Activist Letter to The Restaurant Group Plc
The following is a letter that I sent to the independent members of the board of directors of The Restaurant Group Plc. shortly after making an investment in the company. In this particular situation, I followed another activist, Oasis Management, into the company. My views, as expressed in the letter, were somewhat different from those of Oasis but not materially so.
The problems that I describe in the letter in regard to the board composition and the CEO’s background are a simple, but still enlightening, case study in the shortfalls demonstrated by so many public company boards.
This turned out to be short-lived as the company was sold to Apollo less than a year after I invested. The investment return was strong but I remain convinced that the company could have thrived with a restructured board and new CEO as a public company. Of course, they is likely what they got via Apollo but as a private company.
Formatting Note: This letter was copied into Substack from a Word document. Increased line spacing has occurred in the inside address and the headings for each subsequent page.
March 14, 2023
Independent Members of the Board of Directors
The Restaurant Group Plc
5-7 Marshalsea Road
London SE1 1EP
VIA ELECTRONIC MAIL
Dear Independent Board Members:
As a shareholder of The Restaurant Group Plc (“TRG” or “the Company”) I am writing to enumerate the shortfalls that I believe currently exist with the Company and to provide my view of what is necessary in order for the company to develop its full potential. Before addressing these issues, two points are in order.
First, there has been a negative impact from the pandemic. One does not have to be an expert in the restaurant industry to grasp this. While it is fair to acknowledge the negative impact of the pandemic, this should not serve as circumstances upon which blame is fixed for the current and future state of the Company.
Second, I am not writing to offer specific strategies or operating initiatives. In other words, it is not my intent to attempt to tell anyone how to run the business. With the exception of situations where the greatest value can be realized via a breakup of a company, my practice has always been to leave the finer points of the value maximization plan to the board and management. Instead, I will highlight what are, in my view, aspects of underperformance, financially and structurally, and then will offer steps that I believe need to be taken so that the Company can maximize its longer-term value.
Underperformance Issues
1. None of the independent board members has multi-chain or other restaurant experience, skills and track records.
2. None of the independent board members has experience, skills or track record of general value creation across numerous industries. The reference here is to the skills of top private equity and some hedge fund executives.
3. The CEO has no multi-chain restaurant experience nor does it appear that he has a track record as a transformative executive.
Independent Members of the Board of Directors
March 14, 2023
Page 2
4. EBITDA Per Share has declined from $0.3076 in 2018 to $0.0958 in 2023:
5. 1 Year and 5 Year stock price performance lags far behind other multi-chain restaurant companies:
Independent Members of the Board of Directors
March 14, 2023
Page 3
Laying The Foundation For Value Maximization
1. Allow Oasis Management to have a seat on the board. This will accomplish two things: First, the board will have a member with a significant stake in the company on the board. Second, this will fill the gap noted previously in this letter regarding no member of the board having general value creation experience, skill and track record.
2. Add at least two individuals to the board with high level executive restaurant (preferably multi-chain) experience, skills and track records. In 2014, activist investor Starboard Value replaced the entire 12 member board at Darden Restaurants, Inc. 6 of the new directors had restaurant industry experience and track records and of this 6, 4 had exemplary restaurant value creation track records. In addition, 2 of the new directors, Jeff Smith and Pete Feld from Starboard, brought general value creation track records to the board. The results of this board transformation (and new CEO) was extraordinary in terms of both operating and stock price performance over an extended period of time. On the following page are the Starboard directors. Please note that each director was chosen relative to the value maximization plan that Starboard had developed for Darden:
Independent Members of the Board of Directors
March 14, 2023
Page 4
3. Appoint a new CEO with multi-chain restaurant experience, skill and track record. The new board that Starboard installed at Darden replaced the incumbent CEO with Gene Lee who had a long and successful career in a variety of restaurant companies. More recently, Brinker International which owns and operates casual dining restaurant chain Chili’s among others selected Kevin Hochman who had great success resuscitating sales in the U.S. for KFC and Pizza Hut owned by Yum Brands. It is this type of executive that The Restaurant Group needs if it is to pull out of its current doldrums and maximize longer-term performance and value.
There is no disputing the underperformance issues highlighted in this letter. And, in my view, there is no disputing the foundational items listed that are mandatory for the development of the full potential of The Restaurant Group.
Sincerely yours,
Henry D. Wolfe