Potential Acquisition Targets For Buffalo Wild Wings

| About: Buffalo Wild (BWLD)

During its latest earnings report, Buffalo Wild Wings (NASDAQ:BWLD) announced it is actively seeking small restaurant chains to acquire. The company remains focused on expanding its current base of 835 to its targeted North American unit number of 1500. The plan is to also actively seek small restaurants to acquire in order to diversify the business, or start its own additional restaurant brand. In a recent article I discussed the growth prospects of Buffalo Wild Wings being additional units opened, international franchising, and acquisitions.

Here is a list of some small publicly traded restaurant chains that could be acquired by Buffalo Wild Wings:

  • Cosi (NASDAQ:COSI) - Cosi has struggled over the years and has a share price of less than $1 and a market cap of $48 million. Buffalo Wild Wings could buyout Cosi with current cash on hand from current shareholders. The struggling restaurant company has locations generally in downtown large city settings, which would provide a new market for Buffalo Wild Wings. Buffalo Wild Wings locations are generally in large cities, but not downtown by skyscrapers. Cosi has locations inside business towers and a focus on businessmen and women as customers. A total of 136 Cosi restaurants are currently (as of March 29th, 2012) in operation around the world. The company owns the majority of the locations, while 56 are owned by franchisees. The company has locations in 17 states, Washington D.C. and the United Arab Emirates. Earlier in April, Cosi announced plans to open five franchised locations in Costa Rica. Cosi would provide a great opportunity for executives to focus on expanding store sales growth, while also utilizing franchise connections to open additional restaurants around the United States.
  • Famous Dave's (NASDAQ:DAVE) - Famous Dave's operates restaurants focusing on barbecue throughout thirty five states. The company, just like Buffalo Wild Wings, is headquartered in Minnesota. It has a similar percentage of company versus franchise locations, with 53 currently owned and 133 franchised (as of April 25th, 2012). The company has a market cap of around $75 million and could likely be acquired with cash on hand and some shares of Buffalo Wild Wings.
  • Denny's (NASDAQ:DENN) - This pick will probably not make sense to anyone, but I think it offers a good possibility for the company. Buffalo Wild Wings focuses on dinner and has tried hard to lure in a lunch crowd as well. The company is not likely to ever become a staple in breakfast restaurants based on its food offerings. Denny's has been on a turnaround path, and would offer Buffalo Wild Wings a chance to control a leading breakfast company in the United States. The company has over 1,500 locations and is present in eight countries. A win-win situation could be had if Buffalo Wild Wings could help the company increase same store sales, while Denny's could provide franchising connections and opportunities for Buffalo Wild Wings' international growth.
  • Good Times Restaurants (NASDAQ:GTIM) - Good Times represents a regional restaurant chain that is in the category most likely being looked at by Buffalo Wild Wings. I think a regional burger chain makes the most sense as it will be cheap to acquire, offers diversification, and allows Buffalo Wild Wings the best chance to grow the company at its own pace and rules. Good Times has 39 locations in Colorado, 2 in Wyoming, and a single location in North Dakota.
  • Kona Grill (NASDAQ:KONA) - Kona Grill has a rather small restaurant base with 23 locations (as of April 2, 2012). All of the locations are company owned, which would give Buffalo Wild Wings the ability to control any company changes, and also the power to later franchise current locations. The company operates upscale restaurants in sixteen states. This would provide a new demographic to Buffalo Wild Wings operations. The company has a market cap of $60 million and could easily be afforded by Buffalo Wild Wings.
  • Nathan's Famous (NASDAQ:NATH) - Nathan's Famous would give Buffalo Wild Wings one of the leaders in the hot dog market. The company has over 250 locations across the United States, with the majority being owned by franchisees. The key to this deal could be the licensing power of the Nathan's brand and the potential to increase food offerings at Buffalo Wild Wings locations with Nathan's Famous hot dogs joining the menu. A buyout of the company would cost over $100 million, so Buffalo Wild Wings would have to offer shares of its stock as part of a deal, or borrow money against its debt free balance sheet. I think this deal would make sense in the long run. Perhaps a deal would lead to a wing eating contest to pair with the annual Nathan's hot dog contest.

