Reporter's Notebook

Biglari Holdings faces its own proxy contest

Biglari Holdings has used a pair of proxy showdowns to help build its business. Now it faces a shareholder vote of its own — despite agreements designed in part to discourage a proxy.

A group led by Minneapolis-based investment firm Groveland Capital has quietly filed documents with the SEC to replace each of Biglari Holdings’ six board seats, which would presumably include Chairman Sardar Biglari himself.

The group owns a small percentage of shares, but has owned them for years. It has not filed documents with the SEC suggesting it has an activist investment. So the filing has not come with the sort of election-style posturing that often marks proxy fights, at least not yet.

The proxy represents the first real threat to Sardar Biglari’s control at Biglari Holdings since he won a proxy fight against Steak n Shake in 2008, won the chairmanship and then renamed the company Biglari Holdings. It also reveals mounting shareholder unrest at the company, which also owns Western Sizzlin — of which he also gained control in a proxy.

Last year, for instance, Biglari barely beat out a shareholder vote over his compensation. Even the Humane Society, upset at Biglari’s refusal to adopt its suggestions on animal welfare, has proposed a shareholder motion to have Biglari Holdings name an independent director.

The company’s stock is down 28.8 percent this year. And while much of that was due to a shareholder rights offering earlier this year that brought down the per-share value of the stock, it was on its way down before that offering was announced.

Perhaps more telling is this: In May 2011, Biglari began buying up shares in Cracker Barrel, and then launched a series of unsuccessful proxy fights against the Tennessee-based family dining chain.

Stock in Cracker Barrel has gone up 133 percent over that period, and the value of Biglari’s shares has more than doubled — up by more than $323 million. The total value of Biglari Holdings’ Cracker Barrel shares, now owned through the Sardar Biglari-run hedge fund The Lion Fund, is worth nearly $564 million. Plus, Cracker Barrel has paid the fund $34.9 million in dividends over that time.

But shareholders aren’t giving Biglari Holdings the full credit of those shares. The total market cap for the company is just $618.7 million. That would leave only $55 million for the company’s entire restaurant operations, including Steak n Shake and Western Sizzlin, which last year had total revenues of $778 million, according to the company’s annual report.

Investors might be undervaluing Biglari Holdings’ ownership of the Cracker Barrel shares in part because of the transfer to the Lion Fund, which complicated the ownership structure. Also, it’s difficult to imagine Biglari Holdings receiving the full value of those shares unless Cracker Barrel is sold. Cracker Barrel has so far resisted a push by Biglari Holdings to sell the company.

A call this morning to Groveland Capital was not returned. The fund says it invests on a global basis and is focused on “unearthing unique investment opportunities” A related hedge fund, AO Partners Fund, does have a history of proxy contests.

Groveland has nominated six people, including Nicholas Swenson, the CEO of Groveland, Seth Barkett, who is also with Groveland, Tom Lujan, principal at Lujan Legal Counsel, Jim Stryker, a 37-year restaurant industry veteran and former CFO of Perkins Marie Callender’s, Chicago attorney Steve Lombardo, and Ryan Buckley, a director at investment banking firm Livingstone Partners.

Biglari Holdings has just six board members, making this a bid by Groveland to unseat the entire board, similar to the effort by the activist Starboard Value to take control at Darden Restaurants.

Of course, Biglari Holdings is fundamentally different than Darden. Biglari would be due substantial sums if he were to ever be ousted from the company.

A license agreement reached between Biglari and Biglari Holdings, and another deal between Biglari and Steak n Shake, gives those companies the use of his name. But “in the event of a change of control,” according to the company’s annual report, or if he’s terminated from his job as CEO or chairman, Biglari gets 2.5 percent of company sales for at least five years. Biglari would also get payments under performance compensation plan.

That would be a substantial amount of money. Steak n Shake’s 2014 sales alone were $765.6 million, and 2.5 percent of that would be more than $19 million. According to the report, the payments would be a “significant liability.”

The risk of these licensing deals? According to the company’s annual report, these agreements “may deter a change of control or proxy contest.” 

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