In late November 2017, Roark Capital Group (Roark) must decide on a last, best offer to purchase Buffalo Wild Wings (BWW) in a leveraged buyout (LBO) for $157 per share. That bid had followed a series of offers that began in August 2017, at $150 per share, after a protracted proxy fight by activist investor Marcato Capital (Marcato) ended with the resignation of BWW’s longtime CEO, Sally Smith. Marcato had accumulated a sizeable stake in BWW and several board seats as part of the proxy contest and had been pushing BWW’s board to seek a higher price. Roark must now decide if the returns to its investors merit the $157 per share offer.
This case is meant to follow cases in which the topic of residual cash flows and LBOs have been introduced. We typically assign it after teaching an earlier case that introduces that material and how private equity (PE) sponsors typically evaluate LBOs, such as “DuPont Corporation: Sale of Performance Coatings” (UVA-F-1709) (DPC). DPC provides an opportunity to evaluate an LBO from a company’s and sponsor’s perspective, but the cash flows and debt structure are simplified to focus on the conceptual differences in how the parties might view the deal. BWW focuses on the sponsor’s (Roark’s) perspective and includes a richer set of operating synergies and a more complex debt structure. The debt structure features existing debt that must be refinanced and multiple tranches of debt. As such, the case introduces students to several types of debt that are commonly used to finance LBOs and their related terms. It also introduces students to the pros and cons of LBOs of franchise-model businesses, an area of strong PE investor interest. We also typically assign a technical note, “Valuing Late-Stage Companies and Leveraged Buyouts” (UVA-F-1846), to be read in conjunction with cases that cover LBOs. The note provides a basic overview of the primary sources of financing and the metrics used to gauge LBO capital structures and a step-by-step example of an LBO valuation.
This case is appropriate for classes that survey PE investments or corporate financing classes that cover LBOs and acquisition strategies and debt and equity financing. It is assumed that students have taken valuation courses and understand residual equity cash flow valuation methods.
A spreadsheet file (UVA-F-1984X) of the case exhibits is available to help students with class preparation. An instructor file (UVA-F-1984TNX) provides the Excel-formatted spreadsheets for the exhibits in the teaching note.