UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
(Rule 13d-101)
INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT
TO § 240.13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO
§ 240.13d-2(a)
(Amendment No. )1
Del Frisco’s Restaurant Group, Inc.
(Name of Issuer)
Common Stock, $0.001 par value per share
(Title of Class of Securities)
245077102
(CUSIP Number)
GLENN W. WELLING
ENGAGED CAPITAL, LLC
610 Newport Center Drive, Suite 250
Newport Beach, California 92660
(949) 734-7900
STEVE WOLOSKY
OLSHAN FROME WOLOSKY LLP
1325 Avenue of the Americas
New York, New York 10019
(212) 451-2300
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
November 26, 2018
(Date of Event Which Requires Filing of This Statement)
If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of §§ 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box ¨.
Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See § 240.13d-7 for other parties to whom copies are to be sent.
1 The remainder of this cover page shall be filled out for a reporting person’s initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 (“Act”) or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).
CUSIP NO. 245077102
1 | NAME OF REPORTING PERSON | ||||||||||||||||||
Engaged Capital Flagship Master Fund, LP | |||||||||||||||||||
2 | CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP | (a) ☐ | |||||||||||||||||
(b) ☐ | |||||||||||||||||||
3 | SEC USE ONLY | ||||||||||||||||||
4 | SOURCE OF FUNDS | ||||||||||||||||||
WC | |||||||||||||||||||
5 | CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e) | ☐ | |||||||||||||||||
6 | CITIZENSHIP OR PLACE OF ORGANIZATION | ||||||||||||||||||
CAYMAN ISLANDS | |||||||||||||||||||
NUMBER OF | 7 | SOLE VOTING POWER | |||||||||||||||||
SHARES | |||||||||||||||||||
BENEFICIALLY | 3,052,324 | ||||||||||||||||||
OWNED BY | 8 | SHARED VOTING POWER | |||||||||||||||||
EACH | |||||||||||||||||||
REPORTING | - 0 - | ||||||||||||||||||
PERSON WITH | 9 | SOLE DISPOSITIVE POWER | |||||||||||||||||
3,052,324 | |||||||||||||||||||
10 | SHARED DISPOSITIVE POWER | ||||||||||||||||||
- 0 - | |||||||||||||||||||
11 | AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON | ||||||||||||||||||
3,052,324 | |||||||||||||||||||
12 | CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES | ☐ | |||||||||||||||||
13 | PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) | ||||||||||||||||||
9.16% | |||||||||||||||||||
14 | TYPE OF REPORTING PERSON | ||||||||||||||||||
PN |
2 |
CUSIP NO. 245077102
1 | NAME OF REPORTING PERSON | ||||||||||||||||||
Engaged Capital Flagship Fund, LP | |||||||||||||||||||
2 | CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP | (a) ☐ | |||||||||||||||||
(b) ☐ | |||||||||||||||||||
3 | SEC USE ONLY | ||||||||||||||||||
4 | SOURCE OF FUNDS | ||||||||||||||||||
OO | |||||||||||||||||||
5 | CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e) | ☐ | |||||||||||||||||
6 | CITIZENSHIP OR PLACE OF ORGANIZATION | ||||||||||||||||||
DELAWARE | |||||||||||||||||||
NUMBER OF | 7 | SOLE VOTING POWER | |||||||||||||||||
SHARES | |||||||||||||||||||
BENEFICIALLY | 3,052,324 | ||||||||||||||||||
OWNED BY | 8 | SHARED VOTING POWER | |||||||||||||||||
EACH | |||||||||||||||||||
REPORTING | - 0 - | ||||||||||||||||||
PERSON WITH | 9 | SOLE DISPOSITIVE POWER | |||||||||||||||||
3,052,324 | |||||||||||||||||||
10 | SHARED DISPOSITIVE POWER | ||||||||||||||||||
- 0 - | |||||||||||||||||||
11 | AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON | ||||||||||||||||||
3,052,324 | |||||||||||||||||||
12 | CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES | ☐ | |||||||||||||||||
13 | PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) | ||||||||||||||||||
9.16% | |||||||||||||||||||
14 | TYPE OF REPORTING PERSON | ||||||||||||||||||
PN |
3 |
CUSIP NO. 245077102
1 | NAME OF REPORTING PERSON | ||||||||||||||||||
Engaged Capital Flagship Fund, Ltd. | |||||||||||||||||||
2 | CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP | (a) ☐ | |||||||||||||||||
(b) ☐ | |||||||||||||||||||
3 | SEC USE ONLY | ||||||||||||||||||
4 | SOURCE OF FUNDS | ||||||||||||||||||
OO | |||||||||||||||||||
5 | CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e) | ☐ | |||||||||||||||||
6 | CITIZENSHIP OR PLACE OF ORGANIZATION | ||||||||||||||||||
CAYMAN ISLANDS | |||||||||||||||||||
NUMBER OF | 7 | SOLE VOTING POWER | |||||||||||||||||
SHARES | |||||||||||||||||||
BENEFICIALLY | 3,052,324 | ||||||||||||||||||
OWNED BY | 8 | SHARED VOTING POWER | |||||||||||||||||
EACH | |||||||||||||||||||
REPORTING | - 0 - | ||||||||||||||||||
PERSON WITH | 9 | SOLE DISPOSITIVE POWER | |||||||||||||||||
3,052,324 | |||||||||||||||||||
10 | SHARED DISPOSITIVE POWER | ||||||||||||||||||
