Biglari’s Steak n Shake licensing deal stirs up critics

Of all the audacious things Sardar Biglari has done since seizing control of locally based Steak n Shake five years ago, this might be the topper: In January 2013, he licensed the “Biglari” name to the company for 20 years.

Biglari won’t receive royalties if he remains atop the chain and its parent, which he rechristened Biglari Holdings Inc. in 2010. But if Bigalri were forced out of for anything but malfeasance, or if it were sold, he’d receive 2.5 percent of sales for five years—a sum that could surpass $100 million, potentially sapping the company’s liquidity.

The licensing initially drew little notice. But by last summer, attorneys representing shareholders had filed two lawsuits, which now are wending toward trial, that blast Biglari and the Biglari Holdings board for inking such a self-serving deal.
 

Biglari

No doubt, Biglari holds himself in high regard and may truly believe that associating his name with Steak n Shake adds luster to the burger chain. At a retail convention in Las Vegas last May, the company proudly showed off new signage that read “Steak n Shake by Biglari.”

But do Steak n Shake customers give a hoot about Biglari, a 36-year-old Iranian-American who built a name for himself as a shareholder activist? Is anyone more likely to dine there because of the Biglari connection?

The answer is obviously no, assert the two lawsuits, which allege breach of fiduciary duty, waste of corporate assets and unjust enrichment.

“The license agreement is nothing more than a thinly hidden way for defendant Biglari to further entrench himself into his position of power atop BHI,” according to a suit filed in July in San Antonio, where Biglari Holdings is based.

“The license agreement does not provide any benefit to the company because there was no apparent business purpose in naming the company after defendant Biglari in the first place, other than to aggrandize defendant Biglari.”

Language in the license agreement is so onerous as to effectively make Biglari “irremovable,” according to the other lawsuit, which was filed in June in Indianapolis. The company in fiscal 2012 racked up revenue of $740 million. Giving 2.5 percent, or $18.5 million, to Biglari would have eaten up nearly all the company’s $21.6 million in profit.

Biglari does not grant interviews. But in a Securities and Exchange filing last month, the company says the allegations are without merit and that it will “defend these cases vigorously.”

Investors who buy shares of Biglari Holdings know they’re placing a bet with an unconventional entrepreneur. He describes himself as the “sole capital allocator—unrestrained by institutional limitations,” an apparent reference to the wide latitude afforded by his board.

Even so, this isn’t the first time Biglari, who cast himself as a shareholder savior when he gained control of the then-sputtering Steak n Shake, has found himself on the receiving end of blistering attacks.

Shareholders balked when he rolled out plans for a super-sized, hedge-fund-style compensation package for himself, and when he proposed various maneuvers that expanded his control over company stock.

Franchisees also have balked at the company’s insistence that it has the right to set menu prices—an assertion that has spawned at least three lawsuits that charge under-$4 meals and other mandates put them in a financial vise.

But even detractors acknowledge that under Bigalri’s leadership—marked by relentless cost-cutting and the success of under-$4 meals—Steak n Shake’s performance has sparkled. Since he became CEO in August 2009, the company has reported increases in customer counts 17 of 18 quarters.

“We are subscribing to Sam Walton’s philosophy, in which he stated, ‘By cutting your price, you can boost your sales to a point where you earn far more at the cheaper retail price than you would have by selling the item at the higher price,’” Biglari wrote in December in his annual letter to shareholders.

In the letter—which did not address the shareholder or franchisee controversies—Biglari suggested that he and Vice Chairman Phil Cooley, a 70-year-old business professor at Trinity University in San Antonio, are just getting started growing the 80-year-old burger chain.

While Steak n Shake historically has focused on adding company-owned restaurants, Biglari and Cooley have decided that franchising, which requires far less capital, is the better route to future expansion. The company now has 519 restaurants, 104 of them franchised.

Much of that growth likely will be overseas. Steak n Shake has opened an office in Monaco to spearhead expansion in Europe and the Middle East. A Dubai restaurant opened in 2013, and the company has deals in place for 90 locations in the Middle East.

“We want to become a global brand within Phil’s lifetime,” Biglari wrote in his letter. “We are off to a good start.”•