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Monday, 12/21/2009 9:29:43 PM

Monday, December 21, 2009 9:29:43 PM

Post# of 52
SNS: Buffet or Buffett?

By Jonathan Heller, RealMoney Contributor, On Friday December 18, 2009, 9:00 am EST

I've seen plenty of companies carry out reverse stock splits over the years and there are generally two reasons for it. The first is that the company is in trouble and the stock price has fallen so far, it is forced to jack up the share to meet exchange listing requirements. In this way, for example, a 20-cent stock can quickly become a $5 stock if the company conducts a 1-for-25 reverse stock split. The second is more interesting: Companies "go dark," reducing their shareholders of record to fewer than 300, thereby no longer having to file with the SEC, yet remaining a publicly traded company. A reverse split can weed out small shareholders who would possess fractional shares following the split, but who are, instead, bought out for cash. Many smaller companies have gone this route in recent years following the relatively large financial burden brought on by Sarbanes-Oxley.

The newest example fits neither scenario, though. Small-cap fast-food chain Steak n Shake , run by Warren Buffett wannabe Sardar Biglari, splits 1-for-20 after the market closes today, and it's not because the company is in trouble. In fact, it is thriving. The company is not going dark, either. Biglari has stated that he simply wants to attract long-term shareholders and keep speculators away. The current 28.8 million shares outstanding will become 1.4 million, the current stock price increased by a factor of 20 to about $272. (Sounds a bit like Warren to me, although he didn't get there via a stock split.) This will, indeed, be a liquidity killer, but I'm not so sure that's always a bad thing.

To his credit, Biglari has done a good job with the company. He originally became CEO of a micro-cap restaurant chain, Western Sizzlin, when his private investment firm, The Lion Fund, became the company's largest shareholder. He used Western Sizzlin cash flow to take stakes in two other chains, Friendly's (later sold after a proxy battle) and Steak n Shake. As his SNS stake grew, Biglari assumed management control of that company, too. Ultimately, he pitched the merger of Western and SNS, which is currently under way. Steak and Shake shares owned by Western were recently distributed to Western shareholders. To complete the transaction, Western shareholders will also receive five-year callable 14% debentures.

As a current shareholder of both companies, I'm interested to see how this will play out. Biglari is an investment guy, not a restaurateur, but both companies have done well under his leadership. Steak n Shake revenue grew about 2.7% in 2009, not bad given the economic environment, but the company flipped from a loss of nearly $23 million to net income of $6 million. The company also generated loads of cash during the year, ending with $51 million, up from $7 million last year.

Steak n Shake currently has 486 restaurants in 21 states, primarily the southeast and Midwest. I also like the fact that the company owns a significant amount of real estate (if I sound like a broken record, that's because I am): 144 locations. With a current enterprise value just below $500 million, the company trades at about 1.37 times book value.

It will be interesting to see how this plays out. The last thing I needed was another position in a company that trades above $250 with little liquidity, but I'm not bailing now. I'm looking forward to the annual meeting in NY this on April 8. Perhaps then we'll see if Biglari has designs on creating a mini-Berkshire.


Please note that due to factors including low market capitalization and/or insufficient public float, we consider Steak n Shake to be a small-cap stock and Western Sizzlin to be a micro-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

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