Highlights Marcato’s Flawed and Potentially
Value Destructive Refranchising Proposal
Urges Shareholders to Vote “FOR” Each of
Buffalo Wild Wings’ Highly-Qualified Director Nominees on the
YELLOW Proxy Card
Buffalo Wild Wings, Inc. (NASDAQ:BWLD) today mailed a letter to
its shareholders in connection with the company’s upcoming 2017
Annual Meeting of Shareholders (“Annual Meeting”) to be held on
June 2, 2017. The Buffalo Wild Wings Board of Directors unanimously
recommends that shareholders vote the YELLOW proxy card
“FOR” the election of all nine of the Board’s experienced
and highly-qualified director nominees: Cynthia L. Davis, Andre J.
Fernandez, Janice L. Fields, Harry A. Lawton, J. Oliver Maggard,
Jerry R. Rose, Sam B. Rovit, Harmit J. Singh and Sally J.
Smith.
This Smart News Release features multimedia.
View the full release here:
http://www.businesswire.com/news/home/20170515005763/en/
(Photo: Business Wire)
All materials regarding the Board’s recommendation can be found
at http://www.buffalowildwings.com/en/2017-annual-meeting/.
The full text of the letter follows:
VOTE THE ENCLOSED YELLOW PROXY CARD
TODAY“FOR” ALL OF BUFFALO WILD WINGS’ HIGHLY QUALIFIED
DIRECTOR NOMINEES
May 15, 2017
Dear Fellow Shareholder:
We are less than three weeks away from the Buffalo Wild Wings
2017 Annual Meeting of Shareholders, which will be held on June
2nd. As you probably know by now, Marcato Capital Management, L.P.
(“Marcato”) is seeking to have you vote to remove every independent
director who has served on our Board for more than eight months.
Marcato wants you to take this radical step so that there is room
for Marcato to add its hand-picked substitutes, who have neither
the experience with the company nor the skills that we believe are
necessary to continue Buffalo Wild Wings’ history of success.
Buffalo Wild Wings has performed well as a business and as an
investment. The company has generally outperformed its casual
dining peers on key operational and financial metrics. Not
surprisingly, shareholders have been rewarded as well – the total
return earned by our shareholders over the one-, three-, five- and
ten-year periods ended April 28, 2017, for example, exceed the
median returns generated by our casual dining peers.1
We encourage you to vote for all our nominees, who have helped
Buffalo Wild Wings generate these returns. Please protect the value
of your investment by voting the enclosed YELLOW proxy card
“FOR” ALL nine of our company’s highly qualified director
nominees: Cynthia L. Davis, Andre J. Fernandez, Janice L. Fields,
Harry A. Lawton, J. Oliver Maggard, Jerry R. Rose, Sam B. Rovit,
Harmit J. Singh and Sally J. Smith.
MARCATO’S AGGRESSIVE REFRANCHISING PROPOSAL
IS UNPRECEDENTED, RECKLESS AND POTENTIALLY VALUE
DESTRUCTIVE
Marcato has offered no plan for operating Buffalo Wild Wings
differently, except that Marcato believes we should sell nearly all
our restaurants to franchisees. Specifically, Marcato is suggesting
that we announce the sale of 500+ restaurants to be completed by
2020. No casual dining company has ever completed such an
aggressive transition.
Marcato accuses us of "dismissing" its refranchising
proposal. This is absolutely untrue. Buffalo Wild Wings'
management and Board, along with our financial advisor, have
thoroughly analyzed Marcato’s proposal and have run complex models
to assess the potential benefits of a sale of the vast majority of
our assets. Further, between August and December 2016, the company
and its financial advisors engaged in multiple in-person,
telephonic and e-mail discussions with Marcato to present our
analysis and demonstrated clearly our reasons for disagreeing with
Marcato’s analysis and proposal.
We firmly believe that, in the absence of data about the market
for our restaurants and given what history there is of such a major
undertaking, it would be imprudent to announce and embark on such a
dramatic transformation at this time. As fiduciaries of your
investment, we cannot in good faith undertake such an aggressive
endeavor with such a significant risk of destruction of shareholder
value.
At Buffalo Wild Wings, we make decisions based on rigorous
analysis of data. We are currently selling 80 carefully chosen
restaurants in our portfolio, using an investment bank that Marcato
has used and presumably respects. We will learn valuable facts
about the strength of the market for our assets during that
process. Based on these facts, we will assess if further
refranchising creates greater value for our shareholders.
MARCATO'S ANALYSIS IS BASED ON FLAWED
ASSUMPTIONS
A number of Marcato’s assumptions are untested, speculative,
aggressive or simply impossible.