- 0 - | |||||||||||||||||||
11 | AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON | ||||||||||||||||||
3,052,324 | |||||||||||||||||||
12 | CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES | ☐ | |||||||||||||||||
13 | PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) | ||||||||||||||||||
9.16% | |||||||||||||||||||
14 | TYPE OF REPORTING PERSON | ||||||||||||||||||
CO |
4 |
CUSIP NO. 245077102
1 | NAME OF REPORTING PERSON | ||||||||||||||||||
Engaged Capital, LLC | |||||||||||||||||||
2 | CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP | (a) ☐ | |||||||||||||||||
(b) ☐ | |||||||||||||||||||
3 | SEC USE ONLY | ||||||||||||||||||
4 | SOURCE OF FUNDS | ||||||||||||||||||
OO | |||||||||||||||||||
5 | CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e) | ☐ | |||||||||||||||||
6 | CITIZENSHIP OR PLACE OF ORGANIZATION | ||||||||||||||||||
DELAWARE | |||||||||||||||||||
NUMBER OF | 7 | SOLE VOTING POWER | |||||||||||||||||
SHARES | |||||||||||||||||||
BENEFICIALLY | 3,328,000 | ||||||||||||||||||
OWNED BY | 8 | SHARED VOTING POWER | |||||||||||||||||
EACH | |||||||||||||||||||
REPORTING | - 0 - | ||||||||||||||||||
PERSON WITH | 9 | SOLE DISPOSITIVE POWER | |||||||||||||||||
3,328,000 | |||||||||||||||||||
10 | SHARED DISPOSITIVE POWER | ||||||||||||||||||
- 0 - | |||||||||||||||||||
11 | AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON | ||||||||||||||||||
3,328,000 | |||||||||||||||||||
12 | CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES | ☐ | |||||||||||||||||
13 | PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) | ||||||||||||||||||
9.99% | |||||||||||||||||||
14 | TYPE OF REPORTING PERSON | ||||||||||||||||||
OO |
5 |
CUSIP NO. 245077102
1 | NAME OF REPORTING PERSON | ||||||||||||||||||
Engaged Capital Holdings, LLC | |||||||||||||||||||
2 | CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP | (a) ☐ | |||||||||||||||||
(b) ☐ | |||||||||||||||||||
3 | SEC USE ONLY | ||||||||||||||||||
4 | SOURCE OF FUNDS | ||||||||||||||||||
OO | |||||||||||||||||||
5 | CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e) | ☐ | |||||||||||||||||
6 | CITIZENSHIP OR PLACE OF ORGANIZATION | ||||||||||||||||||
DELAWARE | |||||||||||||||||||
NUMBER OF | 7 | SOLE VOTING POWER | |||||||||||||||||
SHARES | |||||||||||||||||||
BENEFICIALLY | 3,328,000 | ||||||||||||||||||
OWNED BY | 8 | SHARED VOTING POWER | |||||||||||||||||
EACH | |||||||||||||||||||
REPORTING | - 0 - | ||||||||||||||||||
PERSON WITH | 9 | SOLE DISPOSITIVE POWER | |||||||||||||||||
3,328,000 | |||||||||||||||||||
10 | SHARED DISPOSITIVE POWER | ||||||||||||||||||
- 0 - | |||||||||||||||||||
11 | AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON | ||||||||||||||||||
3,328,000 | |||||||||||||||||||
12 | CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES | ☐ | |||||||||||||||||
13 | PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) | ||||||||||||||||||
9.99% | |||||||||||||||||||
14 | TYPE OF REPORTING PERSON | ||||||||||||||||||
OO |
6 |
CUSIP NO. 245077102
1 | NAME OF REPORTING PERSON | ||||||||||||||||||
Glenn W. Welling | |||||||||||||||||||
2 | CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP | (a) ☐ | |||||||||||||||||
(b) ☐ | |||||||||||||||||||
3 | SEC USE ONLY | ||||||||||||||||||
4 | SOURCE OF FUNDS | ||||||||||||||||||
OO | |||||||||||||||||||
5 | CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e) | ☐ | |||||||||||||||||
6 | CITIZENSHIP OR PLACE OF ORGANIZATION | ||||||||||||||||||
USA | |||||||||||||||||||
NUMBER OF | 7 | SOLE VOTING POWER | |||||||||||||||||
SHARES | |||||||||||||||||||
BENEFICIALLY | 3,328,000 | ||||||||||||||||||
OWNED BY | 8 | SHARED VOTING POWER | |||||||||||||||||
EACH | |||||||||||||||||||
REPORTING | - 0 - | ||||||||||||||||||
PERSON WITH | 9 | SOLE DISPOSITIVE POWER | |||||||||||||||||
3,328,000 | |||||||||||||||||||
10 | SHARED DISPOSITIVE POWER | ||||||||||||||||||
- 0 - | |||||||||||||||||||
11 | AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON | ||||||||||||||||||
3,328,000 | |||||||||||||||||||
12 | CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES | ☐ | |||||||||||||||||
13 | PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) | ||||||||||||||||||
9.99% | |||||||||||||||||||
14 | TYPE OF REPORTING PERSON | ||||||||||||||||||
IN |
7 |
CUSIP NO. 245077102
The following constitutes the Schedule 13D filed by the undersigned (the “Schedule 13D”).
Item 1. | Security and Issuer. |
This statement relates to the common stock, $0.001 par value per share (the “Shares”), of Del Frisco’s Restaurant Group, Inc. , a Delaware corporation (the “Issuer”). The address of the principal executive offices of the Issuer is 2900 Ranch Trail, Irving, Texas 75063.
