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Activist Target: BJ's Restaurants

By Alexandra Garfinkle

BJ’s Restaurants Inc. (BJRI) is exuding signs that the company, which operates more than 200 restaurants in 28 states, could soon find itself in the crosshairs of an activist investor.

The company, whose deadline to nominate director candidates for election at its annual meeting is Feb. 24, finds itself a rapidly consolidating sector with subpar performance metrics compared with its peers, no insider control, a long-tenured board and a declining stock price. It’s possible an investor could come in and push the company to pursue a sale.

“I think BJ’s would make a compelling investment for private equity,” Stephen Anderson of Maxim Group LLC said in a recent interview. He said BJ’s declining performance over the past few years — the restaurant chain’s shares have fallen 44.2% from an August 2018 peak — and its performance relative to peers could be fodder for an activist to enter the scene.

Of late, BJ’s has also been outperformed by a number of competitors, including Outback Steakhouse parent Bloomin’ Brands Inc. (BLMN), Chili’s owner Brinker International Inc. (EAT) and Olive Garden proprietor Darden Restaurants Inc. (DRI), according to FactSet Research Systems Inc. Bloomin’ Brands’ numbers, however, may be skewed, as the company finds itself in a director battle with Jana Partners LLC and recently appointed BofA Securities Inc. for a strategic review, both events that have lifted shares.

Shares of BJ’s Restaurants closed at $42.20 apiece on Tuesday, Feb. 18, compared with a 2018 high of $75.70 per share. Conversely, Bloomin’ Brands was down about 23% from mid-2018 highs at the time it announced its strategic review.

A theoretical playbook could involve an activist looking to push the company to explore strategic alternatives, which would include a take-private, according to Chris O’Cull of Stifel, Nicolaus & Co.

The scheme has played out recently at other restaurant chains, including Buffalo Wild Wings Inc., which sold to Roark Capital Group in November 2017 after a campaign from Marcato Capital Management LLC; Del Frisco’s Restaurant Group Inc., which sold to L Catterton last fall after a campaign from Engaged Capital LLC; and Potbelly Corp. (PBPB), which starting a review in 2017 following pressure from Ancora Management LLC. Potbelly. Potbelly, however, remains independent, and despite a failed review that ended in 2018 is once again under pressure from a shareholder contingent.

Meanwhile, activist fund Viex Capital Advisors LLC is considering a director fight at Red Robin Gourmet Burgers Inc. (RRGB) if the chain doesn’t launch a strategic review first, two people familiar with the situation told The Deal in January.

Atlanta-based Roark Capital Group, which has been an active restaurant consolidator, could also be in play, O’Cull said. Though the company has shown an affinity for more national chains, it has acquired chains with smaller, more regional footprints, including Jupiter, Fla.-based Miller’s Ale House and Birmingham, Ala.-based Jim ‘N Nick’s Bar-B-Q. Most recently, Roark spent $2.3 billion to acquire Sonic Corp.

Looking to BJ’s, a possible strategic acquirer may attempt to consolidate the company with restaurants it owns to find supply chain and support services efficiencies, per Stifel’s O’Cull.

However, Nick Setyan of Wedbush Securities Inc. isn’t so sure BJ’s is a valid target, as the company is fundamentally a “high-quality asset,” he told The Deal.

“M&A is a higher probability scenario,” said Setyan, who identifies Darden as a company that has always had an interest in BJ’s, though it would be unlikely to pay the 12 times Ebitda multiple — at least $1.5 billion — that BJ’s management would likely seek.

Overall there is absolutely a way forward for BJ’s, agrees O’Cull. The business has a number of bright spots. BJ’s currently has about 200 locations, but could support more, he said. Further, he noted, part of BJ’s issues in the public markets tie into the company’s concentration in California, where significant inflation has pressured margins.

“The average BJ’s restaurant serves more guests per square foot every week than most casual dining restaurants,” said O’Cull.

The company has garnered the attention of activists in the past. Huntington Beach, Calif.-based BJ’s, which has an $813 million market cap, was the target of a group of activists in 2014, led by Patrick Walsh of PW Partners and Luxor Capital Group LP. The company settled with PW and Luxor in April 2014 in a deal that included the nomination of three new directors to the company’s nine-person board and a $50 million share buyback.

Currently, BJ’s has four directors on its board that have served in their roles for more than 15 years, according to BoardEx, a sister company of The Deal. To date, no one shareholder owns a blocking stake in the company, according to FactSet.

The company’s last annual meeting was in mid-June and the deadline to nominate directors is Feb. 24.