Sunday, May 25, 2008
The Steak n Shake Company
36 South Pennsylvania Street
Indianapolis, IN 46204
To the Board of Directors
During the past number of years, the board has acted irrationally to the detriment of its shareholders, customers, and staff. While the industry and economy provide a difficult operating environment, the company’s performance remains unacceptable. In the recent proxy, shareholders sent a very clear message to the board. Change.
I, along with many of your shareholders, question the company’s lack of transparency around the points raised by Messrs. Biglari and Cooley during the proxy contest. While I understand and appreciate the difficulty in addressing operational execution, other issues seem easier for the board to immediately address.
Regarding capital use
- The company needs to re-evaluate its failed strategy of increasing the number of company–operated locations. Investors would have been much better off financially had the company simply invested past cash flows in treasury bills. Growth through franchising carries less risk and offers higher returns.
- At current market prices, I find it difficult to believe that the company can find more appropriate uses of cash flow than share repurchases. Even the planned store remodels scheduled in Q3/4 should be considered against share repurchases.
- All capital investments should be considered with the goal of maximizing intrinsic value on a per share basis.
- Electing either of the new board members to chairman would send a strong message to shareholders that the company has heard and acknowledges the need for a change in strategy.
- Repeal the 80% requirement needed to call a special meeting of shareholders and return it to the previous level. The inability to hold company stewards accountable for their actions represents a disturbing wrinkle in corporate governance. Directors might sharpen their thinking by asking themselves if they would desire an 80% consensus, should their daughter, admit a mistake in marrying an irrational spendthrift husband and then seek a divorce. Regardless of whether owners actually exercise their right to call a special meeting it is important they remain able to do so. As it stands now, changing the charter of rights in many countries is easier than calling a special meeting at our company.
I am confident that the two newest directors are attempting to persuade the others towards their view. If they are unsuccessful in this endeavor, I hope they make their views known to the absentee owners.
I sincerely hope you heed the desires of your shareholders and move expeditiously to enact the changes mentioned above.
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The author holds a long position at the time of writing (and we're still awaiting a response from the company). This is not a recommendation to buy or sell any securities. Please consider the incentives behind anyone offering advice and always think for yourself.