Americans love Cracker Barrel Old Country Store (NASDAQ:CBRL) -- but there is one person who loves it even more.
For the last two and a half years, Sardar Biglari, the chairman and CEO of Biglari Holdings (NYSE:BH), has been engaged in a behind-the-scenes battle with Cracker Barrel's board of directors and shareholders. Mainly via shares controlled by his hedge fund arm, Biglari Capital, the Iranian-born millionaire has aimed to undertake a variety of actions that would result in a radical shift in the underlying make-up of the company.
Who is Sardar Biglari?
Biglari, a member of Forbes' 20 Most Powerful CEOs 40 and Under list -- headlined by Google's Larry Page -- emigrated to from Iran to the United States following the Iranian revolution. He and his parents moved to San Antonio, Texas, and like many investors, he is widely known to idolize Warren Buffett of Berkshire Hathaway.
After college at Trinity University, he started his own hedge fund, and he's been steadily engaging in corporate takeover efforts ever since. At first, he took over the small 86-store chain Western Sizzlin -- which Biglari Holdings still controls -- then moved his target to Friendly's, which was ultimately acquired by a private equity fund.
From there, Biglari set his sights on Steak N' Shake. After another takeover battle, Biglari led the turnaround efforts at the struggling fast food chain. Biglari took over Steak N' Shake in 2007, and in 2008, the company had losses of $22.9 million, but in 2010, it had a net income of $29.4 million.
In June of 2011, an SEC filing declared Biglari Holdings had amassed a nearly 10% stake in Cracker Barrel, and he has been steadily adding to his holdings ever since. Through his affiliated funds, Biglari is the lead investor in Cracker Barrel and now has an approximate 20% stake of the company.
What does he want with Cracker Barrel? The cobbler?
The battle with Cracker Barrel encompasses a variety of different factors, but it largely has to do with the question of capital allocation, which is what the company does with the money it earns.
Biglari has pushed Cracker Barrel to take on more debt since interest rates are low, noting; "[n]ow is time to add debt prudently. Plainly, Cracker Barrel is a prodigious cash generator, producing more than what is required to maintain its business."
He pushed for the additional debt to allow the company to pay a one-time special dividend of $20 per share, which would represent a payout of almost 20% based on current share prices. The proposal did not pass at the recent shareholder meeting. In addition, he argued against the chain opening up new stores with its existing cash pile because he believes "plowing money at a low return on invested capital is value destructive," and adds that the cash generated from new stores isn't worth the investment.
Biglari has pushed for seats on the board for both himself and the vice chairman of Biglari Holdings, Philip Cooley. However, like his dividend proposal, both the current management of Cracker Barrel and shareholders voted against the two receiving seats.
In a recent SEC filing, Cracker Barrel noted that it "continues to believe that the election of Biglari and Cooley would not be in the best interests of all of the Company's shareholders."
Why does he want that
Cracker Barrel highlighted that one of its concerns against Biglari was "continuing concerns about business and legal conflicts of interest and the uncertainty about Mr. Biglari's ultimate agenda."
Yet in a recent letter to shareholders, Biglari states plainly, "[w]e are interested in making money, not controlling the Company," and also adds, "[o]ur agenda is the same as yours: to make money."
It's easy to chalk this up to another example of corporate greed for a big-time hedge fund manager, but Cracker Barrel has offered to repurchase Biglari's holdings, and he rejected this "so that the cash payments could instead be shared with all shareholders." Often times, takeover and proxy battles leads to the common shareholders getting burned, but that doesn't appear to be the case here.
It will be interesting to watch how all of this plays out, but at least for now, there will be no changes in either the company's structure or the Old Timer's Breakfast we can all love.