An Outback Steakhouse truck sits parked exterior a restaurant in New York.
Daniel Acker | Bloomberg | Getty Images
Company: Bloomin’ Brands (BLMN)
Business: Bloomin’ Brands owns and operates informal, upscale informal and effective eating eating places within the United States and internationally. Its restaurant portfolio contains Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Prime Steakhouse & Wine Bar. The firm’s gross sales are damaged down by Outback (65% of gross sales), Carrabba’s (15% of gross sales), and Fleming’s and Bonefish (the remaining 20% of gross sales).
Stock Market Value: $2.35B ($26.98 per share)
Activist: Starboard Value
Percentage Ownership: 9.6%
Average Cost: $25.80
Activist Commentary: Starboard is a very profitable activist investor and has intensive expertise serving to corporations concentrate on operational effectivity and margin enchancment. Starboard has made 112 prior 13D filings and has a mean return of 27.16% versus 11.98% for the S&P 500 over the identical interval. Of these filings, 19 have been on corporations within the shopper discretionary sector, the place Starboard has a mean return of 28.11% versus 11.83% for the S&P 500 over the identical interval. However, two of their most profitable engagements lately have been at Papa John’s International (376.8% return versus 47.34% for the S&P 500) and Darden Restaurants (63.3% return versus 13.6% for the S&P 500).
What’s taking place?
Starboard took a 9.6% position in BLMN for funding functions. Earlier this month, Starboard entered into an advisor settlement with David C. George, a retired restaurant govt who served in numerous roles at Darden for almost 17 years, with respect to the agency’s funding in BLMN. Starboard famous that it determined to retain him as an advisor in reference to this funding, following discussions with him and in view of his distinctive talent set, broad restaurant business expertise and intensive restaurant business data.
Behind the scenes
Bloomin’ Brands is one of the most important informal eating corporations on this planet and has been on Starboard’s radar for the reason that agency invested in direct competitor Darden Restaurants back in 2013. At that point, Bloomin’ was outperforming Darden and buying and selling at a premium a number of, however the circumstances have since flipped with Bloomin’ buying and selling within the 5-6x earnings earlier than curiosity, taxes, depreciation and amortization vary. Meanwhile, Darden and Texas Roadhouse are buying and selling at double-digit multiples.
Despite having nice manufacturers, Bloomin’ has misplaced the boldness of the market and fallen behind on numerous operational metrics, however its fundamental downside is lagging similar retailer gross sales and points producing visitors due to considerably of an id disaster in the way it operates the Outback eating places. Traditionally, Outback had been a family-friendly steakhouse, however lately the corporate has tried to pivot to a “bar and grill” mannequin with greater menus and extra inexpensive gadgets – attempting to grow to be all issues to all individuals. Not solely is that rather more operationally complicated, however it has them working within the cheaper price and extra aggressive bar and grill area. This has pushed away many of their unique, longstanding clients, compared to LongHorn Steakhouse and Texas Roadhouse, which have stayed true to what they’re.
The main alternative right here is to enhance operations, primarily from a prime line stage but additionally by slicing prices. This can largely be completed by restoring Outback to its former family-friendly steakhouse glory and shifting away from the extra complicated and aggressive “bar and grill” mannequin. If there may be anybody with the expertise to do that, it’s Starboard’s Jeff Smith, who led vital shareholder value creation at each Darden and Papa John’s. Getting Starboard concerned with recent eyes on the board would additionally go a good distance towards restoring administration’s misplaced credibility available in the market.
There are additionally very compelling strategic alternatives to create shareholder value. Bloomin’ would get extra value in promoting some of its undervalued belongings, corresponding to Fleming’s, its upscale steakhouse enterprise. There has been a lot of M&A within the high-end steakhouse area: Ruth’s Chris was recently acquired by Darden for 10x EBITDA; Del Frisco’s was acquired for 11-12x EBITDA; and Fogo De Chao was purchased in a private transaction for a reported $1.1 billion. At comparable EBITDA multiples, Fleming’s may go for $500 million. But a higher alternative may be their hidden gem within the 150 Outback eating places in Brazil. These are all company-owned with a robust administration workforce and are among the many hottest eating places within the nation with 2- to 3-hour wait occasions. Selling these eating places at a 10x EBITDA a number of may garner an extra $750 million, or they may franchise them for much less cash however an ongoing royalty.
In the United States, solely 157 of the corporate’s 1,157 eating places are franchised. Bloomin’ has been attempting to develop by including company-owned eating places, which is capital intensive and operationally complicated. There is a chance to improve the proportion of franchised eating places by including by franchising or changing company-owned eating places to franchises. This isn’t solely capital accretive to the corporate however ends in a extra secure and predictable stage of money move that typically will get a greater a number of within the market. Additionally, the corporate may use the money it generates to return capital to shareholders.
This isn’t unfamiliar territory for Bloomin’ or Starboard. In 2020, Jana Partners engaged with Bloomin’ and was profitable in getting two directors appointed to the board: John P. Gainor, Jr. and Lawrence V. Jackson. While Jana not owns shares of Bloomin’ and certain doesn’t usually speak to these two about in regards to the firm, as administrators appointed by an activist with a comparable value-creating agenda, it could not be stunning in the event that they have been considerably like-minded to Starboard’s agenda. As for Starboard, the agency has had intensive success at each Papa John’s and Darden, however in strikingly other ways. Papa John’s was a very amicable engagement through which Starboard was invited onto the board and labored with administration to create intensive shareholder value. The agency did the identical at Darden, however that took a lengthy, contentious proxy combat for them to in the end replace the entire board and the CEO. These two conditions present Starboard’s breadth and skills as an activist. Knowing the agency, it could a lot favor to go the amicable path like Papa John’s, however it would take the Darden path if compelled to. If administration is sensible, they’ll view Darden as a warning, and Papa John’s as the chance.
Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Bloomin’ Brands is owned within the fund.