Dear Messrs. Hammett, Johnson, Page and Phillips,
Thank you for your consideration of our recent letter and in particular for your timely response in setting up a conference call following the release of Rave Restaurant Group's (NASDAQ: RAVE) first quarter results earlier this month.
In the three weeks since the Open Letter to the Rave Restaurant Group Board of Directors was published, RAVE's stock has fallen another 30%-40% and most of this past week's trading range equated to a market value for RAVE of under $20 million. While RAVE's stock was hitting these new multi-year lows, it was announced that competitor MOD Pizza brought in a $42 million round of funding to push its total funding to $150 million, pushing its implied value to what is likely the $200+ million range ("likely" because we don't know what % stake its founders have retained so we assume at least 25%). MOD is a nearly identical chain/concept to RAVE's Pie Five, and while it has opened more fast casual pizza restaurants (170 to RAVE's 100) than RAVE, MOD's total restaurant count is still dwarfed by the combined (Pizza Inn + Pie Five) RAVE restaurant count of 320. Despite a restaurant count of just over half that of Rave Restaurant Group, MOD Pizza now has a valuation of approximately 10x the current enterprise value of RAVE.
In addition to the MOD Pizza funding, a much smaller fast casual pizza chain that hopes to reach 21 restaurants opened by year end raised $25 million this week. &Pizza's latest round of private equity funding implies a valuation somewhere in the range of $50 million, which is difficult to pin down due to the lack of information available about the percentage of equity its founders have retained; but the most notable thing for RAVE Board members should be that this tiny upstart with a small fraction (1/5) of the fast casual restaurants that Pie Five has open is now valued at more than 2x the value of Pie Five parent company RAVE Restaurant Group in its 320 restaurant entirety. Such a disparity only highlights the importance of immediacy for the RAVE Board in taking action and we are sending this letter to inform you that there is clearly capital flowing into the space at valuations ten times or more RAVE's current enterprise value to those who can successfully execute a growth plan.
Clearly, the iron is as hot as it has ever been for private equity and venture capital investing in the fast casual pizza space, and we find it interesting that last week's two deals totaling $67 million in new capital were announced in the same week that RAVE's stock hit multi-year lows. This makes the Board's decision of whether it would be prudent to consider investigating strategic alternatives including the sale of the company a fairly obvious one. Your choices -
1) is our fiduciary duty to maximize returns for all shareholders better served if we actively pursue a process whereby we seek to put the Pie Five chain (or the whole company) in the hands of operators who have the operational expertise to drive greater value than the current strategy has been able to achieve for our Pie Five and Pizza Inn assets?
2) Are all RAVE shareholders better served by continuing to pursue the new strategy brought to the table from the leadership that brought us the old strategy that has resulted in RAVE stock trading down 90% since last year?
If the decision is the former, we respectfully request that the board communicate that to the investing community so that potential investors and current shareholders can be made aware that the process is underway. The pursuit of such a process would likely determine a market value for the Pie Five and Pizza Inn assets that reflects the potential they have under different management and with current funding trends, it would almost certainly result in a significantly higher value for each share of RAVE. If the Board determines that the latter option is best for all shareholders, we request that the detail of the discussion of the rationale behind such a decision be clearly delineated in the minutes of that meeting.
In summary, venture capital and private equity firms are staking claims in the fast casual space at valuations that last week climbed to 10x or more the current market valuation for RAVE despite its ownership of one of the top players (Pie Five Pizza) in the space. Timing is of the essence and there is a significant and growing cross section of RAVE shareholders who now believe it is in the best interest of all shareholders for the Board to sell the company and put Pie Five Pizza and Pizza Inn into hands who have the capital and expertise to create greater value.
Disclosure: I am/we are long RAVE.
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.
Additional disclosure: My intent in publishing this article is to inform investors about developments related to RAVE Restaurant Group. I did not and do not intend to suggest any specific action by any investor or shareholder and strongly suggest that any decision made to buy or sell shares of this stock be made after consultation with an investment advisor as to the suitability of such an investment. I currently own shares of RAVE outright and in some managed accounts. I may buy or sell shares at any time based on market conditions and the trading price of RAVE.
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