Bravo Brio Restaurant Group (NASDAQ:BBRG) is valued at roughly 0.3x TEV/Revenue, 3.5x TEV/EBITDA and sports a 20% free cash flow yield today. While there are posts here on Seeking Alpha advising investors to avoid BBRG I think that given the valuation the stock deserves a look (fellow charter holder Shaun Currie does a great job overviewing the bear case for the name). However, the fact that a new CEO was put in place late last year and a major hedge fund has gotten involved makes me think the short story has played out and that it's time to go long an underperforming restaurant name.
The bear case is easy to see: same store sales are collapsing, management has consistently revised guidance downwards this year, and capital is being deployed with a dated and fading restaurant model (I actually found the name because a new Brio opened up near me in South Norwalk, CT, and they really did a great job renovating the space). Further, the $40mn of debt with BBRG has covenants that require a minimum fixed charge coverage ratio (EBITDAR - maintenance CapEx compared to Consolidated Fixed Charges) of 1.35 and maximum leverage ratio (Debt compared to EBITDA) of 2.75 before April 2017 and 2.5 after, and both require clarification from management because EBTIDA is not mentioned once in the recent 10-K, 10-Q, or conference call and there are multiple adjustments to the calculations according to the debt filings. It also bears mentioning that the debt is in the form of a revolver held by a bank so it is likely not in the best interest of the bank to force default if issues arise.
Shaun's main argument in his second, more recent article, that the company needs to change strategy before deploying growth capital, could actually happen because of the new CEO and a major hedge fund getting involved.
Brian O'Malley was named CEO in late 2015 after Saed Mohseni left to run Bob Evans (NASDAQ:BOBE). Brian has spent 20+ years within the company where he most recently served as COO since 2010. The new CEO has said he wants to take more risks with his business indicating change is on the way.
Hedgie Involvement & Activist History
TAC Capital owns a 13.3% stake in BBRG, gleaned through a 13-G/A filing on 9/9/2016. The position was reported through a passive 7.9% ownership in a 13-G filing on 7/27/2016, days before the earnings miss, which was amended to an 11.2% ownership level on 9/1/2016 and a 13.3% ownership on 9/9/2016.
TAC Capital has been active before with underperforming small-cap assets. They were an activist fighting for 5 board seats at Sterling Bancshares (NASDAQ:SBIB) in 2010. It had owned a passive 6.4% stake in the name in November 2008 that increased to a passive 9.9% stake in January 2009. SBIB sold themselves in January 2011 after TAC revised their filing to active, from passive, in early November 2010. I think it's important to note that TAC seems to engage on friendly terms when it files 13-G's, but as is proof with SBIB TAC is not shy about getting more involved if need be.
A really cool thing when it comes to analyzing mergers and acquisitions is that the history of the transaction must be reported in a DEFM14A filing. In SBIB's "Background of the Merger" section in its DEFM14A (filed in April 2011) the chain of events leading to the sale are very clear. TAC principal Donald Adam and SBIB CEO Mr. Bridgewater met in December 2009 to discuss TAC's intentions after TAC's 9.9% stake was reported, with no follow-up for nearly a year. Then, TAC revised its filing to an active position (13-D) in November 2010. Following TAC's revision from passive to active the board of SBIB convened and decided on the next course of action to realize value. While considering some new operational plans to boost EPS in the years to come the board also decided to consider a sale that it ended up following through with, all because of TAC's involvement. One month later SBIB had 5 bidders and another month later, in January 2011, it was announced that Sterling would be selling itself for $1bn (roughly $10/share versus the $7.70 closing price) to Comerica.
Hopefully BBRG's board is shaking in its boots right now.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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