Cracker Barrel vs. Biglari - Round 3

Amelia Morrison Hipps

Editor’s note: Because Cracker Barrel Old Country Store Inc. was founded in Lebanon and its corporate headquarters are here, The Wilson Post decided to take a look back at the three-year battle between the local restaurant/gift shop corporation and activist investor Sardar Biglari before next week’s annual meeting.

For the third time in as many years, Cracker Barrel Old Country Store Inc. (CBRL) shareholders will be asked to place activist investor Sardar Biglari and his second in command at Biglari Holdings Inc. on the local restaurant’s board of directors next Wednesday.

In addition, Biglari, who is the largest shareholder of CBRL, wants shareholders to approve a $20 per share special dividend for all stockholders.

If approved, the special dividend would cost the restaurant/gift shop company $800 million, of which it would have to borrow close to $400 million, essentially doubling its debt, to finance.

These two requests are despite the fact that Biglari, the holder of almost 20 percent of Cracker Barrel stock, has failed twice to win seats on the board. In 2011, the first year Biglari asked shareholders to place him on the board, and 74 percent of the votes cast by non-Biglari shareholders voted no. In 2012, 90 percent of non-Biglari shareholders voted against his addition.

Still, Biglari, whose San Antonio, Texas-based Biglari Holdings which owns the Steak ‘n Shake and Western Sizzlin brand restaurants, seems determined to not give up the fight.


Back to the beginning

Biglari began purchasing shares of CBRL stock almost three years ago. By October 2011, Biglari Holdings and its affiliated Lion Fund Limited Partnership had acquired almost 2.3 million shares.

According to an article by Reuters News Service, in late June 2011 Biglari called former Cracker Barrel Chief Executive Officer Michael Woodhouse to say he had ideas for improving the company and that he wanted himself and Philip Cooley, vice chairman of Biglari Holdings, appointed to the board of directors.

Based on this, it was apparent the now 36-year-old was not going to be a passive investor.

The Cracker Barrel board refused his request, citing in a Sept. 6. 2011 letter from CEO Sandra Cochran and Chairman of the Board James W. Bradford Jr., “concerns about potential conflicts of interest and legal issues given your roles with Steak ‘n Shake, as well as other issues.”

However, the company did offer to allow him to appoint two independent directors “unaffiliated with Biglari Holdings.”

However, he declined the offer, Cracker Barrel said.

Also in September 2011, Biglari, who according to numerous articles throughout the years refuses to talk to the media and instead communicates primarily via his company’s website, press releases and filings with the Securities Exchange Commission, announced that he had applied for regulatory permission to purchase as much as 49.99 percent of CBRL common stock. But in a statement, said his company had no intention of purchasing anywhere near that amount.

At that point, Cracker Barrel’s board decided to implement what is called a shareholder rights plan, or “poison pill” provision, that would kick in after an investor acquires 10 percent of the company.

In essence, the poison pill provision is a tactic boards can take against a possible takeover. Cracker Barrel’s plan at the time would kick in if a shareholder or group acquired 10 percent of CBRL stock and give other shareholders the right to purchase for $200 shares that normally would be twice that value.

By doing this, the percentage of shares any single shareholder or group had before the poison pill is invoked is diluted.

Biglari countered that it effectively prevented any shareholder from purchasing more than 10 percent of the stock, and that Biglari Holdings planned to keep its stake “well under 20 percent.”

In April 2012, Cracker Barrel’s board approved a new shareholder rights plan that had a 20 percent threshold, instead of the former 10 percent. Neither plan applied to all-cash, fully financed offers for the company open for at least 60 business days.

The poison pill provision, which was approved by CBRL shareholders at the annual meeting in November 2012, will expire on April 9, 2015.

Today, Biglari owns 19.9 percent, just .1 percent shy of the 20 percent trigger, of CBRL stock, according to an Aug. 17, 2013 article in The Tennessean.


Biglari settles with FTC over violation

According to the Sept. 25, 2012 article by Reuters, Biglari owned 100 CBRL shares on May 23, 2011. But by the end of May and mid-June of the same year, he bought more shares until he held more than $66 million worth of shares.

While Biglari disclosed his purchases to the Securities and Exchange Commission, as required by law, he failed to notify the Federal Trade Commission, which works with the U.S. Justice Department to enforce antitrust laws.

