There's rarely a dull moment in restaurant land, a sector that is not often associated with value investing, but one where I have found some unique opportunities the past several years.
The Biglari Holding-Cracker Barrel soap opera continues to smolder. Biglari Holdings has amassed nearly a 20 percent stake in Cracker Barrel, and, unhappy with the direction of the specialty restaurant chain, has attempted to obtain seats on the board of directors. Cracker Barrel rejected these overtures and the relationship between the two companies may be getting worse.
While Cracker Barrel's recently adopted poison pill limits Biglari Holdings from increasing its stake beyond 20 percent, the situation has taken an interesting turn. Last week, Cracker Barrel management fired off a letter to Biglari Holdings CEO, Sardar Biglari, offering to buy back the 4.7 million-plus shares the company currently owns, at the market price, which equates to about $310 million. Cracker Barrel said that the offer was more than fair given that such a large a stake would be sold at a discount if unwound slowly. The company also pointed out that Biglari Holdings has already seen some $70 million in unrealized gains in its stake, suggesting that it's time to lock in those gains for Biglari shareholders.
It took all of one day for Biglari to respond with a resounding "no," insisting that Biglari Holdings plans to remain a long-term owner of Cracker Barrel. Sardar Biglari turned the tables, suggesting that since Cracker Barrel believes it has the financial resources to repurchase such a large stake, it should consider making a tender offer for 20 percent of the company, or issue a one-time $300 million special dividend to shareholders. Zing!
It's difficult to say where this situation is headed next, but there's little doubt in my mind that Biglari will continue in his quest for seats on Cracker Barrel's board.
Meanwhile, the fundamentals of Biglari Holdings continue to look interesting. With a $472 million market cap, the company owns $310 million worth of Cracker Barrel, around 500 locations of fast-food chain Steak 'n Shake, small restaurant chain Western Sizzlin, a 12.75 percent stake in CCA Industries, 9.48 percent of Unico American, and other assets. Each share of Biglari Holdings theoretically represents ownership of 3.85 shares of Cracker Barrel, worth $256.
I've been a Cracker Barrel fan for a long time, both as a consumer, and as an investor. I believe it is one of the more interesting restaurant concepts, and its 44-year history demonstrates staying power among seemingly ever-changing consumer tastes. From an asset perspective, the company is real-estate rich, owning 409 locations. While I've owned the name outright in the past, I now get exposure through owning Biglari Holdings.
Stay tuned. This little saga is bound to get even more interesting.
—By TheStreet.com Contributor Jonathan Heller
At the time of publication, Jonathan Heller had was long BH.