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Activist Spotlight: Franchising, Sale or Boardroom Battle Is Next At Potbelly

Potbelly Corp. (PBPB) will need to franchise lots of stores or put itself on the auction block. Otherwise, expect a change-of-control director contest to emerge in the months to come.

That's because the restaurant chain's shares have struggled of late, leading Cleveland-based activist fund Ancora Advisors LLC to launch a campaign last month demanding that the Chicago-based sandwich maker immediately change its strategy or explore a sale of the business.

As an alternative to a sale, Ancora would like to see Potbelly franchise a significant chunk of its 413 company-owned stores. (It currently franchises out 51). The activists also want to see Potbelly franchise new stores as they open up.

Activist funds often push restaurant chains to franchise more stores and use the proceeds for stock buybacks or dividends as a mechanism to boost total shareholder returns. That's part of what Ancora, which owns a 4% Potbelly stake, is after at the sandwich chain. Marcato Capital employed the strategy at Buffalo Wild Wings and it's also possible that activist Glenn Welling could soon push Ruby Tuesday's (RT) to franchise some of the hundreds of stores it currently operates. And activists could push for further franchising and M&A at Jack in the Box Inc. (JACK) .

Without a sale or major franchising move at Potbelly it is a serious possibility that Ancora Advisors will seek to take over a majority of the board at the company's next annual meeting expected in May. The chain has six or seven months to take action before its Feb. 10 deadline for...