As a result, the Justice Department filed a complaint on behalf of the FTC stating that he violated the Hart-Scott-Rodino Act, which requires stock purchases over a specific amount to be reported to antitrust regulators.

Passive investments are exempt, according to the Reuters’ article. However, the FTC argued that Biglari intended to be an active investor, meaning he intended to become involved in the operations and management of the company.

The Reuters article reported that the FTC stated in its complaint the Biglari phone call to Woodhouse in late June 2011,

In September 2012, Biglari Holdings agreed to pay a $850,000 penalty to settle the charges, but admitted no liability, according to the article.


Biglari refuses buyout offers from CBRL

After his failed second attempt at gaining seats on Cracker Barrel’s board of directors, Bradford and Cochran conveyed two offers to Biglari to buy back his 4,737,794 shares of CBRL, according to a letter filed with the SEC by Biglari.

The first was on Nov. 30, 2012 and the second was in a letter dated Feb. 13, 2013. At the time, it would have cost Cracker Barrel $305 million to buy out his shares.

However, in a letter dated on Valentine’s Day, Biglari refused the offered. In fact, Biglari reiterates, “that Biglari Holdings plans to remain a long-term owner of Cracker Barrel. Furthermore – as I have repeated before – we would not be interested in a share repurchase that is not offered to all other Cracker Barrel shareholders.”

He also stated that “We have not had, nor do we have, a need for an exit strategy. We have one of the longest time horizons in the investment world.”

Clearly, the Iranian-born, self-made millionaire was not going away.

(For profiles on Biglari, here are three: “Who is Sardar Biglari” in the January 2012 issue of QSR Magazine and “The Restaurant Investor” in the November 2009 issue of (no longer online) and an eight-part series “Biglari Holdings, Inc: Sardar Biglari – Bet the Jockey” at


Biglari restructures his holdings

According to documents filed with the SEC, Biglari spent part of this year restructuring his business ventures, which were made public in July.

Dr. Paul Stumb, dean of the Labry School of Business and Technology at Cumberland University, explained the changes to The Wilson Post.

“He clearly has engaged in some questionable corporate governance practices,” Stumb said.

Biglari has five major business interests. Biglari Holdings Inc., is a publicly traded, diversified holding company “owning controlled and noncontrolled businesses,” according to a 2012 letter to shareholders from Biglari.

Then there is Biglari Capital Corp., which is now the general partner over two limited partnerships – The Lion Fund I and The Lion Fund II – with a limited number of members. Steak ‘n Shake Operations is a wholly-owned subsidiary of Biglari Holdings.

Prior to the restructuring, everything fell under Biglari Holdings, including Biglari Capital Corp.

“He serves as a general partner in some of those organizations. As a general partner, he is essentially on the payroll of the organization,” Stumb said. “The Lion Funds are limited partnerships. A limited partner is somebody who just invests in a company but doesn’t get actively involved in the management of the company.”

Stumb said The Lion Fund II is a new fund Biglari established and that he did for one of three reasons.

“One was to separate the Cracker Barrel stock ownership from Steak ‘n Shake so that he can avoid that conflict of interest issue,” Stumb said.

Documents show that approximately 17 percent of his CBRL stock is now under the control of The Lion Fund II, while approximately three percent remains under Biglari Holdings and Steak ‘n Shake Operations.

Prior to the restructuring, approximately 19 percent of his CBRL stock was under Biglari Holdings, with approximately one percent in his original The Lion Fund.

“Two, the moves provided himself greater singular control over those shares, because if they’re under Biglari Holdings, that’s a publicly traded company and he doesn’t have as much personal control,” said Stumb.

By moving the majority of his CBRL shares into The Lion Fund II, where he is the general partner, ‘he has total control and voting control over those shares of stock.”

The third reason was that he could do it to increase his own personal wealth by avoiding the compensation cap at Biglari Holdings.

“In any company, for example a public trading company like Biglari Holdings, the board of that company will establish compensation caps for the officers and directors,” Stumb said. “Those are maximum amounts payable to any one individuals.

“What he's apparently done by moving funds around, he’s allowing himself to be compensated in unique ways that bypass those compensation caps, just to increase his personal wealth by essentially cheating the system.”

Stumb said nothing Biglari has done is illegal, but that he is “lining his own pockets and being very shrewd.”