Item 2. | Identity and Background. |
(a) | This statement is filed by: |
(i) | Engaged Capital Flagship Master Fund, LP (“Engaged Capital Flagship Master”), a Cayman Islands exempted limited partnership, with respect to the Shares directly and beneficially owned by it; |
(ii) | Engaged Capital Flagship Fund, LP (“Engaged Capital Fund”), a Delaware limited partnership, as a feeder fund of Engaged Capital Flagship Master; |
(iii) | Engaged Capital Flagship Fund, Ltd. (“Engaged Capital Offshore”), a Cayman Islands exempted company, as a feeder fund of Engaged Capital Flagship Master; |
(iv) | Engaged Capital, LLC, a Delaware limited liability company (“Engaged Capital”), as the general partner and investment adviser of Engaged Capital Flagship Master and the investment adviser of a certain managed account (the “Engaged Capital Account”); |
(v) | Engaged Capital Holdings, LLC, a Delaware limited liability company (“Engaged Holdings”), as the managing member of Engaged Capital; and |
(vi) | Glenn W. Welling, as the Founder and Chief Investment Officer (“CIO”) of Engaged Capital and the sole member of Engaged Holdings. |
Each of the foregoing is referred to as a “Reporting Person” and collectively as the “Reporting Persons.” Each of the Reporting Persons is party to that certain Joint Filing Agreement, as further described in Item 6. Accordingly, the Reporting Persons are hereby filing a joint Schedule 13D.
(b) The address of the principal office of each of Engaged Capital Flagship Master and Engaged Capital Offshore is c/o Conyers Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands. The address of the principal office of each of Engaged Capital Fund, Engaged Capital, Engaged Holdings and Mr. Welling is 610 Newport Center Drive, Suite 250, Newport Beach, California 92660. The officers and directors of Engaged Capital Offshore and their principal occupations and business addresses are set forth on Schedule A and are incorporated by reference in this Item 2.
8 |
CUSIP NO. 245077102
(c) The principal business of Engaged Capital Flagship Master is investing in securities. Each of Engaged Capital Fund and Engaged Capital Offshore is a private investment partnership that serves as a feeder fund of Engaged Capital Flagship Master. Engaged Capital is a registered investment advisor and serves as the investment adviser to each of Engaged Capital Flagship Master, Engaged Capital Fund, Engaged Capital Offshore and the Engaged Capital Account. Engaged Capital is also the general partner of each of Engaged Capital Flagship Master and Engaged Capital Fund. Engaged Holdings serves as the managing member of Engaged Capital. Mr. Welling is the Founder and CIO of Engaged Capital, the sole member of Engaged Holdings and a director of Engaged Capital Offshore.
(d) No Reporting Person, nor any person listed on Schedule A, annexed hereto, has, during the last five years, been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors).
(e) No Reporting Person, nor any person listed on Schedule A, annexed hereto, has during the last five years, been party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws.
(f) Engaged Capital Flagship Master and Engaged Capital Offshore are organized under the laws of the Cayman Islands. Engaged Capital Fund, Engaged Capital and Engaged Holdings are organized under the laws of the State of Delaware. Mr. Welling is a citizen of the United States of America. The citizenship of the persons listed on Schedule A is set forth therein.
Item 3. | Source and Amount of Funds or Other Consideration. |
The Shares purchased by Engaged Capital Flagship Master and held in the Engaged Capital Account were purchased with working capital (which may, at any given time, include margin loans made by brokerage firms in the ordinary course of business). The aggregate purchase price of the 3,052,324 Shares beneficially owned by Engaged Capital Flagship Master is approximately $20,655,608, including brokerage commissions. The aggregate purchase price of the 275,676 Shares held in the Engaged Capital Account is approximately $1,865,298, including brokerage commissions.
Item 4. | Purpose of Transaction. |
The Reporting Persons purchased the Shares based on the Reporting Persons’ belief that the Shares, when purchased, were undervalued and represented an attractive investment opportunity. Depending upon overall market conditions, other investment opportunities available to the Reporting Persons, and the availability of Shares at prices that would make the purchase or sale of Shares desirable, the Reporting Persons may endeavor to increase or decrease their position in the Issuer through, among other things, the purchase or sale of Shares on the open market or in private transactions or otherwise, on such terms and at such times as the Reporting Persons may deem advisable.
On December 6, 2018, Engaged Capital issued a public letter to the Issuer’s Board of Directors (the “Board”) calling on the Board to immediately commence a process to explore strategic alternatives. The Issuer owns a number of highly attractive dining concepts, the value of which is not reflected in the Share price, and Engaged Capital believes that there are multiple parties interested in acquiring the Issuer, either in pieces or in its entirety, at valuations that would provide shareholders a meaningful premium to the current Share price.
9 |
CUSIP NO. 245077102
In the letter, Engaged Capital raised its concerns with the continued destruction of shareholder value and the Issuer’s significant short- and long-term underperformance versus its peers, the restaurant industry and the broader market. Engaged Capital explained its belief that the Board’s decision to approve the acquisition of Barteca Restaurant Group (“Barteca”), coupled with management’s weak operating performance, are the primary reasons for the Issuer’s underperformance. Troublingly, it has come to Engaged Capital’s attention that the acquisition of Barteca was likely defensive in nature, intended to dissuade an already interested bidder (or bidders) from making an offer to acquire the Issuer. Engaged Capital noted that the environment for M&A in the restaurant industry has rarely been more active than it is today and explained its belief that it is imperative for the Board to take advantage of this window by forming a strategic review committee of the independent directors, hiring advisors and beginning a process to explore strategic alternatives. Engaged Capital also explained the need for shareholder representation on the Board to oversee the process in order to give shareholders confidence that the strategic review process will be objective and focused on providing the most attractive risk-adjusted return for shareholders. Engaged Capital concluded by making clear that it is prepared to meet with members of management and the Board to discuss the contents of its letter, and that it intends to monitor developments at the Issuer closely and will not hesitate to take any action that it believes is necessary to protect the best interests of the Issuer’s shareholders. The full text of the letter is attached hereto as Exhibit 99.1 and is incorporated herein by reference.
