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Marcato: Refranchising Buffalo Wild Wings is 'not risky,' will create value
Mick McGuire, the founder of Marcato Capital Management, is feeling pretty confident ahead of the Buffalo Wild Wings (NASDAQ: BWLD) proxy vote next week.
On Wednesday, Institutional Shareholder Services backed three out of the four board nominees his hedge fund put forth, including McGuire himself and Scott Bergren, a former Pizza Hut CEO. ISS also backed Sam Rovit, the CEO of CTI Foods. Both Marcato and the company support Rovit as a director.
However, the proxy advisory service cast doubt on Marcato's push to boost Buffalo Wild Wings' franchised stores from 50 percent of its fleet to 90 percent, saying it was "unwise."
"Our perspective is that there is a lot of analysis to support that this is a very value-creating plan, that refranchising will unlock a lot of capital, improve margins, improve returns on capital," he said on CNBC's "Halftime Report" Thursday.
"We've also done a lot of work... to demonstrate that this is not risky," he said. "This is very feasible. There's an enormous appetite for these restaurants, both within the existing franchise system and also from operators outside of the Buffalo Wild Wings franchise system."
McGuire added that Lee Sanders, the nominee that ISS didn't include in its recommendation, would bring much needed experience to Marcato's refranchising efforts, if he were to be elected to the board.
"We don't perceive the move to a 90 percent franchisee model to be as critical as other strategic initiatives to the company's long-term growth and profitability," ISS said, in its recommendation.
ISS said that the majority of Buffalo Wild Wings' peers franchise less than one-third of their restaurants.
"Except for Applebee's (NYSE: DIN), no other casual dining restaurant chain with similar operational complexity has over 90 percent of units franchised," ISS said. Applebee's, owned by DineEquity, became 100 percent franchised in 2015, and saw its share price and operating performance flatten during and after its refranchising efforts.
Although B-Dubs could have a different outcome, ISS warned, "It is difficult to predict the outcome of such a large refranchising."
Buffalo Wild Wings told ISS it plans to boost its franchise percentage to 65 percent in the coming years.
ISS did say that there were some positive aspects of a largely franchised restaurant company. Namely, that having so many franchisees on board could help improve the quality of in-restaurant service to diners.
However, the proxy firm said having too many franchisees would diminish the amount of control Buffalo Wild Wings would have over implementing projects, like remodeling.
Still, McGuire is confident in his hedge fund's plans.
"We're optimistic that when we have the right people in the board room and they're able to analyze the right information from the right advisers that we can come to a thoughtful plan fairly quickly," he said.
Marcato, with about a 9.9 percent stake, is Buffalo Wild Wings' largest shareholder. The proxy vote will be held on June 2.
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