For example, Marcato’s analysis assumes:
1. We can sell more than 500 stores by 2020 at a 6x EBITDA;
2. We can repurchase shares for 8x-9x EBITDA through 2020,
before suddenly re-rating to 13x EBITDA;
3. We will trade at 13x after refranchising, a higher multiple
than observed for any comparable casual dining peer, including
highly franchised companies;
4. We can reduce G&A, as a percentage of system-wide sales,
below where we believe is achievable, while appropriately
supporting our business;
5. A scale refranchising will not negatively impact the
company’s 5% royalty rate;
6. We will continue to develop new restaurants during the
proposed refranchising period, even refranchising more restaurants
than Buffalo Wild Wings owns today; and
7. We can achieve a lower tax rate than what would be realized
in a highly franchised system.
We do not believe there is any evidence that these assumptions
are likely to turn out to be true. And, as fiduciaries for all
shareholders, we do not believe it would be responsible to launch a
massive refranchising effort on the basis of untested and
unrealistic assumptions, particularly at a time when the casual
dining sector in general and Buffalo Wild Wings are facing strong
revenue and cost pressures.
Marcato’s own director nominee, Lee Sanders (who Marcato has
touted as an expert in franchising) has privately questioned the
sustainability of the valuation multiples that could be achieved in
such a massive refranchising, explaining that the market will
become oversaturated, causing the value of each asset to
decrease.
“Too much available product in the market will
cause a commensurate decline in value and demand over a 2-3 year
period.” (Lee Sanders, August 2016 email)2
For evidence that such a refranchising would be feasible and
create value, Marcato references the refranchising programs of
certain quick-service restaurants (QSR) – or fast food concepts.
The operations and business models of QSRs are much simpler to
execute than those of casual dining restaurants like Buffalo Wild
Wings, and, accordingly, the franchisee market for QSRs is
deeper, and the need for corporate ownership is lower. QSRs do not
have the complexity of employing servers, running an alcohol
program or scheduling labor around sports and entertainment events.
Additionally, the capital requirements are lower and there is less
technology, loyalty program and menu complexity.
Don’t just take our word for it. The independent analysts
at Dougherty & Co. agree with this important distinction
between QSRs and casual dining restaurants:
“Casual dining restaurants are significantly
more complex than running a QSR operation and we believe much
harder to standardize operations and service.” (Dougherty &
Co., April 2017)2
THE APPLEBEE’S REFRANCHISING EXERCISE IS
INFORMATIVE
One example of a casual dining restaurant executing a major
refranchising was Applebee's, which is a significant part of
DineEquity, Inc. Applebee's is comparable to Buffalo Wild Wings,
and we have studied this process and its results. It informs our
inclination to be cautious even as we sell 80 restaurants.
Marcato was very supportive of the major refranchising at
Applebee’s of approximately 480 stores, a
process that took five years. However, same-store sales
growth has struggled following Applebee’s transition to an
approximately 99% franchised system and the stock has significantly
underperformed.
After Marcato championed the refranchising at Applebee’s,
Marcato held DineEquity stock for only a short time. Then Marcato
sold its entire position. DineEquity’s shares have declined 18%
since Marcato’s exit.
The accompanying chart highlights DineEquity's operating and
stock performance compared to Buffalo Wild Wings. The stock of
DineEquity has underperformed the casual dining sector because
Applebee’s has struggled as a business now that it is fully
franchised. In each of the last two quarters, Applebee's has had
same-store sales declines of more than 7%!
We do not want Buffalo Wild Wings to be the next
Applebee's.
BUFFALO WILD WINGS REGULARLY REVIEWS ITS
COMPANY-OWNED AND FRANCHISED RESTAURANTS TO ACHIEVE OPTIMAL
MIX
We continuously review our portfolio of restaurants. We do not
target a specific franchise mix, as the optimal balance is
dependent upon many factors that change over time.
It is important to observe, however, how rare a 90% franchisee
model is in the casual dining sector. Among other things, for the
system to perform well, it is important to have a significant
number of company-owned restaurants so the company can remain in
the timely flows of increasingly changing customer tastes and
preferences.
The only casual dining peers with a greater franchise mix than
Buffalo Wild Wings are DineEquity (Applebee’s and IHOP) and
Denny’s. Notably, IHOP and Denny’s are substantially easier to
operate. Their "Family Restaurant" model, with no alcohol, limited
technology and less differentiation is much more
straightforward.
PROTECT THE VALUE OF YOUR INVESTMENT
–VOTE THE ENCLOSED YELLOW PROXY CARD TODAY
We encourage you to protect the value of your investment in
Buffalo Wild Wings by using the enclosed YELLOW proxy card
to vote “FOR” each of Buffalo Wild Wings’ nine nominees by
telephone, by Internet, or by signing and dating the enclosed
YELLOW proxy card and returning it in the postage-paid
envelope provided. No matter how few shares you own, it is
important that all shareholders have their voices heard in this
critically important decision regarding your investment. We further
encourage you to discard any proxy materials sent to you by
Marcato.
We thank you for your continued support.
