Brazil Takeover — Probably Have to Accept it, But No Rush

by Travis Johnson, Stock Gumshoe | September 27, 2013 11:05 am

One of our longer-term huge winners just got a relatively tepid take-under bid

This morning I was surprised to see a note that the CEO and a group of insiders are trying to take Brazil Fast Food (BOBS) private — not because it’s a bad idea on their part, but because the timing is a little odd.

Brazil Fast Food is an operator of fast food restaurants, including the Bob’s chain of hamburger shops that’s Brazil’s answer to McDonald’s. Not that you cant’ also find McDonald’s in Brazil, the country is a major focus both of Arcos Dorados (ARCO), which is the master franchise holder for most of Latin America, as well as of now Brazilian-controlled Burger King (BKW). BOBS also owns franchises for KFC and Pizza Hut that contribute significantly to the company, but their profit comes largely from franchising out Bob’s restaurants and their other local concepts, including the Yoggi’s frozen yogurt chain.

And the stock has been on an incredible tear — I first suggested it many years ago at about $4.50, and it has been volatile thanks to input cost inflation (labor and food) in Brazil, and has certainly been swayed in US dollar terms by the movement in Brazil’s currency, but the company has managed the changes very well, reorganizing and constantly reacting with store closures, openings, franchises, new concepts, and profitable deals. I last looked at the stock in mid-August and concluded that it was probably fairly valued[1] at the then-current price of about $14.50, with the very reasonable chance that it could grow quickly in the buildout for the Olympics and the World Cup in Brazil in the coming years and, if the story got out among investors, could become nicely overvalued for a better selling opportunity.

Doesn’t look like we’re going to get that chance. The shares had spiked up over $17 in recent weeks, but now we’re told that the CEO and other insiders and investors representing about 75% of the shares are offering to take the company private at $15.50 a share — which seems like a bit of a discount given the fact that the shares have traded between $15.25 and $17.50 over the past month. They’ve gotten the board approval, but do require a majority of the non-affiliated shareholders — so that’s mostly small shareholders, presumably, like you and I. Will they approve the proxy at $15.50 even though it’s seven or eight percent below recent highs, thankful that the stock has climbed so dramatically over the last year? Or will they reject it because they’re holding out for a better offer?

I’m inclined to think that we won’t see a better offer than $15.50 — it’s certainly possible, there are plenty of private equity investors who would be happy to acquire a potential fast growing company like this, particularly given that they don’t have much debt, but it would have to be a substantially better offer to make the insiders want to give up the control position they already had, and any better offer would need the approval of the CEO and/or other large shareholders who have already agreed to the going-private deal. And as I noted last month, BOBS is an appealing stock still at $14.50, but not necessarily a cheap stock.

The upside potential from here is that another bidder emerges or a bunch of grousing from shareholders leads them to raise their bid a bit, the downside potential is that if the investors reject the takeover offer and there is no other bidder, the shares could easily fall by perhaps 10-20% — absent any bad operational news, I suspect the stock shouldn’t fall much more than that. I’m always a bit suspicious of small companies where the CEO tries to take the company private, because it makes me worry that they’ve been obscuring something about their plans or potential, but I don’t know any specific reason to be suspicious in this case and I don’t think it’s a rock-bottom cheapskate offer. If they had tried to take the company over last Fall in the $7-8 range, I would have absolutely cried foul and I doubt they would have gotten the deal done … but now that the company is performing well and valued reasonably, my early reaction is that I think investors are likely to sit back and take their $15.50. I’ll hold on to my shares for a bit as we see what the reaction might be — it’s a very illiquid stock, so it might take time for any possible other bids or complaints from shareholders to build up to have any impact, but I personally expect that I’ll probably be selling at $15.50 at some point over the next couple months. Not bad performance and return, since the stock is up about 250% in the 3-1/2 years since I first suggested it and we’ve just tickled off of almost a 20-year high in the stock, but it’s unfortunate that we may be missing out on something better in the years to come.

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  1. last looked at the stock in mid-August and concluded that it was probably fairly valued:
  2. Charitable Membership drive:

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