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Friendly's: Why bother?

October 03, 2006 | About:
Zac Bissonnette

Zac Bissonnette

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Untitled Document On September 25th, Sardar Biglari and his Lion Fund filed a 13D disclosing a 12% stake in restauranteur Friendly’s (AMEX: FRN). He also asked for two seats on the company’s board of directors. It’s hard to understand what Biglari is up to. When asked what the Lion Fund was up to, Biglari’s associate Philip Cooley replied, “I’m not sure we’re up to anything. We’d like to make some money. We’d like to invest X and have the value go to Y, so we earn a return.”

It’s hard to understand why Biglari and Cooley expect to earn a return. Most activist fund managers target companies where the balance sheet is a source of value. According to the latest 10-Q, Friendly’s has a negative net worth of 138 million dollars. On the sales front, the company reported negative comparable sales growth for the most recent quarter. Income was up big for the quarter, but that’s almost entirely attributable to lower income taxes paid by the company.

As a native of Friendly’s home state (my friend makes sundaes at the local Friendly’s restaurant), it’s hard to imagine anything more passe than Friendly’s. A visit to the tackily-decorated stores will reveal a disturbing trend for Friendly’s shareholders: almost no one who isn’t collecting Social Security goes there. Investing for growth in this company is like betting that the Lawrence Welk Show will see a resurgence in 2015.

So Friendly’s isn’t growing, the balance sheet’s a disaster, and the company hasn’t been profitable since 2003. Maybe the Lion Fund can work some magic if they get on the Board of Directors, but after running up around 20% since the beginning of September, I think it’s wise to pass on Friendly’s for now.

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Zac Bissonnette's blog: http://deepvalues.blogspot.com

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