Biglari consolidates power, as Steak n Shake rebounds

When Sardar Biglari was an outside investor of Steak n Shake Co., he scolded management, writing in a publicly released
letter that “the company must be more forthright about its business.”

But Biglari, now the company’s
chairman and CEO, doesn’t seem like such a champion of transparency these days. Since he took the reins last year, the
company has been increasingly uncommunicative, even as he has amassed more and more power.

Steak n Shake this
spring and summer did make special filings with the Securities and Exchange Commission to reveal particularly strong preliminary
quarterly sales. But the company has discontinued quarterly Q&A sessions with analysts and isn’t returning calls
from reporters.

In an interview, former director Wayne L. Kelley summed it up this way. “I think he is
transparent when he wants to be, and is very close to the vest when he wants to be.”

Kelley—son of
legendary Hoosier businessman E.W. Kelley, who presided over Steak n Shake for two decades—quit the board in March.
In his resignation later, Kelley wrote, “The advice of board members has not been sought, either before or after major
decisions affecting the company.”

Biglari

Since then, the three remaining independent directors have given Biglari, a Texas hedge fund manager,
an even longer leash. Regulatory filings show that in July, the board renegotiated its lending agreement with Fifth Third
Bank to give the company the leeway to use up to $10 million in surplus cash “to make investments of any lawful nature.”

Around the same time, directors approved resolutions giving Biglari “full power and authority to make
all investment and capital allocation decisions on behalf of the company”—a highly unusual move for a public company
board.

That’s not the only news that has rankled the good-governance crowd. In May, the board boosted his
pay from $280,000 to $900,000—all in cash. Watchdogs like to see a big chunk of pay tied to performance, so that executives
suffer, or prosper, in step with shareholders.

This isn’t to say Biglari, 31, has done a poor job executing
a turnaround at the 75-year-old burger chain. Steak n Shake recently reported that same-store sales in the fiscal third quarter
rose 5 percent. It was the second straight quarterly increase after 14 consecutive declines.

“I think the
company needed some fresh perspective, and couldn’t just do things the way that they did,” said Kelley, 65. In
particular, he praised Biglari for his four-meals-for-$4 campaign, which caused customer traffic to skyrocket.

But Biglari is running a public company, and its shareholders deserve the forthright management he once called for himself.

On that score, the company fared miserably this month when it announced a deal to buy Virginia-based Western Sizzlin
Corp.—another firm where Biglari is chairman and CEO—for $23 million.

The summary of the deal spelled
out in a joint press release was difficult to decipher, and calls to Steak n Shake for elaboration went unanswered. The release
did note that independent directors from the two firms approved the transaction, but gave no explanation of why it made sense
strategically for either firm.

“At first glance, there seems to us to be some self-dealing regarding the
transaction,” given that Biglari’s hedge fund owns one-third of Western Sizzlin’s shares, CL King analyst
Michael Gallo said in a report. “Given the apparent progress toward stabilizing [Steak n Shake] over the last couple
of quarters, this transaction makes no sense to us.”

Kelley said the board looked at a Steak n Shake/Western
Sizzlin deal last year, but the Indianapolis company was struggling, and Biglari and other board members agreed the timing
was wrong.

Kelley said the thought then was that the pairing would provide synergies in such areas as purchasing.
It also offered Steak n Shake access to Western Sizzlin’s franchising expertise. Nearly all of Western’s 100 eateries
are franchised. Most of Steak n Shake’s 486 locations are company-owned, though the chain hopes to ratchet up franchising.

Western Sizzlin already is a major Steak n Shake stockholder, with more than 1.5 million shares, according to a
regulatory filing. Under the deal, that stock would be transferred directly to Western Sizzlin shareholders. Steak n Shake
also plans to issue Western Sizzlin shareholder bonds paying 14-percent interest for five years. The Indianapolis company
has the right to pay off the bonds after one year without penalty.

Kelley noted that the 14-percent rate is extremely
high, and he said he was surprised Steak n Shake wouldn’t instead pay in stock. He speculated that issuing bonds was
appealing for Biglari because the interest payments translate into cash flow for him and his hedge fund.

Yet,
despite all his misgivings, Kelley still owns about 30,000 shares and is hopeful the company’s resurgence will continue.
The stock now trades for around $10.30—triple its 52-week low—and Kelley is rooting for $20.

He said
Biglari is one smart guy, but isn’t infallible.

“He is young, and a lot of people who are young think
they have the answer to everything,” Kelley said. “He will make mistakes. My hope is the mistakes he makes are
not monumental ones, and he learns from those.”•