Finance | November 2017 | By Danny Klein

Arby's to Buy Buffalo Wild Wings in $2.9B Deal

Backed by Roark Capital, fast-food giant Arby's is adding 1,200-unit Buffalo Wild Wings, one of the nation's top casual dining chains, to its company.
Buffalo Wild Wings is being taken private in a $2.9 billion deal. flickr: Mike Mozart
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Buffalo Wild Wings announced Tuesday that it has entered into a definitive merger agreement with Arby’s Restaurant Group. ARG will acquire the casual dining chain for $157 per share in cash, a deal valued at about $2.9 billion, including Buffalo Wild Wings’ net debt.

Arby’s is controlled by Roark Capital Group Inc., a private-equity firm that’s portfolio also includes Jim ‘N Nick’s Bar-B-Q, CKE Restaurants (parent company of Carl’s Jr. and Hardee’s), Corner Bakery, FOCUS Brands (Auntie Anne’s Pretzels, Carvel Ice Cream, Cinnabon, McAlister’s Deli, Moe’s Southwest Grill, and Schlotzsky’s), Il Fornaio, Jimmy John’s, Miller’s Ale House, and Naf Naf Grille.

The agreement represents a premium of about 38 percent to Buffalo Wild Wings’ 30-day volume-weighted average stock price as of November 13, the last day prior to when the Wall Street Journal first reported that a takeover bid was in the works. It's also 65 percent higher than the 52-week low of $95. Shares were up another 6.5 percent to $155.90 in premarket trading Tuesday, lifting it more than 30 percent above that closing price.

“Buffalo Wild Wings is one of the most distinctive and successful entertainment and casual dining restaurant companies in America,” says Paul Brown, CEO of Arby’s Restaurant Group, Inc, in a statement. “We are excited to welcome a brand with such a rich heritage, led by an exceptionally talented team. We look forward to leveraging the combined strengths of both organizations into a truly differentiated and transformative multi-brand restaurant company.”

Following the transaction, which is expected to close during the first quarter of 2018, Buffalo Wild Wings will be a privately held subsidiary of ARG. It will, however, continue to be operated as an independent brand, the company said. Brown will serve as chief executive officer of the parent company.

“We are excited about this merger and confident Arby’s represents an excellent partner for Buffalo Wild Wings,” says Sally Smith, CEO of Buffalo Wild Wings, in a statement. “This transaction provides compelling value to our shareholders and is a testament to the hard work and efforts of our talented team members and franchisees. We are confident that the strength of our two industry-leading brands, under the sponsorship of Roark Capital—an experienced restaurant and food service investor—will enable us to capitalize on significant growth opportunities in the years ahead.”

Buffalo Wild Wings was founded in 1982 and went public in 2003. The company had 220 units at the time and has since grown to more than 1,200 locations worldwide.

Jim Badum, executive vice president of client partnerships at Ansira, the second largest independent CRM firm in the U.S., says the deal will help the brand's current operators.

"With the new deal in place, franchisees will have the opportunity to focus on brand operations and differentiation without having to worry about all of the corporate pressures that come with being a public company, such as satisfying board members," he says. "These corporate issues have distracted from franchisees day-to-day operations, resulting in poor performance, but they will now be a thing of the past."

The chain has faced its share of challenges in recent quarters. In the third, the company reported a net earnings decrease of nearly 20 percent as its cost of sales rose to 30.8 percent of restaurant sales from 28.9 percent during the same quarter last year. Buffalo Wild Wings posted adjusted earnings per share of $1.36. Same-store sales decreased 2.3 percent at company-owned restaurants and fell by 3.2 percent at franchise locations. Overall sales rose by 0.5 percent to $473 million while revenue also increased 0.5 percent to $496.7 million.

"I believe this deal does benefit both parties," Badum says. "Acquiring Buffalo Wild Wings enables Roark to further diversity its restaurant portfolio. Buffalo Wild Wings is a major brand with a lot of great potential—Roark just needs to activate it. Going private will allow Buffalo Wild Wings to take a good look at their brand and assess where it is going, reestablishing its foundation and growing as a brand. This solid foundation will allow Buffalo Wild Wings to succeed long-term for years to come, as opposed to struggling from quarter to quarter, like it has in the past."

A leading culprit has been chicken wing prices. Buffalo Wild Wings said traditional wings prices rose by 25.6 percent since last year, and cost the brand $2.16 per pound during the third quarter. Restaurant level profit fell from 17.6 percent of restaurant sales during Q3 2016 to 16.6 percent of restaurant sales this year.

Buffalo Wild Wings has also faced pressure from activist investor Marcato Capital Management LP. The company has pushed the brand to franchise more stores and replace Smith in past months.

Badum says the shift to a privately held company will ease some of the outside pressure. "Going private will also benefit the company as a whole, as it will make the pressure to gross immediate earnings dissipate for a good while," he says. "Infighting among the company and pressure to push out the CEO has been very distracting for it in the past, and going private will eliminate these issues."

Smith said in June she planned to retire by year’s end, ending a 21-year-era. At the company’s shareholder’s meeting, investors voted to add Marcato Capital Management LP nominees Scott Bergren, the CEO of Pizza Hut, CIT Foods CEO Sam Rovit, and Marcato founder and managing partner Mick McGuire to the board.

Brown has been one of the key catalysts in Arby's turnaround. In 2013, two years after Wendy’s sold Arby’s, Brown, the former president of Hilton Worldwide, took over. During his tenure, sales have swelled 20 percent, and are on track to hit $4 billion in 2018. The brand has reported 26 consecutive quarters of growth.

"Arby’s is a very different company from Buffalo Wild Wings," Badum says. "The challenge for Paul Brown in shaping both brands is to take advantage of the company’s’ operation efficiencies, while allowing each brand to maintain its own identity. Paul Brown must effectively use both back offices to decrease operating costs, while delivering the brands consumers have known and loved for years."

"With Buffalo Wild Wings going private, we can expect to see improved operation throughout the company, as well as menu diversification," Badum adds. "Improvement throughout the organization is sure to follow as the company focuses on improving their foundation to deliver long-term success."