Letter to Steak n Shake Board of Directors

The following letter was sent to the Board of Directors of the Steak n Shake company.

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Sunday, May 25, 2008

The Steak n Shake Company
36 South Pennsylvania Street
Suite 500
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.

Regarding governance

• 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.

Sincerely,

Noise Free Investing

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Disclosure: Author holds a long position in SNS

Comments

[Donald Johnson:]

No company should repurchase shares when it has the opportunities SNS has to build, open and remodel its stores.

I believe companies that repurchase shares cheat their shareholders out of growth opportunities. Better to pay dividends than to repurchase shares at inflated prices.

2008 Jun 01 05:28 PM

[radicallycdn:]

I'm not fond of share repurchase, but I certainly agree that the 80% requirement needed to call a special meeting of shareholders is in need of revision. We need a company open to change, not one which makes the status quo almost permanent. I am long on SNS, although I only have a small position.

2008 Jun 04 10:46 PM

[Noise Free ...:]

For those of you that have emailed me privately and asked - no i have not yet received a response from the company.

2008 Jun 16 06:15 PM