Biglari Stake Pushes Cracker Barrel Management Into A Corner

Shares of restaurant operator Cracker Barrel Old Country Store (CBRL) are jumping $4 today to new all-time highs on the heels of a strong quarterly earnings report and news that it will raise its dividend by 50% to $3.00 per year, giving the $93 stock a yield of over 3%. While I do not own CBRL shares directly, Biglari Holdings (BH) is a large position in the client accounts I manage and that company owns a 20% stake in Cracker Barrel, after having started buying the stock in the 40’s two years ago. That stake is now worth over $440 million and represents a majority of BH’s current equity market value of $585 million.

I have written about Biglari Holdings quite a bit previously, so I suggest searching this blog for those articles if you would like to learn more on that front. What I find interesting today is that Biglari has really cornered Cracker Barrel into a position where Biglari and its shareholders can win on multiple fronts with its CBRL investment. The Biglari-Cracker Barrel relationship is a dicey one, which is contrary to many situations where a company and its largest shareholder communicate amicably on a fairly regular basis. As a 20% holder, Biglari has agitated for board seats for two years now, and has been rejected by both management and CBRL shareholders both times. Biglari’s main beef was with how CBRL was being managed, and as a large holder he wanted to sit down with the senior management team and work together to improve capital allocation and get the stock price higher.

Interestingly, Cracker Barrel has been quick to dismiss Biglari’s ideas publicly, only to later implement them and try and take credit. Many of those changes have contributed to the doubling of CBRL’s share price over the last two years. Now that CBRL is generating excess free cash flow at a very healthy clip, they are faced with the decision of how to allocate that capital. Previously CBRL has repurchased shares, but now that Biglari Holdings owns 20% of the company (the maximum amount it can own due to a poison pill put into place by Cracker Barrel management) any share repurchases would increase Biglari’s stake in the company without any additional cash investment. If that stake were to rise, Biglari’s odds of gaining seats on the company’s board of directors would also increase, and given the tense relationship, CBRL has no incentive to buy back stock right now.

So that leaves the issue of the company’s dividend. When Biglari Holdings bought its first shares of Cracker Barrel in 2011, CBRL’s quarterly dividend was 22 cents per share. Since then they have raised it on four separate occasions, more than tripling the payout to the current 75 cents per quarter rate. Cracker Barrel likely thought doing so would make Biglari happier and might cause him to be less vocal. However, that has not happened and there is every indication that he will continue to seek board seats in the future.

From Biglari’s perspective, he really could not be in a better position. If Cracker Barrel hoards its cash or spends it unwisely (unprofitable unit expansion has been a core tenet of Biglari’s critique), he will likely get more shareholders on his side when it comes time to re-elect the company’s directors. If CBRL decides to buy back shares with its free cash flow (something Biglari has suggested they do), his ownership percentage will increase and help him in that quest.

Not surprisingly, Cracker Barrel has opted for the dividend increase approach, as it eases shareholder concerns generally and does nothing to help Biglari get on the company’s board. However, it serves to funnel cash right into Biglari Holdings’ bank account. So shareholders of Biglari Holdings are going to win either way; they benefit from the torrid pace of the stock price’s ascent, and they are getting ever-rising dividend payments every quarter, with which Biglari can make additional investments. On BH’s 4+ million share stake, that equates to over $12 million a year in dividends, which comes to about 2% of Biglari Holdings’ market value.

I’ll make one final observation as it relates to the merits of Biglari Holdings as an investment, since I am playing this scenario indirectly through BH stock. Before BH even purchased its first share of CBRL, its stock was trading at $400 per share. Now, two years later with that stake in CBRL worth over $440 million (and paying $12 million out annually), BH shares trade for $405. The market has not yet fully appreciated what Biglari has been building here, but I think it will just be a matter of time.

Full Disclosure: Long BH shares at the time of writing, but positions may change at any time

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8 Thoughts on “Biglari Stake Pushes Cracker Barrel Management Into A Corner

  1. Troy on June 3, 2013 at 2:46 PM said:

    At least Cracker Barrel gives its shareholders a return. I’m not sure that management is “in a corner” with the stock up 100% over two year periods and outperforming its benchmarks.

    1) Keeping Biglari off the board has allowed CBRL stock to double over the past two years. As such, management strategy keeping him out has generated phenomenal returns to shareholders.

    2) Cracker Barrel pays a dividend. Biglari only pays dividends to its management team.

    3) Cracker Barrel management does not steal from shareholders by putting in a ridiculous bonus compensation that accretes the book value to the management team. Horrible governance.

    • Chad Brand on June 3, 2013 at 3:20 PM said:

      I would bet CBRL cringes at the fact that they are now paying Biglari $12M a year and in return he publicly bashes them. Plus CBRL is essentially funding the annual proxy fights against them.

      To argue that CBRL would be lower with Biglari on the board makes little sense to me. CBRL management was content with awful performance before Biglari started buying and now all of the sudden they become shareholder friendly? Hardly a coincidence.

      I agree that BH being dead money is disheartening to many, but Biglari does not seem concerned with the short term fact that the company’s intrinsic value does not really show up in the income statement. I expect this to change over time, but it will take a while.

      It will be interesting to see what CBRL share gains can come from here, since the stock is now more than fully valued relative to its peers and the business isn’t exactly on fire (traffic up 0.7% and ROI on new units still poor). The easy gains have likely been made.

  2. Good post. I agree with you that the market hasn’t fully realized how much Biglari has been increasing intrinsic value for the company. As a side note, I believe the CBRL payout to Biglari is now actually $14M+ annually, since they have 4,737,794 CBRL shares (140,100 through the Lion Fund), with a total value of over $450M today. You bring up an interesting point regarding the CBRL share buyback would increase Biglari’s ownership percentage and likelihood to win a board seat. The flip side of this would be that the CBRL poison pill would go into affect for passing the 20% trigger. Not sure how this all will play out, but Biglari and his shareholders should end up doing alright in the end.

    • Chad Brand on June 4, 2013 at 2:27 PM said:

      I wonder if their poison pill can be triggered without Biglari buying any more stock. Not sure if a company can proactively trigger a pill themselves or not (through repurchases). I would imagine each case can be a bit different in terms of the details.

    • From the press release (
      “If a person or group acquires 20% or more of Cracker Barrel’s outstanding common stock, each right will entitle its holder (other than such person or members of such group) to purchase, for $200, a number of Cracker Barrel’s common shares having a market value of twice such price. In addition, at any time after a person or group acquires 20% or more of Cracker Barrel’s outstanding common stock (unless such person or group acquires 50% or more), Cracker Barrel’s Board of Directors may exchange one share of Cracker Barrel common stock for each outstanding right (other than rights owned by such person or group, which would have become void).”

      All depends on how “acquires 20% or more of Cracker Barrel’s outstanding common stock” is defined.

  3. Josh on June 5, 2013 at 7:11 PM said:

    With CBRL almost the entire value, it makes sense to be long BH.

    Did the company pay this fine? Was this factored in against the CEO compensation agreement?

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