It looks like Biglari took my advice to purchase a position in RRGB. I wrote him in October 2009 describing the benefits to BH (SNS at the time) of purchasing shares. I was of course a shareholder at the time. I would like to be one in the future if the compensation plan gets voted down.
From: joshhill1978@xxx To: email@example.com Subject: Capital Deployment Opportunity Date: Sat, 31 Oct 2009 15:56:59 -0500
I am writing as a fellow value investor in the mold of Warren Buffett and Steak n Shake shareholder to tell you that I am grateful for the direction you have taken our company. I have recently begun accumulating shares in Steak n Shake and while I am not a large owner I look forward to increasing the position further. I have spent eight years as a research analyst and portfolio manager and in two of those years I focused solely on restaurant companies. It is refreshing to see a management team focus on the important aspects of a business including capital allocation and operational excellence.
From a capital allocation standpoint our recent investment in Fremont Michigan Insuracorp seems particularly timely as it will provide us an opportunity to partner with an insurance company that has a rock solid balance sheet and the potential to invest insurance float at high returns. I am hopeful that with your influence the company will begin to write insurance outside of Michigan. Given Steak n Shake’s heritage in Indianapolis it would seem that Indiana may be a wonderful place to start.
I also wanted to make a recommendation to you for a potential use of capital. I am sure you are familiar with Red Robin Gourmet Burgers (RRGB) out of Denver, Colorado. The management team was recently in our office and while the company’s brand is not as strong as Steak n Shake’s in my opinion it does have significantly more value than the market is currently ascribing to it. The current market cap is approximately $260 million and the company trades at 4.7x TTM EV/EBITDA. Red Robin operates 304 company owned restaurants and franchisees operate another 131 units as of July 12, 2009. I believe that the company can generate nearly $60 million in FCF by cutting development to zero based on TTM operating results and investing 2.5% of sales in maintenance capital expenditures (actual amount of CAPEX could likely be lower as 46% of restaurant base is 5 years old or less as of December 2008). As you know if the company were to eliminate development and focus on operational excellence it is likely that results would improve causing FCF to increase. The company does have $208 million in debt due to recent development and franchise acquisitions which could be reduced through FCF and the sale of company owned restaurants to franchisees. As of FY08 the company only owned the real estate of 31 units so there isn’t much that could be done from that perspective.
I think that this idea should be seriously considered as it certainly falls within your circle of competence and would likely yield synergies between Steak n Shake, Western Sizzlin and Red Robin Gourmet Burgers. I would enjoy the opportunity to discuss the idea with you at your convenience.