Activist Starboard has a variety of strategies to build value at Bloomin’ Brands

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An Outback Steakhouse truck sits parked outside a restaurant in New York.

Daniel Acker | Bloomberg | Getty Images

Company: Bloomin’ Brands (BLMN)

Business: Bloomin’ Brands owns and operates casual, upscale casual and fine dining restaurants in the United States and internationally. Outback Steakhouse is part of the company’s portfolio, which also includes Carrabba’s Italian Grill Bonefish Grill, and Fleming 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 filed 112 13Ds in the past and had an average return of 27.16 compared to the S&P 500’s 11.98%. Starboard’s average return on these 19 filings was 28.11 versus the S&P 500’s 11.83%. 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).

What’s happening?

Starboard took a 9.6% position in BLMN for investment purposes. Starboard, which has invested in BLMN, entered into an agreement with David C. George earlier this month. George is a retired restaurant executive, who worked in different roles at Darden over a period of nearly 17 years. 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. Bloomin’ Brands was trading at 5-6x earnings, before taxes, depreciation, and amortization, when it outperformed Darden. 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. Outback was traditionally a family-friendly restaurant, but the company is now trying to switch to a bar and grill model, with larger menus and cheaper items, in an attempt to be all things to everyone. Outback is not only more complex to run, but they are also competing in a more competitive and lower-priced bar and grill market. The result has been a loss of many long-standing customers to LongHorn Steakhouse or Texas Roadhouse who have remained true to their brand. Outback can achieve this by returning to its family-friendly, steakhouse glory. It should also move away from the complex and competitive bar and grill model. Jeff Smith from Starboard has the necessary experience. He was responsible for creating significant shareholder value at Darden and Papa John’s. Starboard’s involvement with new eyes on the board could also help restore management’s credibility in the marketplace. There are many other compelling opportunities to increase shareholder value. Bloomin’s would gain more value by selling its undervalued assets such as Fleming’s upscale steakhouse. In the high-end restaurant space, there have been many M&A deals: Ruth’s Chris has recently been acquired by Darden at 10x EBITDA. Del Frisco’s acquired for 11-12x EBITDA. Fogo De Chao bought in a confidential transaction for $1.1 billion. Fleming’s might be worth $500 million at similar EBITDA multipliers. A better opportunity may be the hidden gem of their 150 Outback Restaurants in Brazil. All of these restaurants are owned by the company and have a strong management. They are also among the most popular in the country, with wait times between 2 to 3 hours. They could sell these restaurants for an additional $750,000,000 or franchise them at a lower price but with a royalty. Bloomin’s has tried to expand by adding company owned restaurants. This is a capital-intensive and complex operation. It is possible to increase the number of franchised restaurant by franchising existing restaurants or converting them to franchises. It is not only capital-accretive for the company, but it also results in a stable and predictable cash flow which can be sold at a higher price. The company can also use the cash generated to return capital to its shareholders. This is not a new territory for Bloomin’ or Starboard. Jana Partners successfully engaged Bloomin’ in 2020 and appointed two directors to the board, John P. Gainor Jr. and Lawrence V. Jackson. Jana Partners no longer owns Bloomin’ shares and probably does not talk regularly to these two directors about the company. However, as directors appointed to the board by an activist who has a similar agenda to Starboard, it wouldn’t be surprising to find that they are somewhat in line with Starboard’s goals. Starboard has been successful at both Darden and Papa John’s, but in very different ways. Starboard’s engagement with Papa John’s, where it was invited to the board of directors and worked closely with management in order to increase shareholder value, was very friendly. It took the firm a long and contentious proxy battle to replace the entire Darden board, including the CEO. Starboard’s ability to act as an activist is demonstrated by these two cases. If management is smart, they will view Darden as a warning and Papa John’s as an opportunity. 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. The fund owns Bloomin’ Brands.