Diversified Restaurant Holdings

Buy Price
Holding Type
Investment Theme
Spin Off
Trade Date
December 6, 2016

Diversified is the largest franchisee of Buffalo Wild Wings (BWLD) restaurants with 64 locations. Diversified also owns 19 Bagger Dave’s burger restaurants. The company expects to operate 77 BWLD locations by the end of 2021. Diversified plans to spin-off the Bagger Dave’s locations into a separate public company by yearend 2016.

There are 26.7m shares outstanding. I purchased at $1.35 per share for a market cap of $36m. Debt is relatively high at $118m (net). The company guided to post-spin 2016 EBITDA of $21-23m for BWW only. This puts the stock at 7x EBITDA with 5.4x leverage.

So, what are the pieces worth?

Starting with Bagger Dave’s (spinco): sales are estimated to be $20-21m in 2016. Restaurant-level EBITDA margins were breakeven in 3Q16 but could improve in 2017 with cost reduction initiatives. They also closed 11 underperforming locations in 2015. Total G&A/capex estimated at $2-2.3m in 2017. The business will also be capitalized with $2m in cash. It is hard to know if they will generate any EBITDA in 2017; so let’s say it’s worth a discount to the lowest trading peer (BBRG) at 0.2x EV/Sales. That would mean $4.1m ($20.5m x 0.2x) plus $2m in cash = $6.1m or $0.23 per share.

BWW should generate $21-23m in 2016 EBITDA. Let’s assume no growth, $5.5m in interest expense and $6m in capex (management announced it has finished the heavy capex cycle and will see $5-8m over the next few years). Since there are no cash taxes and minimal working capital needs, which equates to $10m or so in free cash flow ($0.37 per share). Debt is high but management is committed to lowering towards $90m (<3x) by 2018. BWW should trade at 5-10x FCF or $1.85-3.70 per share.

All-in these pieces add up to $2+ per share in value for 50%+ upside. This could even be a 2-3 bagger.

UPDATE: Sold the majority of my position throughout 2017 (10,500 shares out of 11,600 = 90%). Average sale price has been $2.10 per share vs. all-in cost basis of $1.46 (this includes the Bagger Dave’s portion). Total return north of 40% but, in hindsight, I should have been more aggressive when shares were >$3 as I was unable to unload any at prices above that level.


Sold remaining 1,100 shares @ $1.48/sh on 3/6/18. Total return was still >40% all-in (even greater when excluding Bagger Dave’s basis).