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Red Robin Gives Activist Investor the Bird

John Jannarone

By John Jannarone

Red Robin Gourmet Burgers, Inc. (ticker: RRGB) has done what activist Brian Kahn of Vintage Capital Management doubted was possible without his help: Find a credible CEO to attempt a turnaround. The question is whether shareholders will still be left hungry.

The struggling burger chain announced Thursday it had hired restaurant veteran Paul J.B. Murphy III to lead the company after a lengthy search process. Red Robin also formally rejected a bid from 11.6% shareholder Vintage Capital, which had proposed an offer of $40 a share (a 25% premium to current prices) backed by an unusual “highly confident” letter rather than hard bank financing. As part of its rationale, Red Robin suggested the lack of unconditional bank financing could mean the deal wouldn’t get done.

The good news for shareholders is that Mr. Murphy has some serious turnaround chops. In his most recent role as Executive Chairman of Noodles & Company (ticker: NDLS), Mr. Murphy helped that restaurant chain post four straight quarters of positive same-store sales. Prior to that, as CEO of Del Taco Restaurants Inc. (ticker: TACO), he delivered 11 quarters of same-store sales growth.

And Mr. Murphy has generated healthy shareholder returns in his last two leadership roles, despite heavy volatility. Between his time joining Noodles & Company in June 2017 and now, that stock has risen a healthy 40%. Between the time Del Taco went public through a special-purpose acquisition company (SPAC) in 2015 and Mr. Murphy’s departure in 2017, the stock swung into negative territory but finished up about 30%.

Red Robin shares certainly look cheap compared with more successful peers. Its shares trade at an enterprise value of 5.5 times 2020 Ebitda, versus 6.8 times for Brinker International and 12 times for Darden Restaurants, according to Sentieo.

But it may not be so simple to get Red Robin off the ground right away. The company’s same-store sales have generally been negative over the last few years, with a 1.5% decline last quarter. Perhaps more worrying, same-store guest counts dropped 6.4% during that period, which may an early sign of brand erosion.

Some of the changes required to fix Red Robin could be difficult while it’s in the public spotlight and subject to quarterly reporting. To generate shareholder value quickly, Mr. Murphy will likely need to take decisive action on moves such as refranchising that the company has so far been resistant to do.

That all puts serious pressure on Red Robin, which has already spent heavily to fend off Vintage with costly investment bankers, lawyers, and other advisors. Shares of Red Robin didn’t budge much Thursday on the new CEO news. If Vintage or another suitor came along with an unconditional bid at $40 or higher, it may be tough to turn down.

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