No Reporting Person has any present plan or proposal which would relate to or result in any of the matters set forth in subparagraphs (a) - (j) of Item 4 of Schedule 13D except as set forth herein or such as would occur upon or in connection with completion of, or following, any of the actions discussed herein. The Reporting Persons intend to review their investment in the Issuer on a continuing basis. Depending on various factors including, without limitation, the Issuer’s financial position and investment strategy, the price levels of the Shares, conditions in the securities markets and general economic and industry conditions, the Reporting Persons may in the future take such actions with respect to their investment in the Issuer as they deem appropriate including, without limitation, engaging in additional communications with management and the Board of the Issuer, engaging in discussions with stockholders of the Issuer and others about the Issuer and the Reporting Persons’ investment, making proposals to the Issuer concerning changes to the capital allocation strategy, capitalization, ownership structure, including a sale of the Issuer as a whole or in parts, Board structure (including Board composition) or operations of the Issuer, purchasing additional Shares, selling some or all of their Shares, engaging in short selling of or any hedging or similar transaction with respect to the Shares, or changing their intention with respect to any and all matters referred to in Item 4.
Item 5. | Interest in Securities of the Issuer. |
(a) The aggregate percentage of Shares reported owned by each person named herein is based upon 33,321,795 Shares outstanding as of November 6, 2018, which is the total number of Shares outstanding as reported in the Issuer’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2018.
As of the close of business on December 5, 2018, Engaged Capital Flagship Master beneficially owned 3,052,324 Shares, constituting approximately 9.16% of the Shares outstanding. Each of Engaged Capital Fund and Engaged Capital Offshore, as feeder funds of Engaged Capital Flagship Master, may be deemed to beneficially own the 3,052,324 Shares owned by Engaged Capital Flagship Master, constituting approximately 9.16% of the Shares outstanding.
As of the close of business on December 5, 2018, 275,676 Shares were held in the Engaged Capital Account, constituting less than 1% of the Shares outstanding.
10 |
CUSIP NO. 245077102
Engaged Capital, as the general partner and investment adviser of Engaged Capital Flagship Master and the investment adviser of the Engaged Capital Account, may be deemed to beneficially own the 3,328,000 Shares owned in the aggregate by Engaged Capital Flagship Master and held in the Engaged Capital Account, constituting approximately 9.99% of the Shares outstanding. Engaged Holdings, as the managing member of Engaged Capital, may be deemed to beneficially own the 3,328,000 Shares owned in the aggregate by Engaged Capital Flagship Master and held in the Engaged Capital Account, constituting approximately 9.99% of the Shares outstanding. Mr. Welling, as the Founder and CIO of Engaged Capital and sole member of Engaged Holdings, may be deemed to beneficially own the 3,328,000 Shares owned in the aggregate by Engaged Capital Flagship Master and held in the Engaged Capital Account, constituting approximately 9.99% of the Shares outstanding.
Each Reporting Person, as a member of a “group” with the other Reporting Persons for the purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), may be deemed the beneficial owner of the Shares directly owned by the other Reporting Persons. The filing of this Schedule 13D shall not be deemed an admission that the Reporting Persons are, for purposes of Section 13(d) of the Exchange Act, the beneficial owners of any securities of the Issuer he or it does not directly own. Each of the Reporting Persons specifically disclaims beneficial ownership of the securities reported herein that he or it does not directly own.
(b) By virtue of their respective positions with Engaged Capital Flagship Master, each of Engaged Capital Fund, Engaged Capital Offshore, Engaged Capital, Engaged Holdings and Mr. Welling may be deemed to have sole power to vote and dispose of the Shares reported owned by Engaged Capital Flagship Master.
By virtue of their respective positions with the Engaged Capital Account, each of Engaged Capital, Engaged Holdings and Mr. Welling may be deemed to have sole power to vote and dispose of the Shares held in the Engaged Capital Account.
(c) Schedule B annexed hereto lists all transactions in securities of the Issuer by the Reporting Persons during the past 60 days. All of such transactions were effected in the open market.
(d) No person other than the Reporting Persons is known to have the right to receive, or the power to direct the receipt of dividends from, or proceeds from the sale of, the Shares.
(e) Not applicable.
Item 6. | Contracts, Arrangements, Understandings or Relationships With Respect to Securities of the Issuer. |
On December 6, 2018 the Reporting Persons entered into a Joint Filing Agreement in which the Reporting Persons agreed to the joint filing on behalf of each of them of statements on Schedule 13D with respect to the securities of the Issuer to the extent required by applicable law. The Joint Filing Agreement is attached hereto as Exhibit 99.2 and is incorporated herein by reference.
Other than as described herein, there are no contracts, arrangements, understandings or relationships among the Reporting Persons, or between the Reporting Persons and any other person, with respect to the securities of the Issuer.
11 |
CUSIP NO. 245077102
Item 7. | Material to be Filed as Exhibits. |
99.1 | Letter to the Board, dated December 6, 2018. |
99.2 | Joint Filing Agreement, dated December 6, 2018. |
12 |
CUSIP NO. 245077102
SIGNATURES
After reasonable inquiry and to the best of his knowledge and belief, the undersigned certifies that the information set forth in this statement is true, complete and correct.
