Biglari Cements His Status


Fear has a way of motivating people to do good work. That includes the boards and executives of public companies. Arguably the broadest sword in the activist investor's arsenal is fear: The prospect that an activist investor will force some folks out of their jobs frequently lights a fire under companies and leads to considerable improvement.

And so it is always a red flag when we see actions designed to prevent that from happening. Look no further than the following risk factor, at the end of a lengthy list of such risks, on the most recent annual report at San Antonio-based Biglari Holdings:

Certain agreements with our Chairman and CEO may deter a change of control.
We have entered into a license agreement with Sardar Biglari, Chairman and Chief Executive Officer, under which Mr. Biglari has granted the Company an exclusive license to use his name when connected to the provision of certain products and services, and a sublicense agreement with Steak n Shake that, among other things, grants Steak n Shake the right to use the trademark “Steak n Shake by Biglari.” In the event of a change of control of the Company, Mr. Biglari would be entitled to receive revenue-based royalty payments related to the usage of his name under the terms of the license agreement for a defined period of no less than five years. Revenue-based royalties derived from Steak n Shake’s restaurants (including Company operated and franchised locations), products and brands, would be included in calculating these royalty payments. A change of control would also enable franchisees to terminate their franchise agreement with us.  In addition, we have an incentive agreement with Mr. Biglari, in which he is entitled to receive performance-based annual incentive payments contingent on the growth of the Company’s adjusted book value in each fiscal year. In the event of a change in control after the third anniversary of the incentive agreement, Mr. Biglari would receive specified payments thereunder. The combination of these provisions along with others referenced (e.g., contracts cancellable if Mr. Biglari is no longer Chairman and CEO) altogether could have the effect of preventing a transaction involving a change of control of the Company or deterrence of a potential proxy contest.


In other words: For the first time, the company is acknowledging that various license agreements it has with Big for the use of his name, along with his rich incentive agreements, make it difficult for someone to come in and take over the company.

We take risk factors with a big grain of salt. As this week's Great Chipotle Guacamole Freakout suggests, these risk factors are simple statements of what could happen, not what will happen. So companies have risk factors that include global warming, flu pandemics, earthquakes, Obamacare, ecommerce sales and other issues are all risk factors in various public company reports. It doesn't mean they'll happen.

And Biglari Holdings is being established as an investment vehicle, one that is driven by a single man, Mr. Big himself, who largely dictates the investment decisions.

Yet we find this risk factor to be rather rich, coming from a company that itself was taken over in a largely hostile bid several years ago. It demonstrates that, intentional or not, one of the effects of the company's various maneuvers over the years is to keep Big in place, without the scrutiny that typically comes with the territory of being a public company CEO.

Over the years, Big has tried to institute a dual-class stock system. He has tried using reverse stock splits to get the price up to levels that would keep all but the wealthiest investors out. He also pushed a compensation plan so egregious that even his own fawning base of shareholders balked and he was forced to put a cap on his compensation. He would later use his company's complex structure to get around that pesky cap. His board only has six members, including himself and Vice Chairman Phil Cooley—the "Phil" from the frequent "Phil and I" comments in his letters to shareholders.

Licensing his name to the Steak N Shake brand does nothing to add to the value of Steak N Shake—nobody that I know is lured to a burger joint by the image of an investor with slicked-back hair. And yet, should someone take control of the company, he would get a percentage of the chain's royalty stream. We can't think of any reason to put the "By Biglari" name on Steak N Shake unless it's to keep Big in his current position.

And adding a change-of-control payment in his incentive plan does the same thing.

We do believe that Big does some interesting things. He took a dying Midwestern burger brand and turned it into a legitimate force. He also lit a fire under Cracker Barrel executives, helping to ignite an astonishing, two-year stock price run. We wouldn't be surprised if his Maxim Magazine buy works out.

And Big is hardly the only executive who works hard to solidify his position at the company he runs. Change-of-control deals are common and, as many activists point out, boards are not above taking actions to limit shareholder say in board issues. We just think these efforts are egregious. It sure looks to us like Big is an activist investor who is afraid of activist investors.

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