Biglari was persistent in pressing Western Sizzlin deal

November 23, 2009

A newly filed document shows Indianapolis-based Steak n Shake Co.’s purchase of Western Sizzlin Corp. was the idea of Sardar Biglari, who leads both companies, and that Biglari played a key role in shaping the $39 million deal.

The purchase of the Roanoke, Va.-based company has raised eyebrows because of the potential for conflicts of interest stemming from big ownership stakes held in both firms by Biglari investment groups. When the deal was announced in August, at least one analyst suggested it involved self-dealing, and some class-action attorneys began scouting for clients for a possible lawsuit, though none apparently has been filed.

The document, filed with the Securities and Exchange Commission in preparation for the Western Sizzlin shareholder vote on the purchase, says that Biglari proposed the deal at Steak n Shake shareholder meetings on Jan. 8 and Jan. 14.

In response, the boards of both companies formed special committees to consider the deal that excluded Biglari and business partner Phil Cooley. After discussions, Biglari “advised the Steak n Shake board that further consideration should be deferred,” according to the filing. The filing does not explain why, and Biglari did not return a call from IBJ.

Biglari revived the discussion in early May, triggering formation of a special Steak n Shake committee of independent directors comprised of John Ryan, a former Indiana University president; Ruth Person, chancellor and professor of management at the University of Michigan-Flint; and William Regan, a private investor who formerly was chief financial officer of the California Independent System Operator Corp.

Biglari that month provided Regan, the committee chairman, with a “preliminary assessment” of the deal’s value. He also told Regan “he desired that the special committee should remain open to transaction structures” beyond the common practice of paying for a purchase by issuing stock.

The filing shows Regan took steps to try to mitigate conflicts. For example, he didn’t disclose to Biglari and Cooley that Steak n Shake’s financial adviser had provided a preliminary value for Western Sizzlin of between $12 and $13.50 a share. Instead, he reported to the full board that the special committee would be comfortable with an offer from $12 to $13 a share.

The document suggests the special committee initially was reluctant to pursue the unusual structure of the deal, which called for Steak n Shake to pay the bulk of the purchase by issuing bonds to Western Sizzlin shareholders.

Final terms call for Steak n Shake to issue $23 million in bonds, paying a steep 14 percent interest for five years. The rest of the deal’s $39 million value comes from Western’s transferring directly to its shareholders 1.3 million Steak n Shake shares it already owned. That transfer occurred earlier this month.

The decision to issue bonds, the approach championed by Biglari, will generate a steady stream of interest income for him and his investment group. The filing says Biglari justified that approach on the grounds that Steak n Shake shares were undervalued and thus not an ideal currency to use for the purchase.

According to the filing, the boards of both companies approved the deal in part because they concluded the combined firm would save on overhead costs. Steak n Shake’s board also noted that it would boost the company’s scale in the restaurant industry and was consistent with Biglari’s strategy of turning Steak n Shake into a holding company for various businesses. Steak n Shake is by far the larger company, with 485 restaurants, most of them company owned. Western Sizzlin has 101 franchised steakhouse restaurants.

In an August report, Michael Gallo, an analyst with CL King, looked askance at the deal, in part because Steak n Shake’s turnaround is still young.

“At first glance, there seems to us to be some self-dealing regarding the transaction,” he wrote. “Given the apparent progress toward stabilizing [Steak n Shake] over the last couple of quarters, this transaction makes no sense to us.”

Western Sizzlin hasn’t set the date for its shareholder meeting. Based on the current price of Steak n Shake shares, Western Sizzlin shareholders are to receive a total of $13.65—$8.07 in bonds and $5.58 in Steak n Shake stock distributed by Western.

The deal was worth about $13.25 a share on the day it was announced, but the value has grown because Steak n Shake’s share price has increased. Western Sizzlin shares were trading at $12.75 the day before the announcement.



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