Struggling restaurant companies targeted by aggressive shareholders

Nation's Restaurant News, March 24, 2008 by Sarah E. Lockyer

The clout of the activist shareholder continues to grow beyond the high-profile names of William Ackman and Nelson Peltz, who publicly agitated McDonald's and Wendy's for years.

This month alone two wellknown hedge fund investors, Sardar Biglari, head of The Lion Fund LP and chairman of family-dining company Western Sizzlin Corp., and Eric Rosenfeld, head of Crescendo Partners LP, scored victories for disgruntled investors at Steak n Shake and O'Charley's, respectively. Change is no doubt on the horizon for these companies.

At Steak n Shake Co., the Indianapolis-based parent of the 490-unit, full-service chain, Biglari won two board seats in an intense proxy battle and moved quickly to replace ousted board chairman Alan Gilman, a 16-year veteran at Steak n Shake who also had been serving as interim chief executive. Board member Wayne Kelley was named interim chairman and chief executive to replace Gilman.

At Steak n Shake's annual shareholder meeting on March 7, Gilman and another director, James Williamson Jr., failed to win reelection to the board by a wide margin of shareholder votes that instead supported Biglari and a Lion Fund colleague Philip Cooley. The other seven members of the restaurant company's board were re-elected.

San Antonio-based Lion Fund holds about 8.5 percent of Steak n Shake's shares, and Biglari had been pressuring for strategic changes since this past summer. He has urged the company, which reported losses in each quarter of last year as well as negative same-store sales results, to halt corporate store development in favor of aggressive franchising, cut corporate spending, embark on share repurchases and improve corporate governance.

"These are departures we have in mind to inject verve into and

to augment the value of the company," Biglari said in a January letter to shareholders, one of many disseminated during the months-long proxy battle.

At O'Charley's Inc., the management of the Nashville, Tenn.-based company did not let a pending proxy battle rise to the level of intensity seen at Steak n Shake. Instead, the company said this month it settled with 12-percent stakeholder Crescendo Partners by putting three of the hedge fund's nominees onto its board, including former Arby's chief Douglas Benham.

Under an agreement disclosed March 13, O'Charley's, which operates or franchises 364 casual-dining restaurants, expanded its board to 11 seats, from nine. In addition to Benham, the new directors are Arnaud Ajdler, a managing director at New York-based Crescendo, and Gregory Monahan, a senior vice president of the investment firm.

In December, Crescendo had nominated four executives to O'Charley's board ahead of the restaurant company's annual shareholder meeting, which is now slated for May or June. Crescendo had amassed through its funds and affiliates its near 12-percent holding in O'Charley's for about $37.6 million.

The investment firm has said O'Charley's stock is undervalued and that it would urge the exploration of a large stock repurchase, sale-leaseback transactions, refranchising efforts and a sale of O'Charley's 10-unit Stoney River Legendary Steaks brand or even the entire company.

Securities analyst Stephen Anderson at MKM Partners LLC said shareholders of the company should benefit from "the necessary" strategic moves the three Crescendo board members could push through. He predicted the first measure would be the sale of Stoney River.

SARAH E. LOCKYER

slockyer@nrn.com