Dated: December 6, 2018
Engaged Capital Flagship Master Fund, LP | |||
By: | Engaged Capital, LLC General Partner | ||
By: | /s/ Glenn W. Welling | ||
Name: | Glenn W. Welling | ||
Title: | Founder and Chief Investment Officer |
Engaged Capital Flagship Fund, LP | |||
By: | Engaged Capital, LLC General Partner | ||
By: | /s/ Glenn W. Welling | ||
Name: | Glenn W. Welling | ||
|
Title: | Founder and Chief Investment Officer |
Engaged Capital Flagship Fund, Ltd. | |||
By: | /s/ Glenn W. Welling | ||
Name: | Glenn W. Welling | ||
Title: | Director |
Engaged Capital, LLC | |||
By: | /s/ Glenn W. Welling | ||
Name: | Glenn W. Welling | ||
|
Title: | Founder and Chief Investment Officer |
Engaged Capital Holdings, LLC | |||
By: | /s/ Glenn W. Welling | ||
Name: | Glenn W. Welling | ||
Title: | Sole Member |
/s/ Glenn W. Welling | |
Glenn W. Welling |
13 |
CUSIP NO. 245077102
SCHEDULE A
Directors and Officers of Engaged Capital Flagship Fund, Ltd.
Name and Position | Principal Occupation | Principal Business Address | Citizenship |
Glenn W. Welling Director*
|
|||
Mark John Cook Director |
Company Director | 3rd Floor Harbour Centre Grand Cayman
|
Australia |
Mark Victor Murray Director |
Company Director |
2F Landmark Square 64 Earth Close Seven Mile Beach Grand Cayman Cayman Islands
|
United Kingdom & British Overseas Territory Citizen (Cayman Islands) |
*Mr. Welling is a Reporting Person and, as such, the information with respect to Mr. Welling called for by Item 2 of Schedule 13D is set forth therein.
CUSIP NO. 245077102
SCHEDULE B
Transactions in Securities of the Issuer During the Past 60 Days
Nature of the Transaction |
Securities Purchased/(Sold) |
Price Per Share($) |
Date of Purchase / Sale |
Engaged Capital Flagship Master Fund, LP
Purchase of Common Stock | 22,902 | 6.1417 | 11/05/2018 |
Purchase of Common Stock | 21,895 | 6.2147 | 11/05/2018 |
Purchase of Common Stock | 36,937 | 6.3794 | 11/07/2018 |
Purchase of Common Stock | 37,576 | 6.3210 | 11/07/2018 |
Purchase of Common Stock | 67,277 | 6.4466 | 11/07/2018 |
Purchase of Common Stock | 73,505 | 6.9847 | 11/08/2018 |
Purchase of Common Stock | 53,749 | 6.9992 | 11/08/2018 |
Purchase of Common Stock | 75,388 | 6.9034 | 11/09/2018 |
Purchase of Common Stock | 4,261 | 6.7326 | 11/12/2018 |
Purchase of Common Stock | 150,990 | 6.7249 | 11/12/2018 |
Purchase of Common Stock | 6,050 | 6.7354 | 11/12/2018 |
Purchase of Common Stock | 36,664 | 6.6379 | 11/12/2018 |
Purchase of Common Stock | 135,092 | 6.8489 | 11/13/2018 |
Purchase of Common Stock | 24,550 | 6.7797 | 11/13/2018 |
Purchase of Common Stock | 2,383 | 6.8742 | 11/13/2018 |
Purchase of Common Stock | 218,300 | 6.7679 | 11/14/2018 |
Purchase of Common Stock | 275,196 | 6.2999 | 11/15/2018 |
Purchase of Common Stock | 99,117 | 6.1702 | 11/16/2018 |
Purchase of Common Stock | 72,550 | 6.3343 | 11/16/2018 |
Purchase of Common Stock | 54,655 | 6.6897 | 11/19/2018 |
Purchase of Common Stock | 28,500 | 6.5997 | 11/20/2018 |
Purchase of Common Stock | 26,500 | 6.4592 | 11/20/2018 |
Purchase of Common Stock | 197,000 | 6.8087 | 11/26/2018 |
Purchase of Common Stock | 50,462 | 6.8941 | 11/26/2018 |
Purchase of Common Stock | 91,717 | 6.8766 | 11/26/2018 |
Purchase of Common Stock | 20,601 | 6.7268 | 11/26/2018 |
Purchase of Common Stock | 65,231 | 6.9833 | 11/27/2018 |
Purchase of Common Stock | 61,152 | 6.9276 | 11/27/2018 |
Purchase of Common Stock | 25,950 | 6.9322 | 11/27/2018 |
Purchase of Common Stock | 2,135 | 6.8693 | 11/27/2018 |
Purchase of Common Stock | 68,790 | 6.8821 | 11/27/2018 |
Purchase of Common Stock | 66,300 | 6.9925 | 11/28/2018 |
Purchase of Common Stock | 154,750 | 6.8525 | 11/29/2018 |
Purchase of Common Stock | 15,500 | 6.6865 | 11/30/2018 |
Purchase of Common Stock | 143,350 | 6.8815 | 11/30/2018 |
Purchase of Common Stock | 109,550 | 6.9931 | 12/03/2018 |
Purchase of Common Stock | 1,400 | 6.9593 | 12/03/2018 |
Purchase of Common Stock | 4,731 | 6.8389 | 12/03/2018 |
Purchase of Common Stock | 391,883 | 7.0350 | 12/04/2018 |
Purchase of Common Stock | 22,864 | 6.9873 | 12/04/2018 |
Purchase of Common Stock | 29,091 | 6.9524 | 12/04/2018 |
Purchase of Common Stock | 5,830 | 7.0211 | 12/04/2018 |
CUSIP NO. 245077102
Engaged Capital, LLC
(Through the Engaged Capital Account)
Purchase of Common Stock | 2,098 | 6.1417 | 11/05/2018 |
Purchase of Common Stock | 2,005 | 6.2147 | 11/05/2018 |
Purchase of Common Stock | 6,135 | 6.4466 | 11/07/2018 |
Purchase of Common Stock | 3,363 | 6.3794 | 11/07/2018 |
Purchase of Common Stock | 3,421 | 6.3210 | 11/07/2018 |
Purchase of Common Stock | 4,932 | 6.9992 | 11/08/2018 |
Purchase of Common Stock | 6,736 | 6.9847 | 11/08/2018 |
Purchase of Common Stock | 6,864 | 6.9034 | 11/09/2018 |
Purchase of Common Stock | 388 | 6.7326 | 11/12/2018 |
