On a Tuesday last May, five days after Buffalo Wild Wings held its annual meeting with shareholders, a San Francisco investment firm called to say it had purchased a sizable number of shares and wanted to meet executives.
This Friday, at the annual meeting, that investment firm wants shareholders to support its plan to effectively take control of the Golden Valley-based company, which has 1,250 restaurants and $2 billion in annual sales.
What began last spring with a series of relatively amicable meetings between top leaders of the company and the investment firm, Marcato Capital Management, descended by autumn into a bitter fight involving sprawling teams of lawyers, financial advisers and media consultants. Both sides offered compromises through winter and spring, but they couldn't agree with each other and decided in late April to let shareholders settle the company's future.
Not since investor William Ackman angled for strategic control of Target Corp. in 2009 has the fate of a large, high-profile Minnesota company come down to a such a pivotal vote.
"In Minnesota, it's hard to think about times when this has happened," said Paul Vaaler, a business and law professor at the University of Minnesota. "But nationally, this has been increasing in occurrence since 2007."
The battle has also placed on the line the future of Sally Smith, who as chief executive since 1996 grew Buffalo Wild Wings from $55 million in sales. Smith, 59, is one of the longest-tenured top executives in Minnesota and, since Buffalo Wild Wings' public offering in 2003, produced one of the best stock performances of any company in the country. Its shares rose 15-fold.
But over the last two years, the company's growth slowed, sales and earnings missed targets and shares fell about 20 percent from their July 2015 peak. The natural maturing of the business, some strategic misfires and higher food costs all factored in.
With the world awash in capital, large investors are putting more pressure on even the most profitable companies to stay that way. The number of campaigns by activist investors for board seats and corporate influence peaked in 2015 at 377 public companies in the U.S., according to FactSet Research Systems Inc., an investor services firm. It remained high last year with 316, including Marcato's run at Buffalo Wild Wings.
Marcato wants shareholders to back its slate of four new members to the nine-person board of directors. If it succeeds, it will press for the ouster of Smith in favor of a CEO who will pursue its goal of rapidly selling nearly all of the 634 company-owned restaurants to franchisees.
That would diminish the assets and operating responsibilities of the company, letting it concentrate on innovations to its sports-and-chicken concept while collecting royalties from franchisees. Marcato says the company's value would double to triple in about three or four years by making the change.
Buffalo Wild Wings has a different slate of nine directors and its executives favor selling a smaller portion of company-owned units to franchisees. The company argues that only one big restaurant chain, DineEquity Inc.'s Applebees, has gone to the extreme that Marcato seeks in selling its restaurants to franchisees and that the firm's results suffered.
The vote at Buffalo Wild Wings could boil down to the judgment of a handful of money managers. The company's 20 largest investors own nearly 70 percent of its shares. Marcato, which gradually increased its stake to 9.9 percent to become the second-largest investor after BlackRock Inc., needs other large investors on its side.
"Think of these like the swing states" in a presidential election, Vaaler said. "These are Ohio and Pennsylvania. The individual shareholders are like Rhode Island."
The vote could also be close. Three firms that examine proxy fights and advise large investors how to vote have split their recommendations. One sided with the company, one with Marcato and the third recommended some of Marcato's candidates but rejected its strategy of selling most company-owned restaurants.
With so much at stake, executives from both Buffalo Wild Wings and Marcato have said little publicly.
Representatives from both sides declined requests for interviews for this article. Smith has publicly commented on the fight only on quarterly conference calls. Mick McGuire, the founder of Marcato, appeared on CNBC twice this month to promote his effort.
Business challenges
No matter the outcome, Buffalo Wild Wings is undergoing a fundamental transition. For years, executives could deliver great results by identifying and opening new locations for its sports-and-wings concept restaurant. But all restaurant chains level off in popularity and reach at some point. After saturating the U.S. market, Buffalo Wild Wings executives confronted the need for a new strategy and, initially, considered developing other chains with pizza and tacos.
As its new openings leveled, the company also was swept up by forces affecting other casual dining companies, chiefly the overbuilding of restaurants, particularly in suburbs. And with its heavy reliance on the popularity of sports on TV, Buffalo Wild Wings has also been affected by shifting viewership patterns as fans can more readily watch games and highlights on-demand.
"We don't see an easy fix, even for an activist," Jason West, an analyst for Credit Suisse, wrote in April of the company's challenges.
McGuire bought his stake last May just as those issues were becoming more apparent to Buffalo Wild Wings shareholders. He proposed that Smith undertake the restaurant sales and find some new board members. When he raised the stake to 5 percent in August, a threshold that triggered public disclosure, he only lightly criticized executives and the board.
In October, Smith and the board responded by having two long-serving members retire and bringing on three younger members with more experience in restaurants and sports-related marketing. McGuire objected, saying he wasn't consulted.
In January, Buffalo Wild Wings said it would experiment with McGuire's strategy by selling off about 60 company-owned units to franchisees this year. Last month, the company raised the sales target to between 70 and 80 this year. The company said it would test delivery service and a smaller-size restaurant for urban neighborhoods and small towns.
No compromise
As Buffalo Wild Wings began to adopt some of McGuire's ideas, it moved to prevent him from launching a proxy battle for control of the board and company.
In February, the company offered one board seat to Marcato, but McGuire said he wanted four. The board's governance committee in March interviewed McGuire's three other board candidates and agreed to nominate one of them, Sam Rovit, chief executive of an Idaho food distribution firm, on its slate.
On April 16, McGuire offered to withdraw his slate of candidates if Buffalo Wild Wings would agree to add him to its slate along with Rovit — and announce Smith's retirement.
The company refused and, four days later, McGuire went public for the first time with a call for Smith's ouster.
On CNBC last week, McGuire said, "The issues the company faces probably would benefit from a leader with expertise in turning around and improving operations of restaurant businesses and one that has more experience growing and building a more highly franchised system."
Evan Ramstad • 612-673-4241
