Private Equity Puppet: Dave & Buster’s Edition

In late January, the Private Equity behemoth known as KKR disclosed a 10% stake in Dave & Busters (PLAY). Is this a case of Barbarian’s At The Arcade, where KKR makes radical changes to the company through a hostile takeover?

Time will tell. KKR is typically known as a management friendly Private Equity firm who passively buy stakes in profitable companies and make their returns off company growth or debt-related transactions; however, public statements sound more Carl Icahn-ish, a famous activist investor who is known for profiting from hostile takeovers & corporate raiding.

So..What Does This Mean?

Traditionally, in cases like Dave & Buster’s, Private Equity firms may use debt to purchase majority-ownership in publicly traded companies and then elect to take them private. These are known as Leveraged Buyouts.

In some cases, the Private Equity firm does very little and trusts management to make decisions that will increase the value of the company; other times, change is driven by adopting a more Activist approach.

Activist Investors acquire large stakes of publicly traded companies with the intention of obtaining a Board Seat. Then they push for changes at the company, usually related to mismanagement, excessive costs, a multi-year stock slump, corporate crises, or the Private Equity firm believes the Company could be run more profitably.

The Industry Is Changing

Lately, traditionally passive-investor Private Equity firms have grown more aggressive, leaving Dave & Buster’s in a precarious situation where they must await KKR’s next move. As investors around the world are searching for high-yielding assets, many funds are struggling to find attractive deal opportunities due to excessively high-valuations, according to many analysts.

That’s why funds like KKR are forced to take risk and deploy investor capital; otherwise, they can’t charge fees to clients who expect them to put their money to work. That’s why Private Equity firms like KKR, Sycamore, and Golden Gate Capital have built “toehold” stakes in public companies (approximately 5% ownership) in order to get a seat at the table and influence Management decisions.

On the other hand, activist firms like Elliot Management have started buying entire companies such as Barnes & Noble to add to their portfolio and collect dividends.

Are There Returns in Video Games?

At the end of the day, Dave & Buster’s unfortunately (for current management) looks like a prime “whack-a-mole” target in the Private Equity space where KKR will take a more active role.

  • Dave & Buster’s stock fell 18.5% over the year.
  • Prior to KKR’s announcement, the chain had $1.9 billion in debt.

  • The Company’s entire market cap is about $1.3 billion.
  • January, the Company announced that same-store sales are expected to drop nearly 3% this fiscal year.

So it doesn’t look pretty. And the question for investors that currently own Dave & Buster’s, is can KKR turn this company around? You be the judge.