Purchase of Common Stock | 3,336 | 6.6379 | 11/12/2018 |
Purchase of Common Stock | 13,738 | 6.7249 | 11/12/2018 |
Purchase of Common Stock | 450 | 6.7354 | 11/12/2018 |
Purchase of Common Stock | 12,276 | 6.8489 | 11/13/2018 |
Purchase of Common Stock | 217 | 6.8742 | 11/13/2018 |
Purchase of Common Stock | 2,278 | 6.7797 | 11/13/2018 |
Purchase of Common Stock | 19,640 | 6.7679 | 11/14/2018 |
Purchase of Common Stock | 24,941 | 6.2999 | 11/15/2018 |
Purchase of Common Stock | 6,544 | 6.3343 | 11/16/2018 |
Purchase of Common Stock | 9,231 | 6.1702 | 11/16/2018 |
Purchase of Common Stock | 5,345 | 6.6897 | 11/19/2018 |
Purchase of Common Stock | 1,500 | 6.5997 | 11/20/2018 |
Purchase of Common Stock | 2,525 | 6.4592 | 11/20/2018 |
Purchase of Common Stock | 4,549 | 6.8941 | 11/26/2018 |
Purchase of Common Stock | 1,846 | 6.7268 | 11/26/2018 |
Purchase of Common Stock | 17,665 | 6.8087 | 11/26/2018 |
Purchase of Common Stock | 8,283 | 6.8766 | 11/26/2018 |
Purchase of Common Stock | 5,889 | 6.9833 | 11/27/2018 |
Purchase of Common Stock | 2,250 | 6.9322 | 11/27/2018 |
Purchase of Common Stock | 5,520 | 6.9276 | 11/27/2018 |
Purchase of Common Stock | 6,210 | 6.8821 | 11/27/2018 |
Purchase of Common Stock | 6,001 | 6.9925 | 11/28/2018 |
Purchase of Common Stock | 14,440 | 6.8525 | 11/29/2018 |
Purchase of Common Stock | 1,267 | 6.6865 | 11/30/2018 |
Purchase of Common Stock | 12,950 | 6.8815 | 11/30/2018 |
Purchase of Common Stock | 99 | 6.9593 | 12/03/2018 |
Purchase of Common Stock | 9,886 | 6.9931 | 12/03/2018 |
Purchase of Common Stock | 698 | 6.8389 | 12/03/2018 |
Purchase of Common Stock | 478 | 7.0211 | 12/04/2018 |
Purchase of Common Stock | 2,690 | 6.9524 | 12/04/2018 |
Purchase of Common Stock | 2,127 | 6.9873 | 12/04/2018 |
Purchase of Common Stock | 34,865 | 7.0350 | 12/04/2018 |
Exhibit 99.1
ENGAGED CAPITAL URGES DEL FRISCO’S RESTAURANT GROUP, INC.
TO EXPLORE STRATEGIC ALTERNATIVES
· | DFRG’s compelling dining concepts are undervalued by public shareholders |
· | The Board’s approval of the Barteca acquisition, compounded by management’s weak operating performance, has destroyed substantial shareholder value |
· | A sale of DFRG today, in whole or in parts, presents the most attractive risk-adjusted return for shareholders |
Newport Beach, CA, December 6, 2018 - Engaged Capital, LLC, an investment firm specializing in enhancing the value of small and mid-cap North American equities, today sent a letter to the Board of Directors of Del Frisco’s Restaurant Group, Inc. (NASDAQ:DFRG).
The full text of the letter follows:
December 6, 2018
Del Frisco’s Restaurant Group, Inc.
2900 Ranch Trail
Irving, Texas 75063
Attn: Board of Directors
Ladies and Gentlemen:
Engaged Capital, LLC (together with its affiliates, “Engaged Capital” or “we”) is a significant shareholder of Del Frisco’s Restaurant Group, Inc. (“DFRG” or the “Company”) and currently beneficially owns 3,328,000 shares, representing approximately 9.99% ownership of the Company. We acquired a position in the Company because we believe shares in DFRG’s high quality dining concepts are currently trading well below their intrinsic value. Furthermore, we believe there are numerous parties interested in acquiring the Company’s concepts at valuations that would deliver a significant premium to the current share price and be very attractive to the Company’s shareholders. Accordingly, we see a substantial opportunity for the Company’s board of directors (the “Board”) to correct recent strategic missteps and create shareholder value by (1) proactively appointing shareholder representatives to the Board, (2) hiring financial advisors, and (3) forming a strategic review committee consisting of the independent members of the Board to oversee and manage a process to evaluate strategic alternatives. Given DFRG’s short- and long-term underperformance, checkered operational execution, and high financial leverage, it is incumbent upon the members of the Board to fulfill their fiduciary obligations to DFRG shareholders by initiating a process to explore all alternatives to create shareholder value.
DFRG’s Concepts Are Attractive
Despite DFRG’s poor operating and share-price performance, it owns a number of highly attractive dining concepts, the value of which is clearly not reflected in the Company’s enterprise valuation.
Engaged Capital LLC 610 Newport Center Drive Suite 250 Newport Beach, CA 92660 Tel 949-734-7900 Fax 949-734-7901
DFRG’s Double Eagle concept is one of the premiere high-end dining concepts in the U.S. With AUV’s in excess of $14 million per restaurant, restaurant-level EBITDA margins of 25%,1 and the potential to triple the unit count in the U.S., we believe the Double Eagle is an iconic brand with staying power.
