Engaged Capital LLC has bought nearly 10% of the restaurant operator’s shares and plans to push it to sell itself, the hedge fund said in a letter to the company’s board Thursday morning.
The activist hedge fund believes Del Frisco’s is poorly managing its steakhouses and grills and rushed into buying two faster-growing chains to avoid being acquired. It wants Del Frisco’s to add new directors and form a strategic-review committee to consider selling its various brands.
Shares of Del Frisco’s, which operates Double Eagle steakhouses and the more casual Del Frisco’s Grilles, were down more than 55% this year through Wednesday, compared with a 13% gain in the S&P Composite 1500 Restaurants index. Del Frisco’s market value had dropped to $226 million.
Del Frisco’s shares were up 13% Thursday morning after The Wall Street Journal first reported Engaged’s plans Wednesday.
In June, the Irving, Texas-based company spent $325 million to buy Barteca Restaurant Group, based in Norwalk, Conn., which operates Barcelona Wine Bars and Bartaco restaurants. Del Frisco’s at the time said the purchase would aid growth and provide protection in case of an economic downturn as diners would trade pricey multicourse dinners for small plates and tacos with drinks.
Engaged believes the purchase was ill-conceived and that Del Frisco’s namesake brand is falling behind competitors, which include Ruth’s Chris Steak House, by having less innovative menus and less effectively managed labor, according to people familiar with the matter. It believes a handful of strategic and private-equity buyers would be interested in buying some or all of Del Frisco’s brands, including Barcelona and Bartaco, they said.
Late Wednesday, after The Wall Street Journal reported on Engaged’s plans, Del Frisco’s board adopted a so-called poison pill that dilutes the stock if any one shareholder crosses the threshold of owning 10% or more. The company said it did so after observing unusual and substantial trading activity in its shares. It also said the pill isn’t intended to prevent the company from taking actions that are in the best interest of shareholders.
On its most recent earnings call in November, Del Frisco’s Chief Executive Norman Abdallah acknowledged investor concerns about the Barteca acquisition and the debt Del Frisco’s took on to finance it. “We realized that there is a great deal of skepticism around the new DFRG,” he said, referencing the company by its stock ticker. He said the company used proceeds from the recent $32 million sale of its Sullivan’s Steakhouse brand to pay down debt and that it expects cost savings from combining operations.
Engaged was founded in 2012 by Glenn Welling and manages about $750 million from Newport Beach, Calif. It has struck settlements for board seats in about half of its activist campaigns and often presses companies to sell part or all of themselves.
In 2014, Engaged urged smoothie maker Jamba Inc. to shed some locations. The entire company was sold earlier this year. Last year, Engaged took a position in
Hain Celestial Group
and struck a settlement for Mr. Welling and five new directors to join the board and for the board to undertake a strategic review. The company has been looking to sell its protein business.
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