Cracker Barrel battling to keep Biglari at bay

Cracker Barrel is a welcoming place. Guests can sit in rocking chairs and play checkers as they wait for a friendly greeter to guide them to a table. Or they can meander through the country store stocked with rustic bric-a-brac.

Biglari

But the Tennessee-based chain isn’t extending any of its folksy, down-home hospitality to Sardar Biglari, the Texas hedge fund investor who this spring scarfed up so many shares he became the company’s largest shareholder.

Since then, Cracker Barrel Old Country Store Inc. has rejected Biglari’s request that directors appoint him and business partner Phil Cooley to the board. It also has rolled out a “poison pill” plan that would deter outside investors from taking over the business without negotiating with the board first.

No one who followed Biglari’s pursuit of Indianapolis-based Steak n Shake Co. a few years ago should be surprised what happened next. The slender executive girded for battle, rolling out the activist website enhancecrackerbarrel.com and launching a proxy fight aimed at electing him and Cooley to the company’s board at its Dec. 20 annual meeting.

Biglari, 34, knows this game well, and plays it with aplomb. At Steak n Shake, he began buying shares in 2007 and rose to CEO scarcely a year later. Now, the locally based Steak n Shake chain is the centerpiece of Biglari Holdings Inc., the publicly traded firm he runs out of San Antonio.

In a September press release, Cracker Barrel argued that appointing Biglari to the board “would create serious and inappropriate business conflicts of interest,” given that he leads Steak n Shake, a competing restaurant chain. Further, the board expressed misgivings about his background and qualifications and “uncertainty over Mr. Biglari’s ultimate agenda.”

You can understand why Biglari would make board members nervous. He initially called for greater transparency, asking that the company break out its retail and restaurant sales separately.

Since then, he’s turned up the heat, attacking board members for spending barely $250,000 to buy shares on the open market since 2003, a pittance compared with the $100 million he and affiliates spent to amass a 9.3-percent stake.

“Our concern over Cracker Barrel’s leadership stems from its poor strategy, poor operating performance, poor financial disclosure and lack of ownership, which, if left uncorrected … will lead to poor shareholder returns,” he said in a Sept. 13 letter to shareholders.

Biglari swooped in because Cracker Barrel is a little banged up these days. The stock is trading at around $41.50, down 28 percent since November. Unlike many restaurant rivals, the company has avoided using heavy discounting to pull in customers. Even so, rising commodity prices have squeezed profit.

Biglari—who couldn’t be reached for comment—no doubt will trumpet his success at Steak n Shake to help win over Cracker Barrel shareholders. After taking Steak n Shake’s helm, he slashed expenses and rolled out $4 value meals. The strategy helped halt a 14-quarter slide in same-store sales. The chain now has reported rising same-store results for 15 straight quarters.

Even so, analysts doubt Biglari will stir up enough Cracker Barrel shareholders to win a spot on its board. But they say he probably won’t have to to achieve his ultimate goal—pocket a handsome profit on his investment.

Analysts think the stock could spring higher and is unlikely to slip further—in part because of the pressure Biglari is applying to boost results.

It also helps that the 600-restaurant chain is more insulated from competition than many other eateries—thanks to locations off interstates in small towns and rural areas, where Cracker Barrels often are the only full-service option.

Even more significant: Because Cracker Barrel shares are depressed, the company’s stock market value is just $1 billion—barely more than the real estate value of the 400 locations the company owns, Raymond James analyst Bryan Elliott estimated in a report. He said that means investors are valuing the restaurant operations at only around $200 million.

In his Sept. 13 missive to shareholders, Biglari said he has the drive and savvy to help turns things around—and get investors excited about the company again.

“I believe the power of the brand has covered up board missteps,” he wrote. “This … proxy contest centers on placing a real owner on the board of a company with an A+ brand that has failed to produce A+ performance. We blame the board for mediocrity.”•