Breakingviews: Poison pills don’t always taste so bitter

Poison pills are finding new uses in a crisis. Entertainment dining company Dave & Buster’s Entertainment adopted one after its stock fell more than 70%, the idea being that no raider could amass more than a 15% stake in the company without permission. While these so-called shareholder rights plans are often suspect, for companies that could use a cash infusion, they may provide a helpful bargaining chip.

The Dave & Buster’s poison pill looked squarely aimed at KKR, the private equity firm that popped up with a roughly 10% stake in the company in January. Then, the stock traded around $40 per share. But the coronavirus pandemic hasn’t been kind to restaurant chains, even those that offer karaoke video games and driving simulators. As the shares fell, the company rolled out its proposal to automatically dilute any shareholder that goes above 15%. Just days later, it cut some staff, furloughed more than 15,000 hourly workers and halted its new store program.

These defense mechanisms are sparingly used, but when shares fall, companies get jittery about being bought on the cheap, or targeted by activists who spy an opportunity to get a foothold at cut price. Since March 1, more than two dozen companies have adopted them, according to Refinitiv data, including amusement park Six Flags Entertainment, Men’s Wearhouse owner Tailored Brands, Spirit Airlines, and mattress company Tempur Sealy International, compared to just seven similar plans in the two months prior.

When a poison pill stops investors being able to accept a takeover offer at a premium, it’s less than ideal. In this case, Dave & Buster’s is now in talks with private equity firms over taking a big stake in the company, Reuters reported last week. KKR might be happy to lower its average purchase price and gain more influence. But where in normal times, it could just buy shares in the market, a poison pill lets the company ask stake-builders to buy new shares instead, injecting much-needed cash in the process. That doesn’t sound poisonous after all.

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