Three times a charm or strike out?

In August of this year, a letter was delivered to Cracker Barrel from Biglari’s The Lion Fund II, which at this point holds the majority of CBRL shares, nominating himself and Cooley “to stand for election to the board” at the annual meeting this Wednesday.

Just 13 days after receiving the letter, Cracker Barrel’s board announced that it had voted unanimously to reject the nominations, stating they “took into consideration many factors, including the Company’s shareholders’ significant votes, two years in a row, against the proposed candidates …; the individuals’ backgrounds and qualifications; uncertainty over Mr. Biglari’s ultimate agenda; and continued business and legal concerns over conflicts of interest.”

On Sept. 16, Biglari sent a letter to Bradford stating his intentions to continue to seek two positions on the board and to ask the board to approve a 20 percent special dividend to all shareholders.

In his letter, which is available at that he created last year, Biglari writes, “We have one and only one agenda: to make money. … So far, we have made about a quarter of billion dollars in our Cracker Barrel position. We find it undeniable that Cracker Barrel’s stock appreciation generally resulted from our purchasing 20 % of the Company in the open market.”

Biglari, who claims to write all of his own letters and press releases in a 2012 letter to Biglari Holdings’ shareholders, also states in the Sept. 16 letter that they have pushed the CBRL board and management “to return more capital to shareholders along with pursuing value-enhancing initiatives, e.g., licensing. But that’s not enough: we want more.”

Ironically, on Oct. 4, Cracker Barrel announced that the “first shipments of CB Old Country Store™ licensed products made available through their licensing agreement with John Morrell Food Group, a subsidiary of Smithfield Foods, will begin shipping next week.”

In the press release, CBRL CEO Cochran says, “Extending our brand beyond our physical locations is an important component of our strategic plan.”

Biglari closed his letter to Bradford with the following statement: “Rest assured: We are determined to remain relentless in our pursuit of additional value creation.”


October a flurry of activity

Last month saw a flurry of letters and presentations for shareholders’ to consider being filed by both parties throughout the month of October.

In response to Biglari’s proxy fight for two board seats and the payment of a $20 special dividend to all shareholders, Cracker Barrel created an investor presentation for shareholders on Oct. 16, in which they lay out their vision for the future, as well as arguments against both of Biglari’s proposals.

On Oct. 23, Biglari filed a letter to CBRL stockholders asking for their support in his proxy fight. In it he writes: “Our agenda is the same as yours: to make money.

“Cracker Barrel was undervalued and performing poorly before we appeared on the scene. Shortly after we demanded his outster, Chairman and CEO Michael Woodhouse exited. Moreover, since our arrival, nearly 80 % of the Board has turned over. …

“It has been clear that the Board fears its largest owner, for it would rather spend shareholder money to engage in argumentum ad hominem rather than to engage in productive resolutions, which have proposed in an effort to allay the Board’s fears.”

Biglari also writes that “… we have been clear about our agenda: We are interested in making money, not controlling the Company. We have offered multiple compromises to the Board that lay bare this agenda. … We offered to halt our pursuit of Board seats at the upcoming annual meeting if the directors would approve a significant dividend,” which he considers to be between $13 and $20 per share.

He also writes that he had conveyed to Bradford and Cochran “that we would contractually agree not to seek board control if we had two seats.”

Biglari followed that letter with one on Oct. 24 from Jefferies LLC that stated the investment-banking firm “is highly confident of its ability to arrange the Debt Financing” of $800 million “to refinance the Company’s existing debt and fund the special dividend.”

On Oct. 29, Cracker Barrel posted an investor presentation supplement that addressed many of the points Biglari raised in his Oct. 23 letter to CBRL shareholders.

Then on Nov. 1, CBRL issued a press release that states that three “leading proxy voting advisory” firms recommend that shareholders vote against the “non-binding, advisory proposal on a $20 per share special dividend.”

As of Friday, Nov. 8, the last communication by either party is a letter from Cochran to CBRL shareholders urging them to “vote the WHITE proxy card to elect all of the Company’s nominees to the Board of Directors and to vote against the non-binding, advisory proposal on a $20 per share special dividend, which was publicly proposed by affiliates of Biglari Holdings.”

What happens next will be determined at Wednesday’s annual stockholders’ meeting.