Sardar Biglari Named Steak N Shake Chairman: Shareholders Rejoice
Tonight, after the close of the market, Steak N Shake Co. named Sardar Biglari the Chairman of its Board of Directors.
If you didn’t notice by the title of this post or my recent articles concerning the company, this is extremely good news for shareholders of Western Sizzlin’ Corp, of which Biglari is Chairman and CEO, as well as Steak N Shake. I am a shareholder of both.
Here’s what Sardar had to say in the press release:
“As Steak n Shake’s new Chairman, I wholeheartedly look forward to helping lead the Company to the creation of value for all its shareholders. While one of the Board’s and my immediate responsibilities centers on attracting a highly qualified CEO, we will begin by taking needed steps to close the gap between Steak n Shake’s intrinsic business value and its stock price, which we believe considerably underrates that value.”
Western Sizzlin’ owns 5.4% of Steak N Shake as of the end of the first quarter, amounting to about $10mm in market value as of today’s close. As I explained here, Biglari launched an active proxy contest to elect both himself and his partner, Phil Cooley, to the board of Steak N Shake earlier this year, successfully gaining the two spots.
In recent months, Biglari was able to attract others to his 13D activist group: Western Sizzlin’, the Lion Fund (his hedge fund), Jonathan Dash (Dash Acquisitions, LLC), Sue Aramian (a co-founder of the company), and Wayne King (a private investor) all filed under the 13D group. Collectively, they own over 15% of the company.
The Achilles Heel of the company over the last 10 years has been the vast mis-allocation of its cash flows. While the company generally enjoys strong, stable cash inflows, the current and former executives used that cash to open more and more restaurants, increasing sales but destroying profits and wasting capital. The stock price is lower now than it was in 1998, a full 10 years ago. Over that span of time, the company spent a total of $565 million dollars in capital expenditures, creating negative shareholder wealth. Likewise, a bloated cost structure began to negatively impact profits in recent years.
As you can see, there has been a struggle. In buying the stock, Biglari saw those stable cash inflows, a well known Midwestern brand name, and shareholder value not being recognized by either management or the market. His election to Chairman represents a victory for shareholders as he will bring representation of ownership and a history of responsible capital allocation. I’ll reprint his plans, which I mentioned in my first article on WEST, here again:
“Improvement of store-level profitability, growth through franchising, reduction of corporate G&A, focus on generation of free cash flow, share repurchases, pay-for performance compensation, a more effective governance board — these are strategies we have in mind to enhance the value of the company. Western’s 5.4% equity interest in Steak n Shake represents about $33 million of revenue, larger than WSFC’s entire restaurant and franchise operations. Consequently, we are working with the board so we can become more involved with the company, effect necessary changes, and invite in the right CEO.”
While Steak N Shake shareholders will clearly benefit from having Sardar as Chairman, Western Sizzlin’ shareholders will benefit as well. If you take a look at the look-through financial statements that Shane and I produced, Steak N Shake represents $35mm in look through revenue, $638,000 in look through net income, and $2.7mm in look through operating cash flow, all numbers that equal or best the amount of cash represented by Western Sizzlin’s entire restaurant operation. Steak N Shake is a massive part of Western Sizzlin’.
Therefore, if Biglari can successfully increase Steak N Shake’s intrinsic value through responsible capital allocation, Western Sizzlin’ shareholders will benefit. Not only can he improve the business results, but those improvements will also change market sentiment on the company, a double whammy that could propel the shares to much higher levels.
Today is a good day for the shareholders of these two companies. While I wouldn’t get too excited in the near term, there is much work to be done at SNS, the next few years could be prosperous ones for shareholders partnered with Sardar Biglari.
Disclosure: Long both SNS and WEST
Have you subscribed to the RSS feed yet? Even if you were a subscriber of the old Circle of Competence, don’t forget to subscribe in the upper right corner, or via e-mail on the right hand side. The old feed no longer works, so don’t forget to re-subscribe to the new one!
Thanks for the continued excellent coverage of the WEST and SNS story. I’m curious if you were forced to invest in only one of the two companies which you would choose and why.
I like your name there! Peter Lynch is terrific.
Anyways, given the choice, I’d probably choose Steak N Shake at this juncture, simply because the level of undervaluation is much greater. SNS is trading for maybe a third of what it’s worth, while WEST is probably trading at a 40% discount or so, but with much greater future prospects.
They are much different investments, with different horizons, however. I look at Western Sizzlin’ as a free ride on Biglari’s capital allocation talent for the foreseeable future. That’s an investment with an unlimited horizon at this point, unless it hits some seriously irresponsible levels. I’d like to be partnered with Sardar in WEST for a good time to come, as long as the price is reasonable.
Steak N Shake is a more opportunistic investment. The company, while having stable cash flows, is in a very tough industry. This is a situation where the value of the company was not properly recognized by its managers nor the market. A change in the former will impact the latter. Once the gap between value and price closes, I probably won’t continue to hold Steak N Shake. I believe that, with Biglari at the helm, that can happen reasonably in a few years. Of course, nothing is for certain, and the company is facing some huge headwinds. But there is value to there to be recognized and a Chairman at the helm with the talent and incentive to do so.
[...] N Shake, they filed the 8-k today regarding the election of Sardar Biglari to Chairman, a move we mentioned last [...]
In the 8K they also rolled back the requirements to call a special meeting from 80% of the stock to 25%. This effectively means that if WEST and friends get, say, Michael Dell’s people at MSD Capital on board, they could call a meeting.
Do you all think that a meeting will be called in the near future?
It does kinda seem like they are mostly getting their way without the meeting, after all, Biglari has gone from being a “short term speculator” to Chairman of the Board in a matter of 3 months. I doubt that the board really wants to go against him and not be involved in the ride up.
Ragnar,
I actually mentioned the governance change in my most recent post, regarding the buybacks.
Do I think they will call one as it stands now? Probably not, though I could be wrong. As you said, they are basically getting what they want with Biglari appointed Chairman. Incentivized shareholder representation is now running the joint, and shareholders will appreciate that fact. Frankly, I’m not sure what a meeting would do right now.
However, it is good to solve and improve governance issues. Biglari won’t be Chairman forever, and shareholders deserve to have their rights protected under all situations.
[...] young company, Western Sizzlin’ (WEST). As you all know pretty well by now, I’m an unabashed fan of what Sardar Biglari is doing with Western Sizzlin’, and a shareholder myself. The [...]
The problem is that Biglari is Syrian born and raised, second only to the problem that the employees know that, and sooner or later the customers will too.
American made icons taken over by foreign born people are a huge risk, esp at this moment in time when the movement to buy products and services that are American made and managed is growing rapidly , and of course in the case of Biglari’s nationalitythe concerns about radical anti-American terrorists and regimes complicate matters further.
I