Sincerely,
Jerry R. Rose
/s/ Jerry R. Rose
Chairman of the Board and Independent
Director
Cynthia L. Davis
/s/ Cynthia L. Davis
Independent Director
Andre J. Fernandez
/s/ Andre J. Fernandez
Independent Director
Harry A. Lawton III
/s/ Harry A. Lawton III
Independent Director
J. Oliver Maggard
/s/ J. Oliver Maggard
Independent Director
Harmit J. Singh
/s/ Harmit J. Singh
Independent Director
Sally J. Smith
/s/ Sally J. Smith
CEO & President and Director
James M. Damian
/s/ James M. Damian
Independent Director (retiring
2017)
Michael P. Johnson
/s/ Michael P. Johnson
Independent Director (retiring
2017)
If you have any questions or require any
assistance with voting your shares, please contact the company’s
proxy solicitor listed below:
MacKenzie Partners, Inc.105 Madison
AvenueNew York, New York 10016Call Collect: (212)
929-5500orToll-Free (800) 322-2885Email:
proxy@mackenziepartners.com
Lazard Ltd is serving as financial advisor and Faegre Baker
Daniels is serving as legal advisor to the company.
About the Company
Buffalo Wild Wings, Inc., founded in 1982 and headquartered in
Minneapolis, is a growing owner, operator and franchisor of Buffalo
Wild Wings(R) restaurants featuring a variety of boldly-flavored,
made-to-order menu items including its namesake Buffalo, New
York-style chicken wings. The Buffalo Wild Wings menu specializes
in 21 mouth-watering signature sauces and seasonings with flavor
sensations ranging from Sweet BBQ(TM) to Blazin'(R). Guests enjoy a
welcoming neighborhood atmosphere that includes an extensive
multi-media system for watching their favorite sporting events.
Buffalo Wild Wings is the recipient of hundreds of "Best Wings" and
"Best Sports Bar" awards from across the country. There are
currently more than 1,220 Buffalo Wild Wings locations around the
world.
To stay up-to-date on all the latest events and offers for
sports fans and wing lovers, like Buffalo Wild Wings on Facebook,
follow @BWWings on Twitter and visit www.BuffaloWildWings.com.
Cautionary Statement Regarding Certain Information
This communication contains “forward-looking statements” within
the meaning of the federal securities laws. Such statements include
statements concerning anticipated future events and expectations
that are not historical facts. All statements other than statements
of historical fact are statement that could be deemed
forward-looking statements. Actual results may vary materially from
those expressed or implied by forward-looking statements based on a
number of factors, including the factors described under “Risk
Factors” in Part I, Item 1A of our Annual Report on Form 10-K for
the fiscal year ended December 25, 2016, as updated or supplemented
by subsequent reports we file with the SEC. We do not assume any
obligation to publicly update any forward-looking statement after
they are made, whether as a result of new information, future
events or otherwise.
Important Information
Buffalo Wild Wings, Inc., its directors and certain of its
executive officers and employees are participants in the
solicitation of proxies from Buffalo Wild Wings shareholders in
connection with its 2017 annual meeting of shareholders to be held
on June 2, 2017. Information concerning the identity and interests
of these persons is available in the definitive proxy statement
Buffalo Wild Wings filed with the SEC on April 21, 2017.
Buffalo Wild Wings has filed a definitive proxy statement in
connection with its 2017 annual meeting. The definitive proxy
statement, any amendments thereto and any other relevant documents,
and other materials filed with the SEC concerning Buffalo Wild
Wings are (or will be, when filed) available free of charge at
http://www.sec.gov and http://ir.buffalowildwings.com. Shareholders
should read carefully the definitive proxy statement and any other
relevant documents that Buffalo Wild Wings files with the SEC when
they become available before making any voting decision because
they contain important information.
1 Source: FactSet. Market data as of April 28, 2017. Casual
dining peers include BBRG, BJRI, BLMN, CAKE, CBRL, CHUY, DENN, DIN,
DRI, EAT, IRGT, RRGB, RT and TXRH. BBRG, BLMN, CHUY and IRGT
included as of respective IPO dates. California Pizza Kitchen and
P.F. Chang’s data included only in ten-year analysis, due to
buyouts in July 2011 and July 2012, respectively.
2 Permission to use quotations neither sought nor obtained.
3 Source: Company filings and FactSet. Market data as of April
28, 2017. DIN’s total shareholder return since Marcato 13D filing
on December 19, 2012 to exit was 13.2%.
4 Holding period calculated from initial disclosure and exit
based on 13F filings.
5 Source: Company filings. Individual concept data shown for
BLMN, DIN, DRI, EAT and IRG. Excludes concepts with less than 100
units.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20170515005763/en/
Buffalo Wild Wings, Inc.Investor Relations Contact:Heather
Pribyl, 952-540-2095Additional Investor ContactMacKenzie
Partners, Inc.Bob Marese/Paul Schulman212-929-5500MediaJoele
Frank, Wilkinson Brimmer KatcherMeaghan Repko / Nick
Lamplough212-355-4449
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