A Stubborn Cracker Barrel Leaves Biglari With Few Options

Steak n Shake proprietor and long-running activist in Cracker Barrel Old Country Store (NASDAQ: CBRL  )  Sardar Biglari has not gotten his way in influencing the latter. On Monday, the Warren Buffett-idolizing investor attempted to gain two board seats for the third time in as many years. The result mimicked the previous two endeavors -- struck down by shareholders and, eventually, the board. It's an interesting and peculiar battle, as Biglari's Biglari Holdings (NYSE: BH  ) owns 20% f the company and has already made millions upon millions on the stock. Contrary to other activists' actions, such as Bill Ackman's at the plummeting J.C. Penney, Biglari is convinced change is needed at a company whose stock is up nearly 150% in just two years. What comes next for Biglari?

Three-year saga
Cracker Barrel's largest shareholder as of late has also been its most aggravating, as Biglari Holdings' 20% stake has been used again and again as a vehicle for change in the roadside restaurant chain. Cracker Barrel management has used many of the common tactics to rid itself of Biglari's presence -- from a poison pill tactic (flooding the market with shares to avoid any one owner from gaining too much influence) to offering a direct buyout of Biglari's shares—at a premium. The investor sits at 20% ownership today, undeterred by the poison pill, and publicly rejected the company's attempt to buy him out.

The rest of the company's shareholders have not had open arms, either. In the three occasions Biglari has asked for a board seat and voted his 4 million-plus shares in favor, he has never gained even a hint of widespread support from others. Why would they, considering the performance of Cracker Barrel shares?

In a nutshell, the investor holds issue with the company's capital allocation practices, and claims that the ROI on new stores is far lower than reported. Management obviously disagrees. But by putting up such a fight, and showing some degree of fear to the San Antonio-based investor, management validates his concerns.

With little chance of boardroom success, what are Biglari's options?

Unlocking value 
Biglari's Cracker Barrel stake is worth north of $400 million, representing a sizable chunk of his company's entire market cap. One of the reason's Biglari Holdings maintains a shackled valuation is the market risk of Cracker Barrel. If the position is monetized, at a steep profit to Biglari and shareholders, the investor could just wipe his hands of the stubborn management team and see his namesake company's stock rise handsomely.

The other option is to double down efforts and get ready for next year's shareholder vote. After three years of failure, it seems less and less likely that this is an option. For an investor of Biglari's ability and prowess, there are undoubtedly other options in the market, even in the specific QSR space, his apparent wheelhouse.

Exercising option No. 1 would satisfy everybody except perhaps Biglari himself, who is known for his strong personality and stubbornness. It may be a blow to his self esteem, and does not follow his Buffett-modeled strategy of acquiring assets for the ultra long term, but liquidating the Cracker Barrel stake would remind Wall Street there is a shark in the water, and it could rival the success of the Oracle of Omaha.

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