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BTIG: Vintage Capital's Offer To Red Robin Undercooked

Jayson Derrick

Activist investor Vintage Capital Management sent a letter to Red Robin Gourmet Burgers, Inc. (NASDAQ: RRGB) urging the board to review strategic alternatives — including a sale to the activist investor.

The Analyst

BTIG's Peter Saleh maintained a Neutral rating on Red Robin Gourmet Burgers.

The Thesis

Vintage Capital already owns 11.5% of Red Robin and indicated in its letter it would be interested in acquiring the rest of the outstanding stock for $40 per share, Saleh said in a Thursday note. (See his track record here.) 

The price tag represents a multiple of around six times TTM EBITDA, which is "well below" the historical take-out averages of 8.6 times seen in previous casual dining deals, the analyst said. 

The casual burger chain has introduced several strategies to turnaround the business, including a bar bell menu strategy with value and premium items in addition to core menu offerings; changes to the labor model; and different product sourcing, the analyst said. Financial engineering and franchising are likely among the few remaining options available that would unlock value, he said. 

While refranchising could open "some value," it was a strategy Red Robin pursued with no success over the past year, Saleh said. 

The burger chain's lease-adjusted leverage ratio of 4.23 times as of the end of the first quarter is below the covenant of 4.75 times, which implies that debt financing as part of an acquisition is not a reasonable option, according to BTIG. 

Price Action

Shares of Red Robin Gourmet Burgers were trading higher by 2% Friday morning.

Related Links:

Raymond James Revises Red Robin Estimates Lower After CEO, Q1 Announcements

McDonald's, Restaurant Brands, Chipotle Are Morgan Stanley's Top Restaurant Picks In Challenging Year For Sector

Latest Ratings for RRGB

Date Firm Action From To
Jun 2019 Upgrades Hold Buy
May 2019 Maintains Equal-Weight
Apr 2019 Downgrades Buy Neutral

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