Friendly's Being Sold: Interesting Story, But Not An Investment Idea

Friendly Ice Cream Corporation (FRN) has agreed to be acquired by an affiliate of Sun Capital Partners for $15.50 per share in cash or roughly $337.2 million for the entire business. The purchase price represents a premium of more than 8% over the last trade on Friday and more than 30% over the price at which Friendly's stock last traded before the company announced it was exploring strategic alternatives – they used Goldman Sachs (GS).

As you may remember, Friendly's had been the subject of substantial shareholder infighting as Chairman Donald Smith, co-founder S. Prestley Blake, and substantial shareholder Sardar Biglari were quite vocal about their views of the company, its management, and its future. Prestley Blake was the subject of a long Wall Street Journal article on the company. Mr. Smith, who is also the majority owner of the private company that franchises Perkins (a chain of family restaurants), had been accused of mismanagement of Friendly's and its well-known brand.

Obviously, this is a big win for Mr. Blake, 92, who once seemed the most quixotic of the many activists agitating for change at public companies. With Mr. Biglari's entrance that all changed. Sardar Biglari is both general partner of the Lion Fund, L.P., an investment partnership, and chairman of publicly traded Western Sizzlin (WSZL). Western Sizzlin was (and is) primarily a franchiser; however, Mr. Biglari has been granted permission to invest the company's capital as he sees fit without regard to historical operations. In that role, he used capital available at Western Sizzlin to purchase approximately 7% of Friendly's. Biglari's investment partnership, The Lion Fund, purchased an additional 8% of Friendly's. As a result, Mr. Biglari controls approximately 15% of Friendly's.

This is a big win for Biglari, The Lion Fund, and – perhaps most of all – long-term shareholders of Western Sizzlin, a micro-cap stock that is dwarfed by Friendly's market cap. Western Sizzlin bet big on Friendly's; it looks like that bet has paid off.

Finally, please note the following from the company's press release:

The transaction has been unanimously approved by the Company's Board of Directors, which will recommend that Friendly's shareholders approve the transaction. Certain Friendly's shareholders including Donald N. Smith, Friendly's Chairman of the Board, The Lion Fund L.P. and Biglari Capital Corp. and S. Prestley Blake, who collectively own in excess of 50% of the Company's shares, have entered into an agreement to vote in favor of the transaction. The transaction requires the affirmative vote of 66 - 2/3% of the outstanding Company shares and is subject to certain other customary closing conditions. The transaction is expected to close during the third quarter of 2007.

As I write this, there is slightly less than a 2.5% realizable return on Friendly's stock. Unless that gap widens, this announced event isn't worth an individual investor's time (or money). Still, with Smith, Biglari, and Blake having all entered into an agreement to vote for the transaction, it's worth noting there's still a meaningful spread here.

Nonetheless, I'd steer clear of any cash deal with less than a 5% return if the announced event occurs. Tender offers are a little different; but, generally the mistake of accepting too narrow a spread is what hurts investors in announced events not getting involved in one or two bad deals as most people seem to believe.

So, for now, this is just an interesting story, not an investment idea.

Unless, of course, you want to buy shares of Western Sizzlin. Even if you're not interested in Western Sizzlin, read Biglari's annual letter (click on the 2006 Chariman's letter).

FRN 1-yr chart: