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Buffalo Wild Wings Shows That Private Equity Likes Restaurants

Dana Blankenhorn

Roark Capital Group has agreed to take Buffalo Wild Wings (NASDAQ:BWLD) private in a $2.9 billion deal, adding to Atlantan Neal Aronson’s power in the restaurant business.

A lot of lazy journalists headlined this as Arby’s Buys Buffalo Wild Wings but that’s just a small part of the story.

Other writers focused on the irony of Roark giving a relatively small, 7% premium to activist Marcato Capital Management LP, which had just won a fight for three board seats on Buffalo.

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What’s more interesting may be what Roark is building, and why.

Roark, which Aronson founded in 2001 and named for the hero of Ayn Rand’s The Fountainhead, will now own over one dozen restaurant and food brands including Arby’s, Culver’s, Jimmy John’s, Carvel’s, McAlister’s Deli, Schlotzky’s, and Naf Naf Grill.

Roark is not the only private capital group with its eye on the cash flow generated by fast food restaurants.

The Buffalo Wild Wings Attraction

The Roark strategy is looking a lot like that of JAB Holding, which is controlled by German billionaire Wolfgang Reimann. JAB has been on its own U.S. buying spree lately. It’s bought up Panera Bread, Krispy Kreme, Keurig and Einstein Bagels, among others.

You can see what attracts private equity to restaurant brands by looking at Buffalo Wild Wings. The company was only marginally profitable for the quarter ending in September. It made $18 million in profit on $496 million in revenue. But it generated $141 million in operating cash flow during the quarter. And cash flow has been rising for several years.

The price for Buffalo Wild Wings will come to $2.9 billion, including debt. This comes to about 10 times Earnings Before Interest, Taxes and Depreciation, or EBITDA, a key figure used to measure the value of acquisitions. Most other brands being acquired lately have been fetching 11 times EBITDA. Roark got a bargain.

This makes Marcato’s agreement to the deal curious. The company began buying shares a year ago, at between $140-150 per share. It told analysts it thought the company should be worth $400 per share. They then fought an expensive proxy battle with management, but are now selling out at about $159 per share. BWLD shares rose 9% on the open November 28, to $155.60.

Since Roark attracts capital, it’s possible, albeit speculative, that Marcato could be putting some money to work in Roark.

Building Clean, Growing Businesses

What Roark says it’s building is a bear hug with good management. Arby’s is its best-known restaurant investment. But the company also owns Carl’s Jr. and Hardee’s, Corner Bakery, Cinnabon, Il Fornato, Wingstop, along with restaurants previously mentioned.

And that’s just in the restaurant business. Roark also controls Anytime Fitness, Batteries Plus Bulbs, Meineke Car Centers, FASTSIGNS, Great Expressions Dental Centers, Massage Envy, Orangetheory Fitness, and Pet Supermarket, among other retail groups.



What all these companies have in common is that they’re clean and they’re growing, not being short of capital. Roark’s website says it has raised over $6 billion and seeks out stable companies with easily identified niches and predictable cash flow.

Bargains in Restaurant Space

The moves of Roark and JAB Holding should be music to the ears of investors in other fast casual restaurant chains. These chains have otherwise seen nothing but bad news as consumers abandon middle-class mall outfits in favor of either upper-end dining or cook-at-home mealkits.

Companies like Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB), which recently plunged 11% after a bad earnings report, could draw new interest. So could DineEquity Inc (NYSE:DIN), which owns Applebee’s but has plunged almost 45% so far in 2017. After all Ruby Tuesday’s, another fading fast casual chain, was recently snapped up by another Atlanta private equity group, NRD Capital.

So it may be time for small arbitrageurs to start trolling for bargains in the beaten-down restaurant space.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.

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