Finance | March 2017 | By Bruce Horovitz

12 Things Restaurants Should Know About Activist Investors

Some 14 percent of publicly traded operations with a market value of at least $100 million have attracted an activist shareholder.
Buffalo Wild Wings is one brand that has gotten pressure from an activist investor. Buffalo Wild Wings / Bob McNamara
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Common knowledge would suggest a company’s management or board of directors best knows which path the organization should take to success. But a recent spate of activity in the public restaurant world shows that another population—activist investors—thinks it might have a better idea how brands should succeed.

Restaurants have had a glut of activist investor interest in recent years. Most recently and most publicly, Chipotle, under pressure from Pershing Square hedge-fund manager Bill Ackman, abandoned its co-CEO structure—Monty Moran retired, while Steve Ells became the sole chief executive—and named four new board members. At the same time, Buffalo Wild Wings keeps feeling the heat from hedge-fund manager Mick McGuire, who has communicated with franchisees through a public website.

Some 14 percent of publicly traded operations with a market value of at least $100 million have attracted an activist shareholder, according to a recent Bloomberg report. “I’d say the number has roughly quadrupled over the past 10 years,” says Allan Hickok, a Wall Street veteran and senior adviser at Boston Consulting Group.

But when activists show up, it’s not because all is hunky-dory. “You don’t typically find activists with very well-run companies,” says Howard Penney, managing director at Hedgeye Risk Management, an independent research firm. “The broad theme is that activists get involved in companies that are poorly run or mismanaged.”

Here are 12 things experts say public quick-service restaurant companies should know about activist investors.

1. They’re probably helpful.

“I don’t know a single restaurant company where an activist got involved and the stock price declined,” Penney says. “In many ways, activists can be helpful because they bring a third set of eyes and a different perspective,” Hickok adds. “They can challenge long-held practices that may not be appropriate.”

2. They’re not new.

While the public has been increasingly hearing about activist investing for the past half-dozen years, it’s hardly a new thing. Hickok points out that it’s been prevalent on Wall Street for decades. One reason the public hears more about activist investors now is that the activists themselves are increasingly savvy at communicating to the public—and to shareholders.

3. They often excel at eliminating fat.

A successful restaurant chain, like any company that prospers for a while, tends to see its bureaucracy bloat. “You don’t shrink unless someone forces you to,” says Christopher Muller, a professor at Boston University’s School of Hospitality. In other words, it often requires someone from the outside to step in and make a company leaner.

4. They tend to shake up the board.

While the board of directors is supposed to be a counterweight to senior management, it is too often a rubber stamp instead, Muller says. “An activist investor can bring in new blood and a new perspective,” he says.

5. They typically need lots of outside help.

“They don’t know anything about operations,” Penney says. “Not many of them have flipped burgers or made sandwiches. They have to rely on a quality management team.”

No activist can ultimately succeed without the operator’s help, Hickok says. “They aren’t the ones who turn on the lights, fire up the grills, sweep up, and lock up at the end of the day.”

6. They usually steer the company to focus on one thing.

Chairman of the board Nelson Peltz pushed hard to get Wendy’s to laser-focus on its burgers and spin off the Tim Hortons doughnut chain. “You can’t successfully sell doughnuts and burgers at the same time,” Penney says. “It’s all about focusing on the core business.”

7. Even small activists can have large influence.

Even though activists’ stake in the company may be small, their influence over management can be significant, Hickok says.

8. They have no special attraction to quick service.

That said, activists often are attracted to franchise companies because franchises all use an established playbook, Hickok says. Also, restaurants are enormous cash-flow generators and are often sitting on enormous pots of cash, which can be used to pay down debt, Muller says.

9. They don’t mess with good companies.

“You won’t find activists trying to get involved with really well-run companies,” Penney says.

10. There are risks.

Perhaps the biggest risk is that as they downsize, they also may downsize assistance to franchisees and innovation, Muller says. The first things to go may be field reps and R&D personnel, he says. At the same time, the activist team may attempt to seek additional fees or royalties from franchisees.

11. They need to be watched.

Much like the management they replace, activists should be monitored. For example, franchisees who annually contribute 4 percent of their sales to the franchisor for marketing help should make certain their contributions continue to be directed toward that, Penney says.

The biggest issue with activists is their time horizon. “If they’re just in it for a quick flip, that’s when you get into trouble,” Hickok says. “If their sole aim is financial engineering without actually fixing anything that needs to be fixed, that’s troublesome.”

12. They can’t fix a totally broken system.

Sure, they can make a company leaner and more focused, but activists don’t get down to the street level. “No activist can fix a poorly operating company,” Muller says.