Why a Red Robin Investor's Departure May Be Good News
Red Robin (RRGB) stock sank this week after the disclosure that major investor Sardar Biglari sold off his 6 percent stake in the struggling gourmet-burger chain. But Biglari's departure is really good news for Red Robin's long-term survival.
Biglari is rumored to be trying to be the next Warren Buffett -- that is, buying up troubled companies, siphoning off their cash and then using the cash to buy more companies, until he's built a mega-conglomerate a la Berkshire Hathaway (BRK). He's already snapped up two other chains, Steak 'n Shake and Western Sizzlin', and has acccumulated a nearly 6 percent stake in another troubled chain, Sonic Corp. (SNIC)
Investors got excited because Biglari's involvement meant Red Robin might be a takeover target. But being taken over by Biglari Holdings probably wouldn't be beneficial to Red Robin's long-term survival.
Why? Biglari's strategy for improving restaurants' results involves slashing expenses and capital expenditures in order to create more free cash flow for him to use to buy more companies -- in essence, treating them less as going concerns that need ongoing investment to stay vital, and more as short-term cash generators. He did it at Steak 'n Shake, accumulating $75 million to buy Western and take his other investment positions.
Being sucked dry of cash wouldn't be helpful to Red Robin just now. The 440-unit chain needs money for marketing, for buying its way out of leases at low-grossing stores, for revamping and refreshing its menu. Red Robin just picked a new CEO -- and even if I think he's the wrong guy for the job, it might be nice to give him a little time to try to improve the company's results, which have already rebounded a bit over the past six months.
Also, we don't know why Biglari dropped Red Robin. He could have just thought Sonic had more cash-cow potential and turned his attention there. He could have simply taken profits on the stock, which rose after he bought in early July. Or he might have concluded it would be hard to make Red Robin throw off enough cash to make a takeover worth his while -- most of its units are franchised, so maybe there wasn't enough real estate in the deal.
In any case, having a heavyweight investor and prospective buyer like Biglari nosing around is distracting. And it's good to have that distraction gone. Now, Red Robin is free to focus on trying to grow the company again.
Photo via Flickr user terren in Virginia
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