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UPDATE: Steak n Shake vulnerable to buyout, analyst says

June 27, 2007

A Wall Street analyst said today that Steak n Shake Co. might fetch about $20 a share, or $570 million, if the company ultimately is sold-a hefty premium to where it now trades.

Investors have been buzzing about Steak n Shake's future since a group of Dallas-based investors disclosed in a regulatory filing this week that it had amassed nearly 10 percent of the Indianapolis company and wanted to open talks on strategy, such as an acquisition or other "potential transactions to maximize shareholder value."

The filing caused Steak n Shake shares to leap 16 percent, or $2.35, to $17.13 on Tuesday. This morning, shares staged a small retreat and were at $16.88 near midday.

"Everything is a possibility," Michael Gallo, an analyst with CL King in New York, said today. "The reality is that clearly the company has underperformed the last few years. Clearly, there is opportunity for improvement."

In the regulatory filing, the hedge fund HBK Investments and the private-equity firm Lone Star Funds said they did not plan to pursue a transaction unless the company's board of directors supported it.

Even so, the public filing pressures the board to figure out a way to boost the company's stock price, Gallo said.

Steak n Shake hasn't commented publicly on whether it would consider a sale, and an official could not be reached for comment.

In May, Steak n Shake reported a 4.7-percent decline in same-store sales in its fiscal second quarter. It was the seventh consecutive quarter that same-store sales fell. That followed 10 straight quarters of sales gains.

On a conference call with analysts in May, CEO Peter Dunn said business was being hurt by high gas prices and other factors that squeezed disposable income.

Gallo said that despite the tough environment, "we believe there is more that can be done in improving the business."

Officials with the Dallas investment group could not be reached for comment. The group has extensive expertise in the restaurant business. Financial backers include a former Burger King chief financial officer. Lone Star last year agreed to buy the Lone Star Steakhouse chain. It previously bought and sold the Shoney's and Captain D's restaurant chains.

The regulatory filing says the Dallas group purchased its shares in May and June for a total of $41 million.

Steak n Shake shares traded as high as $21 a share in March 2006 before falling as the company's performance sputtered. Even with Tuesday's spike in the stock price, Steak n Shake shares are down nearly 4 percent this year.

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