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TheStreet Open House

Cracker Barrel Makes Faux "Offer" To Biglari Holdings

Stock quotes in this article: BH, CBRL

SAN ANTONIO, TX, September 5, 2012 /PRNewswire/ -- Biglari Holdings Inc. (NYSE: BH) today learned that Cracker Barrel's (NASDAQ: CBRL) new board members have decided to use old board tactics. We believe this Board has made an offer that is not serious; rather, it is an obvious attempt to posture and mislead shareholders. We had higher hopes for this Board: We were expecting it to be reasonable rather than mere window dressing hoping to appear reasonable. The ersatz offer has two fundamental flaws, demanding that we nominate two persons to the Board of Directors who have

1) No relevant restaurant experience 2) No significant ownership in Cracker Barrel's stock

In our view, an offer with such defeatist, detrimental conditions is not a real offer. We ask "what good does it do shareholders for us to find strangers without restaurant experience and then attempt to place them on the Board?"

Plainly, the Board's proposal is diametrically opposed to our ideas as well as to the research showing that companies with the presence of large shareholders outperform companies that have no such owners overseeing management. Over two centuries ago Adam Smith in The Wealth of Nations made the following observation regarding agents of companies: "The directors of such companies, however, being the managers rather of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own…. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company."

Benjamin Graham wrote in his seminal book, Security Analysis (1951 ed.), "The ideal solution is to have the majority of the board of every company made up of people who meet three qualifications: (1) good character and general business ability; (2) substantial stock ownership, either directly or by those who are responsible for their nomination; and (3) absence of close personal or business associations with the operating heads."

In the July/ August 2012 edition of Harvard Business Review, the authors of an article covering corporate governance matters concluded: "[W]e do think that giving a favored role to long-term shareholders, and in the process fostering closer, more constructive relationships between shareholders, managers, and boards, should be a priority."

We believe logic and research are on our side. It is simply irrational to deny an 18% shareholder two board seats. The Board is not willing to extend the courtesy of granting seats commensurate with our capital commitment. Instead, what the Board is saying is that we should play the role of a professional search firm. That is, we give the Board names of candidates unaffiliated with Biglari Holdings, and then the Board will decide whether those individuals are worthy of board seats. If the Board were reasonable, it would have offered us two board seats and not asked us to submit two nominees; however, since there is a proxy contest under way, the Board wants to appear reasonable. The not-so-subtle game the Board is playing is obvious to all shareholders.

Several weeks ago we were optimistic and resultantly were led to believe that Cracker Barrel was under a new, better regime. We flew to Tennessee to meet with two new board members and to become acquainted with each other. Our hope was to join the Board without a proxy contest. In fact, it was such a collegial meeting that we challenge the incoming Chairman to cite any reasons why our presence on the Board would be damaging or destructive to Cracker Barrel.

We want to contribute to the prosperity of Cracker Barrel. The basic idea is to make money for the benefit of all shareholders. The best way to prosper is through fundamental improvement in the company's operations. We have the business knowledge and the financial incentives to help increase the economic value of the business. We are willing to pay the price for vigilant stock ownership.

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