Boy, you think it’s tricky keeping your restaurant’s head above water right now. Be glad you’re not in Marcus Jundt’s shoes. He’s chairman, president and c.e.o. of the 22-unit upscale casual dining chain Kona Grill, and he’s taking heavy fire, very publicly, from his investors. Their complaint: lousy same-store sales, a stock price swoon and share dilution via a below-market rights offering limited to Jundt’s father. Their forum: Kona’s first quarter conference call, where open rebellion prevailed.
Greenwich, CT-based Mill Road Capital, which owns 10 percent of Kona Grill, bills itself as a “Berkshire Hathaway for small companies.” It focuses on “friendly investments in high quality, publicly traded companies under $250 million in size. We invest in and support companies that focus on long-term value creation, regardless of short-term performance,” Mill Road says.
But they’re a little concerned about the lack of long-term value creation going on at Kona Grill right now. It’s not so much the chain’s current performance that irks them. Kona’s same-store sales fell 9.6 percent in the most recent quarter—despite a four percent menu price increase—but Mill Road can live with that. Rather, it’s what Mill Road characterizes as insiders-only financing schemes that are really ticking them off—especially because it and other outside investors weren’t offered the same pricing on these sweetheart deals.
The results could be heard on Kona Grill’s most recent conference call with stock analysts and investors. After top management’s standard opening presentation of operating results and future plans, plus a few routine questions from analysts, the gloves came off. Way off.
Mill Road Capital’s Thomas Lynch got the ball rolling by querying Jundt about the chain’s operating performance and the fact that its stock price has fallen 80 percent since Jundt took over in 2006. Noting that it’s been the worst-performing company in the restaurant stock universe Mill Road follows, he wanted to know “who’s responsible for that and what changes will be made?”
Marcus Jundt: “The board is.”
Thomas Lynch: “The board is?”
Jundt: “The board is responsible for who the CEO of the company is.”
Lynch: “Well, you’re the chairman of the board, Marcus. Will you look into making a change at the CEO level.”
Jundt: “I will bring this issue up to the board.”
Lynch: “I’m asking the opinion of the chairman, though.”
Jundt: “At this moment, I will not give opinion to that.”
If you’ve never listened in on a public company’s results conference call, trust us.
They never go like this.
And that was just the warm-up. Next came a lengthy and bitter exchange about the process by which Kona Grill’s board of directors sought to allow Marcus Jundt’s father, James Jundt, to purchase company shares at a deep discount to the market price on terms offered only to him. (James Jundt is a former co-owner of the NFL’s Minnesota Vikings. His investment firm was placed into receivership in late 2007 by a Minnesota judge after he and his son Marcus failed to satisfy a $2.3 million ruling against their firm. James Jundt subsequently listed his Lake Minnetonka, MN, home for sale. The price: $53.5 million. Yes, that decimal point is in the right place.)
The conversation then swung to just how Marcus Jundt had ascended to his chairman/president/c.e.o. role in the first place. Mill Road Capital’s Justin Jacobs handled this part of the call.
Justin Jacobs: “What was the board governance process that resulted in you becoming CEO?”
Marcus Jundt: “No comment.”
Jacobs: “You can’t comment on how you became c.e.o. of the company?”
Jundt: “I won’t comment at this time.”
Jacobs: “Was a (executive recruitment) firm retained during the search?
Jundt: “No comment.”
Jacobs: “How many candidates were interviewed by the board?”
Jundt: “No comment.”
Jacobs: “So you can’t give any comment to the shareholders of your company as to how you became c.e.o. of the company?”
Jundt: “These issues were addressed three years ago.”
Jacobs: “I’m asking the question now.”
Jundt: “I stated no comment.”
The call ended there, but the rancor lives on. Kona Grill held its annual shareholders meeting the following day, April 30. At it, 53 percent of voting shares withheld their support for the re-election of Marcus Jundt as chairman, president and c.e.o. So is he out? Nope. Jundt retains all three positions because the company’s board of directors, of which Jundt was chairman, had previously refused to certify the candidate nominated to oppose him.
Meanwhile, what’s going on at the restaurant level? Kona Grill has 2,000 employees, has won dozens of awards and its handsome, spacious (300 seats, give or take) units are located in demographically desirable locations. Its Hawaii-meets-the-mainland menu plus dedicated sushi bar puts it dead center of the way people like to eat today. Assuming the economy turns around, there’s plenty of value here for someone.
Mill Road Capital could likely be that someone. It tried to buy Kona Grill via a friendly bid of $10.75 per share just one year ago. The offer was rejected, but Kona’s share price was hovering around $2.44 on the day we prepared this newsletter. Mill Road may have many reasons to complain about Marcus Jundt, but it has to love how he has made it 80 percent cheaper for them to buy out Kona Grill.
In fact, Jundt has made it cheap for anyone to buy shares. We’re not investment advisors by any means, but the current stock price values the entire 22-unit company at $15.9 million. There may be more upside than downside here.
