Hedge fund Marcato seeks Buffalo Wild Wings management shake-up

August 17, 2016 10:24 AM EDT

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By Svea Herbst-Bayliss

BOSTON (Reuters) - Activist hedge fund Marcato Capital Management is pushing Buffalo Wild Wings Inc to shake up its executive ranks and board, saying the casual restaurant chain's stock price could nearly triple if the company improves its business, according to a filing on Wednesday.

Marcato founder Mick McGuire said in a Aug. 17 letter to Buffalo Wings Chairman James Damian that he was "exceedingly optimistic" about the company's future but warned that "substantial changes" were essential for its success.

The company needs "the introduction of fresh talent at both the board and management levels," McGuire wrote, saying more expertise in restaurants and corporate finance is needed.

Buffalo Wings said in a statement that it will "carefully consider" the hedge fund's letter.

The company's share price is down 17.6 percent in the last 52 weeks at $161.33 at Tuesday's close, far short of the $458 Marcato said the company would be worth if it follows his plan to shift toward a more highly franchised model. The stock rose 1.5 percent to $163.69 on Wednesday.

Marcato, which owns 5.2 percent of the company and is its fourth biggest investor, has privately told executives that capital was not being used wisely by concentrating on buying out franchisees and opening more units.

Now the fund is saying publicly that management should concentrate on boosting same-store sales and raising margins at its restaurants. Most importantly, it wants management to shift strategy toward a more highly franchised business model, which analysts have said could boost the share price.

"Suboptimal capital allocation behavior is symptomatic of a larger organizational deficiency: a tendency to favor gut feel and thematic proclamations without tangible evidence or appropriate analytical support," McGuire wrote in the letter.

The letter's sharp tone signaled a ratcheting up of pressure on longtime Chief Executive Sally Smith one day after the company said it would increase its share repurchase plan by $300 million without giving details on the timing.

The hedge fund said it wants to weigh in on personnel changes, warning the company that any unilateral moves would be viewed as a "hostile act of entrenchment."

Bracing for a fight, the company has hired financial advisory firm Lazard and communications firm Joele Frank.

Marcato is also pushing for better technology and says he is concerned that management generally was not moving quickly enough. "This issue is representative of a much larger issue of management's persistent failure to execute," the letter said.

(Editing by Jeffrey Benkoe and Steve Orlofsky)

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