There is also the possibility of acquiring a privately held company. Some possible acquisition targets for Buffalo Wild Wings include:

  • Smashburger - Smashburger has locations in twenty five states and is rapidly expanding. The company focuses on cooking made to order burgers with a variety of toppings available to customers. Tom Ryan, who created Smashburger, is famous for some restaurant innovations like: the McFlurry, stuffed crust pizza at Pizza Hut, and McGriddles. Locations have began to receive a cult like following and are popular around colleges. The customer base fits well with Buffalo Wild Wings and could provide a good balance of chicken and burgers.
  • Dave and Busters - Dave and Busters operates as a restaurant with a large gaming area. Sort of seen as an adult version of Chuck E. Cheese, the locations offer a unique entertainment experience while also serving food. There are 55 locations in the United States and all are company owned. Buffalo Wild Wings taking over could lead to franchises and rapid expansion into college towns. The restaurants are similar with sports bar atmosphere but could prove different enough to make a deal happen.

Along with the potential of a buyout of a small restaurant chain, exists the possibility of a merger of a large restaurant chain. A merger would create a restaurant holding company that would own the Buffalo Wild Wings brand along with one or more other restaurants. Some potential targets for a merger are below:

  • BJ's Restaurants (NASDAQ:BJRI) - BJ's trades with a market capitalization of $1.26 billion, which is close to Buffalo Wild Wings current $1.58. A merger would link together two unique brands and would offer the potential to expand the beer brewed in BJ's Brewhouse locations inside Buffalo Wild Wings locations. The company has 117 locations (as of April 3rd, 2012), with the majority (57) located in California. A partnership with Buffalo Wild Wings would allow management the ability to begin franchising BJ's Restaurant locations to rapidly expand their base count across the country.
  • Red Robin (NASDAQ:RRGB) - When thinking about what could offset Buffalo Wild Wings dependence on chicken, burgers seems like the logical answer. Red Robin could be a good restaurant to merge with Buffalo Wild Wings, linking together one of the biggest wing restaurants with a large sit down burger restaurant. There are 465 Red Robin locations across the United States (as of February 16th, 2012). The majority of the company's locations are company owned, with about 25% being franchised. A partnership with Buffalo Wild Wings could see them swaying Red Robin to sell off some of the company owned to franchisees to cut costs and increase franchise royalty fees annually.
  • Papa John's (NASDAQ:PZZA) - Perhaps the perfect combination to Buffalo Wild Wings would be a large pizza joint. Papa John's, with a market capitalization of just shy of $1 million, could prove to be the logical choice. Papa John's is the official pizza of the National Football League and has endorsement deals with athletes, including Peyton Manning. I think this would be a great partnership and could eventually land Papa John's pizza on Buffalo Wild Wings menu. This idea is a little extreme, but I still can imagine the thought of Buffalo Wild Wings expanding into pizza, since it is so popular in the United States.

There are several publicly traded companies that represent several different restaurant chains. Some examples are:

  • Yum Brands (NYSE:YUM) - Kentucky Fried Chicken, Taco Bell, Pizza Hut
  • Darden Restaurants (NYSE:DRI) - Olive Garden, Red Lobster, LongHorn Steakhouse, The Capital Grille, Bahama Breeze, Seasons 52
  • Brinker International (NYSE:EAT) - Chili's, Maggiano's
  • DineEquity (NYSE:DIN) - Ihop, Applebee's

Buffalo Wild Wings has the ability to be patient when looking at acquisition targets. The number of locations will reach 900 by the end of 2012 and is still five to seven years away from its full count target of 1500. Acquiring another strong brand would greatly diversify Buffalo Wild Wings' business and could take away some of its dependence on the price of chicken wings in the commodity markets. A buyout of a small restaurant chain is more likely than a merger, but whose to stop from wondering what could pair with Buffalo Wild Wings to create a new unique restaurant holding company.

With or without an acquisition, Buffalo Wild Wings remains a good long term bet based on growth in North America and the potential for International expansion. I have a price target of $100 by the end of 2012.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BWLD, BJRI over the next 72 hours.

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