Why a Suggested Sale Has Shares of Del Frisco's Restaurant Popping 12% Thursday

What happened?

Shares of Del Frisco's Restaurant Group (NASDAQ: DFRG) , owner and operator of high-end restaurant concepts that include Del Frisco's Double Eagle Steakhouse, Sullivan's Steakhouse, and Del Frisco's Grille, are up 12% as of 11:51 a.m. EST after Engaged Capital urged the company to explore a sale.

So what

Engaged Capital, a hedge fund that owns just under 10% of DFRG's outstanding shares, drafted a letter that urged management to correct prior strategic missteps that deteriorated value by hiring financial advisors and a strategic review committee to explore a potential sale. The core of Engaged Capital's issue is that the restaurant chain has highly attractive dining concepts, which isn't reflected in the stock valuation. Below is a snippet from Engaged Capital's letter.

DFRG's high leverage, weak and inconsistent operational performance, and value destruction under the current strategy demand quick and decisive action by the Board. It is unacceptable for the Board to ask DFRG shareholders to bear the risk of additional declines in traffic and profitability at Double Eagle and the Grille while hoping that current management will successfully integrate and operate the Barteca concepts (defying a long history of doing otherwise) when we believe there is a far less risky option available: a sale of DFRG today.

Four wine glasses at a high-end restaurant.

Image source: Getty Images.

Now what

DFRG Chart

DFRG data by YCharts.

Indeed, DFRG has shed much of its value since its initial public offering (IPO), while a close competitor, Ruth's Hospitality Group (NASDAQ: RUTH) , has thrived in comparison. DFRG shares are up 12% today, suggesting investors agree shares are undervalued and that a sale would generate a premium to today's stock price. Engaged Capital believes it to be a seller's market within the restaurant industry, and with merger and acquisition activity recently rewarding restaurant concepts at high valuation multiples, it at least makes sense for DFRG to explore its options.

10 stocks we like better than Del Frisco's Restaurant Group
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Del Frisco's Restaurant Group wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 14, 2018

Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance , Stocks
Referenced Symbols: IPO , DFRG , RUTH

More from Motley Fool


Motley Fool

Motley Fool

Market News, Investing

Research Brokers before you trade

Want to trade FX?