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Buying Cracker Barrel With Biglari

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

The management at Cracker Barrel (NASDAQ: CBRL), the ubiquitous country store restaurant chain poised at highway exits across the United States, is busy dealing with pest control this holiday season. It is not a sudden plague of rodents in the familiar wooden stave barrels that has company officials distressed. Rather it is activist investor Sardar Biglari of Biglari Holdings Inc. (NYSE: BH) who has forced a call to battle stations at Cracker Barrel.

The Iranian-born Biglari, often referred to as a "combative investor," has been in this position before. In 2008 he assumed control of the 80 year old Steak-n-Shake diner chain and later added the buffet-style steakhouse Western Sizzlin' to his portfolio. When he attempted to take over a Michigan-based insurance company his efforts were thwarted only by intervention from the Michigan state legislature. Now he has his sights set on a seat on the Board of Directors at Cracker Barrel.

Cracker Barrel Old Country Store was started in 1969 by Dan Evins, who was spending long days on the road as a salesman for Shell Oil. Evins figured that the promise of home-style Southern cooking would lure weary travelers off the new interstates and sell more gasoline. Forty years later the gas pumps have disappeared, but there are more than 600 combination restaurant gift shops in 42 states spawned by the first country store in Lebanon, Tennessee.

Of late, Cracker Barrel has been on a run. The company has sold enough hearty soups, pancakes, and fried chicken for the stock price to soar over 150 percent in the past year. Even so, Biglari, who has accumulated a 20 percent stake in Cracker Barrel (the largest company by-laws allow) figures it can do better. He has peppered shareholders with letters outlining his vision for a more aggressive, entrepreneurial leadership, beginning with a seat on the Board of Directors for himself and Phil Cooley, Vice Chairman of Biglari Holdings. In addition Biglari advocates Cracker Barrel buy back outstanding stock and issue a special $20-per-share special dividend.

Few share that vision. A recent stockholders' meeting saw Biglari's proposals voted down with 70 percent opposition - or virtually all the non-Biglari held votes. But exasperated Cracker Barrel executives have gone to extreme measures to eradicate the Biglari nuisance nonetheless. They have twice offered to buy out the activist investor's stake in the company in the past year. Biglari countered that if Cracker Barrel can so readily dispose of $300 million the money should be paid out as a shareholder dividend, as he suggested in the first place.

There appears no resolution on the horizon. Biglari, still in his thirties, insists he is the longest of long-term investors. With such a dominant position in Cracker Barrel, selling his holdings would seriously deflate the stock price and cripple the value of his stake. At the same time company management and smaller shareholders have indicated no desire to yield to his resolute proposals. It is a behind-the-scenes drama that will continue to play out at Cracker Barrel as unaware travelers continue to browse mindlessly through the old-fashioned candy sticks and hand-crafted ornaments while waiting for the next table to come free.