Cracker Barrel Fight: Biglari Holdings Ups the Ante

NEW YORK (TheStreet) -- The world of activist investing has long fascinated me, even more so when stocks that I have exposure to are involved. One of the more interesting situations that continues to develop is the Cracker Barrel (CBRL) - Biglari Holdings (BH)saga saga.

I've long been a Cracker Barrel fan, both the food and the stock. Although the restaurant chain has been around for decades, it remains one of the more interesting restaurant concepts, and I've always enjoyed the food and atmosphere. I no longer own the stock directly, but rather through my position in Biglari Holdings, which owns about 20% of Cracker Barrel. I saw this as a less expensive way to get exposure to Cracker Barrel, although that has not paid off nearly as well as owning Cracker Barrel shares directly. CBRL Chart CBRL data by YCharts
BH Chart BH data by YCharts

Biglari Holdings CEO Sardar Biglari likes Cracker Barrel too, enough to purchase one fifth of the company over a few years, yet he is at odds with management and believes that the company can do much better with his influence. Due to a poison pill adopted by Cracker Barrel, he simply cannot grow his position beyond 20%, but is trying to effect change via a third attempt to gain seats on the board of directors, and other, more recent "suggestions".

Two weeks ago, Biglari sent another letter to Cracker Barrel shareholders, laying out his vision for the company. In it, he told fellow owners that "Without any question, Cracker Barrel is an A+ brand, but in our view, it has not achieved A+ performance because the board lacks entrepreneurial talent." Never one to pull punches, Biglari goes on to tout one of the ideas he has shared with Cracker Barrel's board, that the company should expand its debt level in order to pay a $20 special cash dividend to shareholders.

I am not typically a fan of piling on debt, in this case too, but Biglari makes the argument that this would improve Cracker Barrel's capital structure; that this is a perfect environment to lever up given low interest rates, and that paying the special dividend is a better use of cash than opening new stores, because Biglari believes the companies returns on capital for new stores are subpar.

Cracker Barrel, not surprisingly had an adverse reaction to Biglari's proposal, primarily because of the additional debt. As Biglari points out in his letter, though, the board did offer to buy out the Biglari holdings stake twice in the past year, which would have cost the company about $300 million, and would also have increased debt. After one of the offers, Biglari turned the tables, suggesting that instead of buying out Biglari Holdings stake, the $300 million should instead be paid as a $13 special dividend to all shareholders.

While Biglari makes an interesting point to the board, stating that if they are willing to go into debt to repurchase Biglari Holding's, they should also be willing to incur debt to return capital to all shareholders. One thing is clear, Biglari is a pain in the backside to Cracker Barrel's management and board, and they just want him to go away. That however, is unlikely, at this point anyway.

Cracker Barrel's annual shareholder meeting will be held on Nov. 13, and both the company, and advisory firms such as ISS and Glass Lewis have recommended that shareholders vote against Biglari Holdings director nominees, and a non-binding proposal concerning whether to pay the $20 special dividend.

What may be most interesting about this situation is the fact that Cracker Barrel shareholders, besides Biglari Holdings, may see little need for change. After all, the stock is up more than 150% in the past year, and it's difficult for the beneficiaries of to see this as a troubled company. Ironically, Biglari Holdings may be responsible for some of that run-up, as it increased its position.

At the time of publication the author is long BH.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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