Image Source: Hasbro
There is a lot happening across the M&A landscape as of late. Buffalo Wild Wings has reportedly received a go-private offer, while speculation is swirling that Hasbro is looking to gobble up Mattel. We like the prospects of both scenarios. However, price will always matter. Buffalo Wild Wings should hold out for the very best offer, while Hasbro should be very careful not to overpay for assets that may be past their prime.
By Brian Nelson, CFA
Buffalo Wild Wings (BWLD) has long been a favorite of ours. You have to read, “3 Reasons Why Buffalo Wild Wings Is a Long-Term Winner” from July 2015. Certainly the beer, wings and sports establishment is facing a host of issues at present, not the least of which is encroaching competition from the likes of Wingstop (WING), but we still like B-dubs a lot. The company is planting the seeds of long-term growth, and the restaurant chain may be doing today in the dine-in category what McDonald’s did for fast-food in the 1980s. B-Dubs is a retreat for parents, and kids aren’t balking at the menu. Those kids will grow up, and as it has been said, “Plant the Brownie acorn and the Kodak oak will grow.”
Buffalo Wild Wings’ third-quarter report, released October 25, was solid, and it included a bump in fiscal 2017 earnings-per-share guidance to the range of $4.85-$5.15 (was $4.50-$5). The improved outlook was welcome news for a company whose investors had only grown more concerned about its fundamental resilience in the wake of declining industy-wide restaurant traffic and executive turnover. Buffalo Wild Wings had been embattled by Marcato Capital during the summer months, likely the reason why CEO Sally Smith decided to step down, so it was reassuring to see the bottom-line hike in the outlook.
We think private equity has become more intensely-focused on Buffalo Wild Wings, especially given that established fast-casual exposure in the public markets is becoming harder and harder to come by given Panera’s decision to go private in April 2017. Many in private equity understandably may not be willing to step up to the plate to tackle the customer-perception issues at Chipotle (CMG), as they don’t ever seem to go away. On November 14, a high-profile actor Jeremy Jordan said he got sick from eating at Chipotle. Even though the restaurant refutes the claim, the bad press just won’t go away. In any case, with Panera off the block and Chipotle struggling mightily, private equity seems to be chomping at the bit to get what’s left of the established players in fast casual or in the more “growthy” dine-in space.
Enter Roark Capital, which reportedly had made a $150 per-share offer for Buffalo Wild Wings in mid-October, according to the Wall Street Journal. Our fair value estimate was $144 at the time. It seems like Roark Capital and Mercato Capital bump heads quite a bit on deals, with both having bid for Popeyes (PLKI) in the past, a company that eventually was folded into Restaurant Brands International (QSR). 3G Capital recently started buying shares of Buffalo Wild Wings, too, and many have speculated that another offer from a different suitor, well in excess of $150 per share, could be in the works. We can’t help but be excited for shareholders, though we emphasis the price must be right to tender shares. A deal price approaching $190 per share, the high end of our new fair value range for shares, might get the job done, but even something higher might be necessary to please all.
In other news, a longtime idea in the Dividend Growth Newsletter portfolio has been on the prowl, looking to buy out a rival going through some tough times. On November 10, the Wall Street Journal reported that Hasbro made a takeover offer for none other than Mattel (MAT). With Hasbro’s Frozen dolls putting Mattel’s Barbie sales under tremendous pressure, Hasbro is looking to buy up assets on the “cheap,” but we’re cautious on the move. From where we stand, the Frozen franchise is ushering in a new era for “princesses,” and the Barbie franchise may very well be permanently impaired. The executive team at Hasbro has to be super smart and not overpay for a deal that almost surely would mean bringing on more debt. We could talk all day about the positives of such a deal–efficiency initiatives, cost savings, better negotiating power with Toys R Us and Walmart (WMT), and reduced competition in the physical toy arena–but paying too-high of a price could negate all the strategic benefits and even put Hasbro’s dividend at long-term risk.
Please be careful with shareholder capital Hasbro. For now, the company remains an idea in the Dividend Growth Newsletter portfolio.