Company: Bloomin’ Brands (BLMN)
Business: Bloomin’ Brands owns and operates casual, upscale casual and fine dining restaurants in the United States and internationally. Its restaurant portfolio includes Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Prime Steakhouse & Wine Bar. The company’s sales are broken down by Outback (65% of sales), Carrabba’s (15% of sales), and Fleming’s and Bonefish (the remaining 20% of sales).
Stock Market Value: $2.35B ($26.98 per share)
Activist: Starboard Value
Percentage Ownership: 9.6%
Average Cost: $25.80
Activist Commentary: Starboard is a very successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. Starboard has made 112 prior 13D filings and has an average return of 27.16% versus 11.98% for the S&P 500 over the same period. Of these filings, 19 have been on companies in the consumer discretionary sector, where Starboard has an average return of 28.11% versus 11.83% for the S&P 500 over the same period. However, two of their most successful engagements in recent years were at Papa John’s International (376.8% return versus 47.34% for the S&P 500) and Darden Restaurants (63.3% return versus 13.6% for the S&P 500).
Starboard took a 9.6% position in BLMN for investment purposes. Earlier this month, Starboard entered into an advisor agreement with David C. George, a retired restaurant executive who served in various roles at Darden for nearly 17 years, with respect to the firm’s investment in BLMN. Starboard noted that it decided to retain him as an advisor in connection with this investment, following discussions with him and in view of his unique skill set, broad restaurant industry experience and extensive restaurant industry knowledge.
Behind the scenes
Bloomin’ Brands is one of the largest casual dining companies in the world and has been on Starboard’s radar since the firm invested in direct competitor Darden Restaurants back in 2013. At that time, Bloomin’ was outperforming Darden and trading at a premium multiple, but the circumstances have since flipped with Bloomin’ trading in the 5-6x earnings before interest, taxes, depreciation and amortization range. Meanwhile, Darden and Texas Roadhouse are trading at double-digit multiples.
Despite having great brands, Bloomin’ has lost the confidence of the market and fallen behind on various operational metrics, but its main problem is lagging same store sales and issues generating traffic due to somewhat of an identity crisis in how it operates the Outback restaurants. Traditionally, Outback had been a family-friendly steakhouse, but recently the company has tried to pivot to a “bar and grill” model with bigger menus and more affordable items – trying to become all things to all people. Not only is that much more operationally complex, but it has them operating in the lower price and more competitive bar and grill space. This has driven away many of their original, longstanding customers, in comparison to LongHorn Steakhouse and Texas Roadhouse, which have stayed true to what they are.
The primary opportunity here is to improve operations, mainly from a top line level but also by cutting costs. This can largely be accomplished by restoring Outback to its former family-friendly steakhouse glory and shifting away from the more complex and competitive “bar and grill” model. If there is anyone with the experience to do this, it is Starboard’s Jeff Smith, who led significant shareholder value creation at both Darden and Papa John’s. Getting Starboard involved with fresh eyes on the board would also go a long way toward restoring management’s lost credibility in the market.
There are also very compelling strategic opportunities to create shareholder value. Bloomin’ would get more value in selling some of its undervalued assets, such as Fleming’s, its upscale steakhouse business. There has been a lot of M&A in the high-end steakhouse space: Ruth’s Chris was recently acquired by Darden for 10x EBITDA; Del Frisco’s was acquired for 11-12x EBITDA; and Fogo De Chao was bought in a private transaction for a reported $1.1 billion. At similar EBITDA multiples, Fleming’s could go for $500 million. But a better opportunity might be their hidden gem in the 150 Outback restaurants in Brazil. These are all company-owned with a strong management team and are among the most popular restaurants in the country with 2- to 3-hour wait times. Selling these restaurants at a 10x EBITDA multiple could garner an additional $750 million, or they could franchise them for less money but an ongoing royalty.
In the United States, only 157 of the company’s 1,157 restaurants are franchised. Bloomin’ has been trying to grow by adding company-owned restaurants, which is capital intensive and operationally complex. There is an opportunity to increase the percentage of franchised restaurants by adding through franchising or converting company-owned restaurants to franchises. This is not only capital accretive to the company but results in a more stable and predictable level of cash flow that generally gets a higher multiple in the marketplace. Additionally, the company could use the cash it generates to return capital to shareholders.
This is not unfamiliar territory for Bloomin’ or Starboard. In 2020, Jana Partners engaged with Bloomin’ and was successful in getting two directors appointed to the board: John P. Gainor, Jr. and Lawrence V. Jackson. While Jana no longer owns shares of Bloomin’ and likely does not regularly talk to these two about about the company, as directors appointed by an activist with a similar value-creating agenda, it would not be surprising if they were somewhat like-minded to Starboard’s agenda. As for Starboard, the firm has had extensive success at both Papa John’s and Darden, but in strikingly different ways. Papa John’s was a very amicable engagement in which Starboard was invited onto the board and worked with management to create extensive shareholder value. The firm did the same at Darden, but that took a long, contentious proxy fight for them to ultimately replace the entire board and the CEO. These two situations show Starboard’s breadth and abilities as an activist. Knowing the firm, it would much prefer to go the amicable path like Papa John’s, but it will take the Darden path if forced to. If management is smart, they will view Darden as a warning, and Papa John’s as the opportunity.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Bloomin’ Brands is owned in the fund.