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Del Frisco’s considers sale of company as activist investor calls for board action

DFRG considers possible sale after acquisition of Barteca, activist letter

Del Frisco’s Restaurant Group (DFRG) announced today that it will complete a strategic review, including the possible sale of the company after activist investor Engaged Capital urged the company to review strategic alternatives in a December 6 letter. The move comes the same year Del Frisco’s unloaded Sullivan’s Steakhouse, which was purchased by Romano’s Macaroni Grill, and acquired Barteca Restaurant Group in June.

Analysis of DFRG performance, acquisitions not positive

Engaged Capital said in its letter that the financing structure for the Barteca acquisition was poorly executed and that the price and risk associated with the acquisition was too high.

According to Engaged Capital, the 15.7x EBITDA multiple paid for Barteca was too too high relative to the 8.3x multiple trading for DFRG at the time of the acquisition. The 17 percent decline after the purchase was another matter cited by the activist investor, which owns nearly 10 percent of DFRG’s shares and is based in Newport Beach, Calif. As for the sale of Sullivan’s, it was a significant discount to book value assets, said the activist investor.

Bartaco is one of the concepts owned by Barteca Restaurant Group, a DFRG acquisition questioned by Engaged Capital
Bartaco is one of the concepts owned by Barteca Restaurant Group, a DFRG acquisition questioned by Engaged Capital. Photo by Bartaco.

It has been a big year for restaurant acquisitions this year. Inspire Brands just completed its purchase of Sonic Corp for $2.3B and Cava Group finalized its acquisition of Zoe’s Kitchen for $300M. Jamba Juice, Yalla Mediterranean, Quiznos LLC and Jamba Juice were notable acquisitions that were finalized in 2018. Additionally, Oprah invested in True Food Kitchen in July.

Del Frisco’s reviews possible sale of all, or parts, of company

As Del Frisco’s reviews a possible sale, there are at least two other chains considering the same move. Jack in the Box confirmed it is conducting its own strategic review, including a possible sale, and according to Restaurant Business Online, Papa John’s has been shopping buyers while the chain battles with its founder, John Schnatter, who has been accused of inappropriate comments, including racially-insensitive remarks to a contractor, and also to the press regarding the NFL.

In its push for a sale of the whole company or parts of the company, Engaged Capital stressed that Barteca is better off on its own because of its prized brands, Barcelona Wine Bar and Bartaco. The latter is a prime concept with a lot of runway, and has above-28 percent EBITDA margins. The activist investor says that the capital for growth of Bartaco has now been restricted from the original operating plan the company had prior to its acquisition by DFRG.

Del Frisco's Restaurant Group considers possible sale of company

“The environment for M&A in the restaurant industry has rarely been more active than it is today,” said Glenn W. Welling, Engaged Capital principal, in his letter to DFRG. “Numerous large, well-capitalized private equity firms and strategic acquirers have been acquiring restaurant concepts at high valuation multiples.” He went on to say “…we believe it is a seller’s market.”

Engaged Capital also insist that management is not running DFRG as it should and the concepts are underperforming. The analysis was made using similar concepts by Ruth’s Chris and Darden Restaurants.

DFRG announced that Piper Jaffray & Co.will serve as financial advisor and that Kirkland & Ellis LLP will serve as legal advisor. Del Frisco’s announced, “The Board is proceeding expeditiously and has formed a transaction committee to assist in its evaluation of strategic alternatives.”

Photo credit: Bartaco (featured, inline), DFRG (inline)

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