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BEHIND THE NEWS: Activist poised to prevail in Steak n Shake showdown

March 3, 2008

Alan Gilman and James Williamson have served on The Steak n Shake Co.'s board a combined 39 years. It's a good bet they won't be around much longer.

Analysts say the Texas-based hedge fund that wants to replace Gilman and Williamson on the board with two of its own representatives likely will succeed.

Major shareholders are mum on how they plan to vote in the proxy battle, which will come to a head at Steak n Shake's annual meeting March 7 at the downtown Marriott.

Yet most or all of those big shareholders are deeply underwater on their Steak n Shake investments, giving them little reason to feel allegiance to the company's existing nine-person board.

As one professional investor with a smaller stake told IBJ, "The range of opinions I have [heard] regarding the board ... are from slightly negative to extremely negative."

The Texas fund, The Lion Fund, argues in a letter to shareholders that Gilman and Williamson "are a main source of the company's myriad problems."

Gilman, 77, was Steak n Shake's CEO from 1992 to 2003, and has been interim CEO since Peter Dunn resigned from the top job in August. Williamson, 76, was Steak n Shake's CEO from 1985 to 1990.

All nine board seats are up for election at the meeting. Eleven candidates are vying for those slots-the nine existing directors, plus the Lion Fund's Sardar Biglari and Philip Cooley. The top nine vote-getters are in.

Biglari is just 30, a young whippersnapper compared with most of the board, whose average age is 65. He founded the San Antonio-based Lion Fund after making his fortune selling an Internet service provider. Cooley, 64, is an adviser to the fund as well as a business professor at Trinity University in San Antonio.

In a shareholder letter, Biglari says Steak n Shake is "handicapped by a lack of leadership, lack of execution and lack of strategic direction from headquarters." He and Cooley say the company wasted millions of dollars building new restaurants and instead should focus on franchising, improving profits at existing locations, and cutting costs.

Steak n Shake counters that it already is well on its way to correcting the problems that have led to 10 straight quarters of declining same-store sales and a sharp decline in the company's stock price. Steak n Shake shares now fetch $9.15, down by nearly half since August.

"In our opinion, the attractiveness of the Steak n Shake brand and business will increase as we implement these changes and improve performance," the board said in a letter to shareholders. "This leads to our firm conviction that this is not the time to hand over control to a group of hedge fund investors with a very short-term investing horizon."

However, given the losses shareholders have suffered, "it would be hard for them to want to support the current board," said Michael Gallo, an analyst with the investment firm CL King in New York.

Added Conrad Lyon, an analyst with FTN Midwest Research in California: "I'd be shocked if [Lion Fund] didn't get at least one seat."

Plus, 55 percent of the stock is in the hands of just seven outside investors. That means Lion Fund may be able to get its votes by winning over a handful of heavyweights rather than having to rely on votes from the rank-and-file masses.

The Lion Fund and its affiliates own 8.5 percent of the stock-more than all the existing directors combined. The biggest investor, New York-based MSD Capital-the family investment vehicle for computer entrepreneur Michael Dell-owns 9.8 percent. An MSD spokesman declined to comment.

It doesn't help the current board's case that both the influential firms that advise big investors on proxy matters are siding with the Lion Fund. One of the firms, Marylandbased Institutional Shareholder Services, noted that the presence of two former CEOs on the board might be a "deterring factor" in the company's quest to hire the best CEO possible.

If Biglari and Cooley both win seats, they still would have to get along with seven other directors, four of whom have been on the board at least five years. In a regulatory filing, Biglari said he's hopeful they would fall into line, interpreting the vote outcome as an endorsement of Lion Fund's strategy.
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