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2015 Trend To Watch: Activist Versus Activist

|Includes: BH-OLD, BRK.B, Cracker Barrel Old Country Store, Inc. (CBRL)

The battle of activist investor versus activist investor battle isn't necessarily what you'd expect. Activists do go head-to-head over what they believe will or will not unlock value at a company. Think of Hertz and the differing views that Carl Icahn and Jana Partners' Barry Rosenstein had over who should become CEO.

But, again, something completely different in activism is taking place. This includes an activist hedge fund taking on a publicly traded activist vehicle. There are only a few publicly traded activist vehicles out there, with the most notable ones being Biglari Holdings (NYSE:BH).

Now, the issues surrounding Biglari are well-circulated, which includes its compensation practices, but the big news is that a fellow activist - Groveland Capital - is calling the company out.

Groveland is looking to takeover the entire Biglari board, which consists of six people. So, a proxy battle will be waged, with Groveland CEO Nick Swenson putting himself up for a board seat. The annual Biglari meeting is on April 9th. Groveland owns just under 1% of Biglari.

What are the issues: Biglari owns Steak n' Shake thanks to a well fought proxy battle in 2008. It also has a large stake in Cracker Barrel. At Cracker Barrel, Biglari owns some 20% of the company, but has lost proxy battles in each of the last three years.

There's some controversy over how Biglari runs Steak n' Shake. But the real issue lies in compensation and corporate governance issues of Biglari. And there's a number of them, but Biglari CEO, Sardar Biglari, seems to be the biggest problem.

Firstly, Sardar's power grip on Biglari Holdings needs to be broken. Sardar owns 2% of Biglari Holdings, but has voting power that equates to nearly 20% of the shares - some of which are held by company affiliates.

Second, Sardar pulled in $10.9mm in total compensation in 2014. Compare that to Apple CEO Tim Cook, who pulled down $9.2mm last year. It's perplexing and Biglari's stock was down 22% in 2014, while shares of Apple were up 37%.

Groveland's solution is to put Sardar's compensation under the control of two truly independent directors. But there's also a licensing deal with Sardar that was inked a couple years ago. In it, Sardar gets tens of millions of dollar if he's ousted during a hostile takeover. Dealing with that will be a task.

Bottom line: Sardar has likened himself to Warren Buffett, calling Biglari Holdings a mini Berkshire Hathaway. But unlike Sardar, Buffett has nearly all his wealth tied up in his company, Berkshire, and gets less than half a million dollars a year in total compensation.

To be successful in the proxy battle Groveland will have to get the support of Biglari's largest investors, which includes the likes of Gamco, BlackRock and Vanguard. This should be an interesting battle, but one that'll likely fly under the radar.