Barcelona’s tapas and wine bar concept is a differentiated asset in the restaurant industry. Barcelona’s beverage mix of 46%2 and consistently positive same store sales provide the foundation for an extended runway of profitable growth.
Finally, we believe bartaco has the potential to be a blockbuster concept. With outstanding restaurant-level EBITDA margins of 28%,3 modest unit capital investment costs, and the potential to increase the unit count 10-fold over time, we believe the sky is the limit for bartaco if the growth strategy can be properly executed.
Given these attractive assets, we believe there are multiple parties interested in acquiring DFRG today, either in pieces or in its entirety, at valuations that would provide shareholders a meaningful premium to the current share price.
DFRG Has Underperformed
Despite these high-quality concepts, DFRG has failed to create shareholder value. Simply put, DFRG’s performance as a public company has been abysmal. Since its IPO in 2012, DFRG has declined by 47%, while RUTH, its closest peer, has nearly quadrupled in value. Over any reasonable short- or long-term time frame, DFRG has underperformed its peers, the restaurant industry, and the broader market.
Source: FactSet. Data as of 11/30/2018
1 Trailing twelve months, per Company filings
2 Per Company filings
3 Trailing twelve months, per Company filings
DFRG’s Underperformance Magnified by Board Missteps
The most significant driver of DFRG’s underperformance vs. its peers was the Board’s decision to approve the acquisition of Barteca Restaurant Group (“Barteca”), which was announced on May 7, 2018 and closed on June 27, 2018. It has been our experience that the risk associated with acquisitions increases exponentially with the size of the deal and the multiple paid. On both metrics, the Barteca acquisition was extremely risky. Barteca was a large acquisition: DFRG committed to pay $325 million for Barteca relative to DFRG’s enterprise value of $338 million on the date of the announcement.4 Furthermore, Barteca was an expensive acquisition: the purchase price represented a multiple of 15.7x TTM EBITDA5 as compared to DFRG’s trading multiple of 8.3x TTM EBITDA.6 Not surprisingly, as investors digested the risk associated with the acquisition, DFRG shares underperformed, declining 17% from the announcement date to the closing date, and one sell-side analyst downgraded the stock, titling his note “Acquisition Clouds ‘18/19, Increases Balance Sheet Risk and Valuation.”7
Unfortunately for DFRG shareholders, the already-high risk associated with the Barteca acquisition was compounded by the Board’s lackadaisical oversight of the financing and the questionable strategic rationale for the deal. As a result, the share price underperformance (and analyst downgrades) that began when the acquisition was announced only accelerated post-close.
First, the Board has approved a strategy, under which the acquisition of Barteca was justified, that is fundamentally flawed, we believe. CEO Norman Abdallah has described DFRG “as a public PE company that invests into brands.”8 However, nothing in DFRG’s operational track record supports the idea that DFRG has any core competency in operating multiple brands. Of the three brands DFRG operated prior to the Barteca acquisition, only the performance of Double Eagle could be deemed as acceptable. DFRG’s other brands, the Grille and Sullivan’s, have experienced years of margin compression and negative same store traffic. In fact, for Sullivan’s this recently culminated in the sale of the concept at a significant discount to the book value9 of the assets. At the Grille, margin pressure and traffic declines have forced management to reverse from past positioning of the brand as a growth concept, instead closing multiple locations in 2018 and capitulating to open no new units in 2019 and 2020.
Second, it is inarguable that Barteca is less valuable under DFRG’s ownership than as a standalone concept. We believe the most important value driver for the Barcelona and bartaco concepts is rapid unit growth. Ordinarily, one of the synergies resulting from a more mature company acquiring a high growth concept would be accelerated growth due to increased access to capital and cash flows from the existing business. However, DFRG’s high leverage resulting from the Barteca acquisition has instead forced management to reduce the amount of capital investment planned for Barcelona and bartaco in 2019 from Barteca’s plans as a standalone concept,10 effectively lowering its growth outlook and therefore value.
4 Data per FactSet
5 Data per DFRG filings
6 Data per FactSet
7 Brian Vaccaro, Raymond James, May 8, 2018
8 Q1:2018 DFRG earnings call
9 Per DFRG Form 10-Q filed 11/09/2018
10 “Following ongoing reviews of our development pipeline, we have cut our CapEx budget for 2019 relative to our original plans. This moderates the more aggressive acceleration of Barcelona and Barteca openings planned by previous ownership…” – Norman J. Abdallah, CEO, Q3:2018 earnings conference call
Third, the Board’s decision to sign the agreement to acquire Barteca prior to securing all necessary financing for the deal cost shareholders dearly. Upon the close of the Barteca acquisition in June, DFRG entered into a $390 million term loan agreement exorbitantly priced at LIBOR + 475bps. Then on August 6th, DFRG issued 12.9 million shares to raise $98 million at a price per share (net of commissions and expenses) of $7.56, a 52% discount to DFRG’s closing price ($15.65) on the day the acquisition was announced. Finally, despite utilizing the proceeds from the equity raise to pay down the initial term loans, on August 27th DFRG secured an additional $18 million in term loans and re-syndicated the remaining balance of the initial term loan at an even higher interest rate of LIBOR + 600bps. The unexplained three-month delay in raising equity from the date of the deal announcement, and the subsequent refinancing of the term loan at a higher interest rate just two months after securing it, represent permanent shareholder value destruction at the hands of the Board.
