Reporter's Notebook
Activist seeks to oust Biglari

Activist seeks to oust Biglari

An activist investor isn’t just seeking to oust Sardar Biglari from his post as chairman of Biglari Holdings, it is looking to replace him as the company’s CEO, according to SEC documents filed this week.

The presentation from the activist, Groveland Capital, effectively portrays an upcoming election for the Biglari Holdings board of directors as a referendum on Biglari’s nearly seven years at the helm of the company. The plan notes that, “If elected, we plan to appoint an interim CEO as soon as possible.”

According to the presentation, Biglari Holdings has been underperforming the stock market and has suffered deteriorating financial results even as Biglari himself has received an increasingly large payday from the company.

Biglari has been paid nearly $76 million in salary and bonuses since the company’s 2009 fiscal year, according to the filing. That includes what Groveland says is an estimated $30.9 million bonus for the 2014 fiscal year that Biglari received from the company through Biglari Capital Corp., his hedge fund that manages investments for Biglari Holdings.

Groveland estimates that the compensation equals 37.7 percent of Biglari Holdings’ total operating income over that period.

“Mr. Biglari’s compensation plan has created outsized compensation for Mr. Biglari, while the financial performance of the company’s operating business has deteriorated significantly,” Groveland wrote in its SEC filing.

That runs counter to Biglari’s own stated view on executive pay over the years. “What we too often learn in corporate America is pay for failure because of asymmetrical payouts through which executives win regardless of whether their shareholders win or lose,” Biglari wrote in 2010, according to the filing.

Groveland has nominated six people to the Biglari Holdings board for a vote to be held in April. That’s one for each spot on the board, including the seat held by Biglari. It’s the first threat to his leadership at the owner of Steak n Shake and Western Sizzlin since his takeover of the former chain in 2009.

In January, Groveland made recommendations to Biglari Holdings that included an end to a controversial license agreement between the company and Biglari, more oversight of his compensation and change to the company’s board of directors.

Biglari Holdings rejected those recommendations, saying that they are “not in the best interest of the company’s long-term shareholders,” according to an SEC filing. According to the filing, William L. Johnson, Biglari Holdings’ lead independent director, said in a letter to Groveland that the company’s long-term goal is to “maximize per-share intrinsic value.” The letter added that, “It is abundantly clear that Groveland neither shares the company’s concern for this objective nor appreciates the substantial long-term value that has been created for all shareholders.”

If Groveland were to win a majority of board seats in the election, that could set up a potentially costly scenario, because Biglari has a licensing agreement that would pay him a royalty for the use of his name at Steak n Shake and Biglari Holdings for at least five years.

Groveland estimates that a change of control could force Biglari Holdings to pay Biglari $100 million over five years. The filing calls it a “super golden parachute” that’s on top of what the investor already considers a rich “golden parachute” equal to 299 percent of his average annual cash compensation — which Groveland says would be $20.6 million.

The investor says that it would “aggressively assert the rights of shareholders,” suggesting that it would fight those payments.

But it also says that the company could more than make up for those annual payments to Biglari even in a “worst case scenario” that requires the payments to be made.

Groveland notes that sales, general and administrative spending has grown from $70 million in the 2009 fiscal year to $128.5 million in the 2014 fiscal year — or 16.2 percent of revenues. If Biglari Holdings simply reduced that spending to 11.1 percent of revenues, the level spent in 2009, the company would save $40.4 million. That would be more than enough to support annual payments to Biglari.

Groveland also goes into detail about what it sees as Biglari Holdings’ “deteriorating” operating performance and its poor performance on Wall Street.

In its filing, Groveland notes that Biglari Holdings stock has underperformed the S&P 500 index over a one, three and five-year period, as well as the S&P 500 Restaurants Index and Biglari Holdings’ own per group.

The filing also notes that Biglari Holdings’ operating income has declined. Since peaking $52.5 million, or 7.4 percent of revenue, in 2011, it has fallen to $14.3 million or 1.8 percent in the 2014 fiscal year.

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