Portillo's Nearly Acquired by Activist Engaged Capital, Sources Say

• According to sources, Engaged Capital has amassed a significant share in the struggling Portillo's food chain in Chicago and is urging management to implement changes in the company's growth and operations strategies.
• Since its successful campaign at Shake Shack, Engaged has launched its first campaign in the "fast casual" sector.
• Management has been engaged in constructive conversations with employees and has received specific recommendations for operational changes, according to sources.

Engaged Capital, an activist investor, has acquired a nearly 10% stake in the struggling Chicago-based hot-dog chain and is collaborating with management to enhance operations, margins, and branding as the company aims to expand nationally, sources claim.

Engaged has launched its first activist campaign in the fast-casual sector since its successful push at a burger chain in 2023. Sources close to the matter revealed that the group plans to replicate its strategy at the burger chain, where the stock price has increased by approximately 100% since the activist's initial investment.

Portillo's shares have experienced a 25% decline in year-to-date performance and a 68% drop since its 2021 initial public offering.

Shares of Portillo's rose around 3% in after-hours trading Thursday, but the company did not immediately respond to a request for comment.

The activist and management have had productive talks, according to the people, and Engaged is not seeking a leadership change. The company has informed Portillo's that there would be substantial private-equity interest if a public-market turnaround fails, the people said.

Since May 2023, when Shake Shack settled with the activist, the company's shares have increased by 67%. As a result of the settlement, Engaged was granted two board seats, preventing a proxy battle.

Management has received specific operational changes from Engaged to help Portillo regain momentum, according to sources.

According to a presentation viewed by CNBC, Engaged believes that Portillo's restaurant could improve its cash-on-cash returns from 25% to 50% if the company no longer owns and develops real estate and shrinks the size of its current locations.

The activist believes that Portillo's should be valued at least 100% more than its current market price, according to the people. Despite being a "fast casual" chain like Chipotle and Shake Shack, Portillo's currently trades at a discounted rate.

Management is being urged by Engaged to speed up the growth of the country, according to the people. Shake Shack has achieved this by implementing standardized store designs and targeted advertising in specific regions. Engaged believes that these same tactics could help Portillo's expand beyond its current 85 locations.

The company was once valued at $1.6 billion and currently has a market capitalization of $867 million. It was previously a portfolio company of Berkshire Partners, a $16 billion private equity firm.

Welling founded Engaged in 2012 and has since pushed for turnarounds or sale processes at various food and consumer companies, including Del Frisco's, which was acquired by Tilman Fertitta's Landry's in 2019.

Berkshire Hathaway maintains a 9.6% ownership stake in the company. A representative from Berkshire declined to provide a comment when asked.