Finally, it has come to our attention that the acquisition of Barteca was likely defensive in nature, intended to dissuade an already interested bidder (or bidders) from making an offer to acquire DFRG. Unfortunately, this scenario provides an explanation for the Board’s otherwise baffling decision to rush to announce the acquisition of two totally unrelated restaurant concepts without first securing financing for the deal. Of course, this “reason” only benefits current management and is of no benefit to DFRG shareholders. Approving a large acquisition to stave off a potential sale of a company is one of the most shareholder-unfriendly actions a board can take and causes us and all other shareholders to question whether this Board understands its fiduciary duties.
DFRG’s Operational Performance is Troubling
While the Board’s ineffective oversight of DFRG’s strategy and capital deployment is concerning enough, the same can be said about the Board’s oversight of management. DFRG’s poor operational execution over the last few years makes the continuation of the current strategy unacceptably risky for shareholders. Weak execution can be seen by simply looking at the Grille and Double Eagle same store sales and margin trends, which have not kept pace with relevant public comparables.
Source: DRI, RUTH, and DFRG company filings and Engaged estimates. DRI same store sales for CY2015, CY2016 and CY2017 calculated as the average same store sales reported for the trailing four quarters ending 11/29/2015, 11/27/2016, and 11/26/2017, respectively. DRI same store sales for Q1:18, Q2:18, and Q3:18 correspond to DRI’s reported same store sales for DRI’s FQ3:18, FQ4:18, and FQ1:19.
Not surprisingly, analysts covering DFRG lack confidence that the current management team will execute upon its long-term growth and profitability plans. Current consensus revenue and EBITDA estimates for DFRG for 2021 are $653 million and $92 million, well below management’s publicly-communicated targets for revenue and EBITDA of $700 million and $100 million, respectively. This lack of confidence is further reflected in DFRG’s discounted trading multiple (8.8x EV/ fwd. EBITDA) relative to peers (RUTH: 10.4x, DRI 11.8x).11
As a result, we are convinced the status quo is not a viable path to value creation for DFRG shareholders.
DFRG’s Board Must Act
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.
The environment for M&A in the restaurant industry has rarely been more active than it is today. Numerous large, well-capitalized private equity firms and strategic acquirers have been acquiring restaurant concepts at high valuation multiples. We experienced this first-hand at Jamba, which was recently acquired by Roark Capital. Simply put, we believe it is a seller’s market. It is imperative that the Board takes advantage of this window by forming a strategic review committee of the independent directors, hiring advisors, and beginning a process to explore strategic alternatives immediately.
Furthermore, shareholder representation is necessary to oversee this process. Based on the actions of the Board to date, we lack the confidence that the Board, as currently constituted, has the ability to fulfill its responsibilities as our fiduciaries. Without shareholder representation on the Board, DFRG shareholders cannot have the confidence that a strategic review process will be objectively focused on providing the most attractive risk-adjusted return for shareholders. Finally, if management or the Board takes further steps to entrench themselves or discourage potential acquirers (as it appears to have done previously) or otherwise ignores the will of shareholders (a dereliction of its fiduciary duty), shareholders will have no choice but to hold each and every director personally liable for such actions.
We stand ready to meet with members of management and the Board to discuss these important matters in greater detail, and we advise them that we intend to monitor developments at the Company closely and will not hesitate to take any action that we believe is necessary to protect the best interests of the Company’s shareholders.
Sincerely yours,
Glenn W. Welling
Principal and Chief Investment Officer
11 Data per FactSet as of 11/30/2018
About Engaged Capital:
Engaged Capital, LLC (“Engaged Capital”) was established in 2012 by a group of professionals with significant experience in activist investing in North America and was seeded by Grosvenor Capital Management, L.P., one of the oldest and largest global alternative investment managers. Engaged Capital is a limited liability company owned by its principals and formed to create long-term shareholder value by bringing an owner’s perspective to the managements and boards of undervalued public companies. Engaged Capital’s efforts and resources are dedicated to a single investment style, “Constructive Activism” with a focus on delivering superior, long-term, risk-adjusted returns for investors. Engaged Capital is based in Newport Beach, California.
Investor Contact:
Engaged Capital, LLC
Glenn W. Welling, 949-734-7900
info@engagedcapital.com
Media Contact:
Gagnier Communications
Dan Gagnier, 646-569-5897
dg@gagnierfc.com
SOURCE: Engaged Capital, LLC
Exhibit 99.2
JOINT FILING AGREEMENT
In accordance with Rule 13d-1(k)(1)(iii) under the Securities Exchange Act of 1934, as amended, the persons named below agree to the joint filing on behalf of each of them of a Statement on Schedule 13D (including additional amendments thereto) with respect to the common stock, $0.001 par value per share, of Del Frisco’s Restaurant Group, Inc., a Delaware corporation. This Joint Filing Agreement shall be filed as an Exhibit to such Statement.
Dated: December 6, 2018
Engaged Capital Flagship Master Fund, LP | |||
By: | Engaged Capital, LLC General Partner | ||
By: | /s/ Glenn W. Welling | ||
Name: | Glenn W. Welling | ||
Title: | Founder and Chief Investment Officer |
Engaged Capital Flagship Fund, LP | |||
By: | Engaged Capital, LLC General Partner | ||
By: | /s/ Glenn W. Welling | ||
Name: | Glenn W. Welling | ||
|
Title: | Founder and Chief Investment Officer |
Engaged Capital Flagship Fund, Ltd. | |||
By: | /s/ Glenn W. Welling | ||
Name: | Glenn W. Welling | ||
Title: | Director |
Engaged Capital, LLC | |||
By: | /s/ Glenn W. Welling | ||
Name: | Glenn W. Welling | ||
|
Title: | Founder and Chief Investment Officer |
Engaged Capital Holdings, LLC | |||
By: | /s/ Glenn W. Welling | ||
Name: | Glenn W. Welling | ||
Title: | Sole Member |
/s/ Glenn W. Welling | |
Glenn W. Welling |