before a contracted date. The good news is that, should the stock not close below that contracted strike price, then you will keep the money you made from selling the contracts on those naked puts.
We have every reason to expect this transaction will close, so there’s no reason to expect BWLD stock to fall below $155. Thus, if you sell naked puts against BWLD stock, you should be able to grab the premium and walk away without having BWLD stock put to you.
The 15 Mar $155 naked puts are selling for about $1.55 each. That means you earn $155 per contract, or about 1%. That’s about 6% annualized. That’s not much, but it’s something — and fairly low-risk too.
You could also just buy BWLD stock outright. Again, you shouldn’t see a loss here. However, you may see a higher price if Mercato offers a higher bid. The firm initiated a position at $140 and said it could see the stock doubling or even tripling over the coming years. It sees some kind of potential here — and its people were voted onto the Board of Directors.
That could mean a higher bid and a bright future for BWLD stock.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com. As of this writing, he did not hold a position in any of the aforementioned securities.
