Denny's proxy fight follows Steak n Shake template

May 4, 2010

A group of dissident investors have launched a proxy fight at the Denny's restaurant chain using the template that led to a successful takeover of Steak n Shake.

The group, which includes former Steak n Shake investor and consultant Jonathan Dash, has formed The Committee to Enhance Denny's, set up the Website enhancedennys.com, and is asking shareholders to approve its slate of three members on the eight-member Denny's board.

The existing management of Spartanburg, S.C.-based Denny's Corp., which operates the 1,551-store chain known for its Grand Slam breakfasts, is pointing to the Steak n Shake example as part of its strategy to block Dash and his group from winning board seats.

Sardar Biglari, now the chairman of Steak n Shake parent Biglari Holdings Inc., in 2007 formed a Committee to Enhance Steak n Shake, set up enhancesteaknshake.com and launched his own proxy fight.

Once Biglari gained a foothold, he quickly rose to CEO, cut costs and added new promotions. He also cut capital expenditures from an average of $55 million per year to just $5.8 million last year, a move that helped Steak n Shake snap a 14-quarter streak of declining same-store sales.

In the meantime, Biglari also converted Steak n Shake into a holding company for a range of investments, including those beyond the restaurant sphere, over which Biglari has complete authority. And he changed the parent company's name to Biglari Holdings.

The board of directors of Denny's, in an April 27 letter urging a vote for its own slate of directors at the Denny's annual meeting on May 19, said the dissident group has "very questionable motives."

"Both the past actions of its members and the manner in which the group has behaved in this process make clear that it has a self-interested agenda, including potentially seeking to gain control of the company without paying a premium to you and the rest of the company's stockholders," the company noted.

The Denny's investors, who already own about 6 percent of the company's outstanding shares, have blasted the chain's descent to second place in sales in its category, behind IHOP, along with poor historic stock performance, "inappropriately high" administrative expenses and low stock ownership among board members. They also are critical of the chain's $150 million in expenditures on repairs, maintenance and new restaurants since 2006.

The group's board candiates—which include Dash, Oak Street Capital Management Founder David Makula and Macquarie Futures USA director Patrick Arbor—say they want to cut costs by $15 million.

Dash, reached at his office in Beverly Hills, referred a reporter to publicly available filings in the proxy battle, where he has described Denny's as an "iconic American brand" that needs a major revamp to survive, and that his group wants to bring a "fresh perspective" to the board.

Sound familiar?

Biglari, who owned about the same percentage of Steak n Shake's shares when he launched his proxy fight, also presented himself as a shareholder-friendly alternative to the chain's management. He bristled at the chain's hefty capital expenditures on new restaurants and renovations to old ones, saying the returns failed to justify the investments.

And he described Steak n Shake as an "iconic American brand" in need of a breath of fresh air.

The Denny's proxy battle sounds like a classic copycat attempt—one with a slim chance of mirroring the turnaround taking hold at Steak n Shake, said Rich Hummel, director of research at Columbus-based Kirr Marbach & Co.

He said takeover attempts in which investors want to collect and redirect a business’s cash flows to other investments are pretty rare. It’s an adapted version of Warren Buffett’s investing method with the former textile manufacturer Berkshire Hathaway—but in Buffett’s case he didn’t start taking cash flows out until it was clear the business was dying.

“The idea is to find stocks with a cheap price relative to cash flow, run them till they die, and take those dollars out of the business,” Hummel said. “Maybe I’m not as bright as these guys, but it seems like there are better ways to make a dollar.”

Denny's isn't exactly thriving but it also isn't looking like a company about to go out of business.

In its most recent letter to shareholders, the board of Denny's cites the example of Steak n Shake to argue the dissident group is more interested in taking over Denny's and diverting its cash flows than trying to improve the underlying business.

The company pointed out that after Biglari took over, Steak n Shake "proceeded to adopt a range of anti-stockholder governance practices and increased the salary of Mr. Biglari more than threefold, from $280,000 to $900,000."

Members of the Denny's group said in proxy materials that they began buying shares in August 2009, a few months after key members met for the first time, in Indianapolis at the annual meeting of what was then Steak n Shake Co.


Recent Articles by Cory Schouten

Comments powered by Disqus