Investors Sardar Biglari and Philip Cooley didn't exactly hit it off with The Steak n Shake Co.'s top brass when they met in August to discuss the company's future.
Company Chairman Alan Gilman and Chief Financial Officer Jeff Blade "refused to disclose basic information" and "rebuffed disclosure of even niggling details like the number of employees at headquarters," according to Biglari's account of the meeting, which he included in a Jan. 23 letter to company shareholders.
"We are suspect of management when it takes the low road of withholding basic, non-competitive information from the owners when competitors reveal the same data," Biglari's letter said.
Since the inauspicious meeting, Biglari's assessment has become even more searing. As he told shareholders in the letter, "By now, we are sufficiently alarmed to conclude that the greatest risk shareholders face is keeping the majority of the current directors in place."
Now, Steak n Shake's board finds itself in all-out battle for control of the Indianapolis company, one of the nation's oldest restaurant chains.
Biglari and Cooley are principals in the Lion Fund, a San Antonio-based hedge fund whose affiliates own 8.5 percent of Steak n Shake-a larger interest than all nine of the company's current directors combined. Biglari, 30, is a former technology entrepreneur, while Cooley, 63, is a business professor at Trinity University in San Antonio.
The pair's goal: Sway shareholders to elect each of them to a board seat at the company's annual meeting in early March. At the same meeting, they want shareholders to oust Gilman and James Williamson, both former company CEOs in their 70s, by withholding votes of support.
The next step, according to the Jan. 23 letter, would be to call a special meeting at which shareholders would replace the majority of the board.
But Steak n Shake's board undermined that strategy on Jan. 29 when it voted to amend its bylaws to up the shareholder support needed to call a special meeting from 25 percent to 80 percent.
In a letter to Biglari and Cooley, Williamson defended the change, saying it prevents a "vocal minority with its own agenda" from taking a step that "would disrupt and interfere" with the company's focus on addressing its challenges.
Biglari scoffed: "This revision provides the board immunity, not accountability, and reveals a culture to which we cannot subscribe."
Bluster goes with the territory for activist investors like Biglari. After all, the best way to win support from fellow shareholders is to stir up outrage.
But he's also one smart guy, as his letter to fellow shareholders shows. The 10-page letter makes a compelling case that the company's expansion from 233 to 435 company-owned restaurants over the past 10 years has come at the expense of shareholder wealth.
The company poured more than a half-billion dollars into capital expenditures during that span. While sales more than doubled, profit failed to keep pace. Pretax profit, $32.8 million in 1998, rose as high as $44.5 million in 2005 before plummeting to $14.9 million last year.
The stock, which topped $18.75 in 1998, now trades for $8.80. Most of the decline came in the past year, as performance worsened. Steak n Shake now has reported 10 straight quarters of declining same-store sales.
"The faster Steak n Shake plans to grow, the more value it will destroy," Biglari said in his letter to shareholders.
Instead, Biglari advocates focusing on the less-capital-intensive business of franchising, while relentlessly seeking ways to improve profits at existing restaurants. He also says the company should buy back stock, a move that reduces the number of shares outstanding, pushing up earnings per share.
And the company needs "an entrepreneurial CEO who will be relentless in fighting costs, who will focus on the customer by leading employees and franchisees to espouse a common standard of quality, service and cleanliness," he said in his letter. Gilman has been interim CEO since Peter Dunn resigned from the top job in August.
The board on Jan. 31 sent Biglari and Cooley a letter that struck a conciliatory tone. It offered the pair slots on management's slate of director nominees, as part of a plan to leave existing directors in place but to expand board membership to 11.
The letter, signed by director John Ryan, a former Indiana University president, noted that "many of the steps you favor are already being implemented." It said that "locating and hiring the best [CEO] candidate is the single most important action we can take to improve the company's performance."
Yet the letter also disclosed the bylaw change-something the board never would have adopted if it thought it could sweet-talk Biglari and Cooley into submission.
Turns out, its wariness was wellfounded. Biglari on Feb. 4 said he was turning down the seats. He suggested he didn't want the blessing of a board that was willing to eliminate a "fundamental shareholder right."
So Biglari and Cooley will continue to pursue board seats on their own, with the ultimate aim of uprooting the current directors. The battle for control already has been bruising, and it promises to get bloody.