BEHIND THE NEWS: 29-year-old investor stirring the pot at Steak n Shake

August 27, 2007

A Texas hedge fund manager young enough to be the grandson of several Steak n Shake Co. board members might cause the board a lot of headaches in the months to come.

Twenty-nine-year-old Sardar Biglari, who runs the San Antonio-based Lion Fund, is leading a group that recently amassed a 5.8-percent stake in the struggling Indianapolis restaurant company.

Biglari isn't the passive investor type-just ask the folks at Applebee's, Friendly Ice Cream Corp. and Western Sizzlin Corp., three other chains where he's thrown his weight around.

Biglari and another principal in the Steak n Shake investor group-Philip L. Cooley, a business professor at Trinity University in San Antonio-already have notified the company that they want to stand for election as board members when it holds its annual meeting.

They're not waiting around for a seat at the table. On Aug. 13, they met with Chairman Alan Gilman and top management to discuss "the business, operations and future plans" of the company, the investment group said in a Securities and Exchange Commission filing. Three days later, the pair followed up with the request for board seats.

If their group can help jack up Steak n Shake's sagging stock price, they could pocket millions in profits. The group spent more than $19 million since spring to acquire its stake.

Biglari has hit pay dirt before-most notably when he sold his Internet service provider at the height of the dot-com boom. He plowed proceeds into launching the Lion Fund in 2000. He's since invested in firms of many stripes. Two years ago, he ran an ad in IBJ seeking to buy shares in the Indianapolis Indians, which he called a "tremendous franchise."

Biglari's group is not the only activist investor with a major slice of Steak n Shake. In June, a Dallas-based investment group that had acquired 9.4 percent of the company said it wanted to explore an acquisition or other "potential transactions to maximize shareholder value."

That group-which includes the hedge fund HBK Investments, the private equity firm Lone Star Funds and ex-Burger King Chief Financial Officer Robert Stetson-declined to comment to IBJ. An aide to Biglari said he also would not comment.

Asked about Biglari, Steak n Shake Executive Vice President Jeff Blade said, "We proactively talk with all of our shareholders," but had no further comment.

The shareholder maneuvering is occurring at a time of great tumult for Steak n Shake, one of the nation's oldest restaurant chains. Earlier this month, Peter Dunn resigned as CEO following eight straight quarters of declining same-store sales.

If Biglari has his way, the company-founded in 1934 in Normal, Ill.-could be in for sweeping changes, including a big shift toward franchising. Just 10 percent of Steak n Shake's 496 restaurants now are owned by franchisees.

That was Biglari's game plan at Western Sizzlin, a Virginia-based chain where he has been an investor since 2005. His Lion Fund now owns one-third of the firm. He became chairman in March 2006 and CEO this May. Part of Biglari's Steak n Shake investment is through Western Sizzlin.

In a letter to shareholders this June, Biglari wrote that in 2006 "Western Sizzlin underwent a cascade of changes-e.g., the elimination of certain expenditures and projects-all under the premise that the company should focus on franchising, not on operating restaurants."

In the 11-page letter, which quoted the noted economist John Maynard Keynes, Biglari said business executives frequently deploy capital based on past practice, rather than on what's best for shareholders.

"In making capital allocation decisions, we were not going to let company history or other institutional constraints influence capital commitment. ... Far too many managers blindly reinvest their shareholders' capital with the prospect of low returns simply because of the history of the company."

So far, other Western Sizzlin investors are slapping him on the back. Shares are up 35 percent since he became chairman.

Biglari also pushed for more franchising and sharper management at Massachusetts-based Friendly Ice Cream after buying a 15-percent stake last year. His activism propelled the restaurant chain into play, and this summer Florida-based Sun Capital (the same firm that acquired Marsh Supermarkets) bought Friendly for $337 million. The $15.50-per-share price was close to double what Biglari paid.

Not all deals have worked out so well. Biglari expressed outrage in July after Applebee's International agreed to be acquired by IHOP Corp. for $1.9 billion. Biglari, whose group owns 1.4 percent of Applebee's, has vowed to vote against the deal, calling it a "grave mistake" that woefully undervalues the business.

Biglari has yet to show his cards at Steak n Shake, but this much is clear: Watching events unfold will be interesting. The company's board-whose average age is 64-will have to take the youthful newcomer seriously.
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