Here's why Shake Shack’s recent deal with Engaged Capital may have fallen short for shareholders

1 year ago 74

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Company: Shake Shack (SHAK)

Business: Shake Shack owns, operates and licenses Shake Shack restaurants, which connection hamburgers, chicken, blistery dogs, crinkle-cut fries, shakes, frozen custard, beer, vino and different products. The institution was primitively founded successful 2001 by Danny Meyer's Union Square Hospitality Group. The institution has owned restaurants successful each portion of the U.S. and licensed locations crossed the Middle East, Asia and the United Kingdom.

Stock Market Value: $2.76B ($65.40 per share)

Activist: Engaged Capital

Percentage Ownership: 6.6%

Average Cost: n/a

Activist Commentary: Engaged Capital was founded by Glenn W. Welling, a erstwhile main and managing manager astatine Relational Investors. Engaged is an experienced and palmy tiny headdress capitalist and makes investments with a two-to-five-year concern horizon. Its benignant is holding absorption and boards accountable down closed doors.

What's happening?

Shake Shack entered a cooperation agreement with Engaged. As portion of that agreement, the edifice concatenation appointed Jeffrey D. Lawrence, erstwhile CFO of Domino's Pizza, to its committee and agreed to enactment with Engaged to place an further mutually agreed upon autarkic manager to name to the Shake Shack committee with edifice operations experience.

Behind the scenes

Shake Shack is an iconic fast-casual edifice founded by a culinary visionary, Danny Meyer. Through Union Square Hospitality Group, Meyer founded and operated immoderate of the astir critically acclaimed gourmet restaurants successful the satellite for galore years. Over the past 20 years, helium and his squad person developed 1 of the top casual hamburger concatenation restaurants successful the country, Shake Shack. They took Shake Shack public successful 2015 with 63 restaurants and person expanded to 436 restaurants successful 8 years.

Much of the elder absorption squad came from Union Square Hospitality Group and the good eating industry. Perhaps astir notably the CEO, Randy Garutti, has a agelong past moving with Meyer and was the wide manager astatine Union Square Café and Tabla successful New York City. The occupation is that the aforesaid skillset required to make a marque and tally upscale, gourmet restaurants is not the aforesaid skillset needed to run and standard a quick-service restaurant. In fact, immoderate mightiness accidental it is simply a wholly other skillset. Accordingly, edifice margins astatine Shake Shack person declined by 790 ground points since 2018 and firm instrumentality connected superior has gone from greater than 30% to little than zero today. As a nationalist company, Shake Shack has importantly underperformed some the marketplace and its peers.

The bully quality is that the hard portion – creating an iconic marque – has already been done. Not galore radical tin bash that. The casual portion – scaling an already beardown and increasing marque – has been done by innumerable people, galore of whom are disposable to bash it again. This means getting a committee that is focused connected putting unneurotic a absorption squad with acquisition operating and expanding quick-service oregon fast-casual restaurants and holding that squad accountable if they bash not succeed.

To that end, Engaged announced that it had identified 3 caller manager candidates and was pushing for the institution to clasp an operational consulting firm. One of these candidates, Kevin Reddy, has extended acquisition operating and increasing edifice chains similar Chipotle. Another campaigner is simply a co-founder of Engaged, and the different is an experienced advisor and consultant. Because the committee is staggered, lone 4 of 11 directors are up for predetermination this year. That is lone the extremity of the iceberg of the challenges Engaged faces successful this run arsenic this is arsenic atrocious of a firm governance operation arsenic we person seen successful a nationalist company.

Meyer controls conscionable nether 9% of the company's shares, but helium holds peculiar rights implicit firm actions that acold transcend his economical ownership, including (i) the quality to name 5 directors; (ii) the quality to designate 50% of the members of each committee of the board; (iii) hiring oregon firing the CEO; and (iv) expanding oregon decreasing the size of the board. In different words, this is Meyer's institution and lone helium tin marque important changes.

As a result, this is simply a crusade of persuasion for Engaged. Engaged had an accidental to spell to a proxy combat and person the shareholders regenerate 3 incumbent directors, including the CEO, with caller directors. While this would not person fixed Engaged oregon the caller committee the powerfulness to overrule thing Meyer and his incumbent directors wanted, it would person sent a beardown connection to them that the shareholders expected change. Instead, Engaged settled for 1 manager who was not adjacent 1 of the 3 they projected and a 2nd to beryllium agreed upon, which besides volition not apt beryllium 1 of the 3 the steadfast proposed.

This is simply a definite triumph for the institution arsenic determination is precise small 1 manager could bash connected a committee similar this. It allows Engaged to assertion a win, but the steadfast is inactive reliant connected Meyer's decisions, and it mislaid a invaluable accidental to nonstop a connection to management. This efficaciously changes thing and gives Engaged nary much powerfulness to institute the changes it truthful astutely identified to make shareholder value. Identifying the problems is 1 happening and having a way to hole them is wholly different. The way present is wholly controlled by management.

Ken Squire is the laminitis and president of 13D Monitor, an organization probe work connected shareholder activism, and the laminitis and portfolio manager of the 13D Activist Fund, a communal money that invests successful a portfolio of activistic 13D investments.

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