Aug 13, 2009
Steak N Shake to merge with Western Sizzlin
A year ago, I remember thinking about this exact possibility, that Steak N Shake (NYSE:) and Western Sizzlin (NASDAQ:) could merge.
Here’s what I said:
One thing I’m wondering is whether we’ll see a merger between Steak N Shake (SNS) and Western Sizzlin (WEST). It would be a little similar to what Eddie Lampert did with Kmart and Sears. The same could happen with Steak N Shake with Western Sizzlin since both are in the restaurant industry, we could see some cost savings and synergies achieved by merging. Although getting the financials to work out, especially currently, would be a major stretch.
Sardar Biglari is CEO of Steak N Shake! (Street Capitalist)
At the time it seemed highly unlikely because Steak N Shake had a number of issues relating to debt and management that needed to be worked out. The common thread here is value investor Sardar Biglari, who manages the Lion Fund. As chairman of both companies, Biglari has implemented a holding company structure in both of them.
The real benefit here is simplification in the organization structure. Merging both companies will preserve the benefits and reduce the redundancies of running two different holding companies.
So let’s look at the transaction and figure this out. For shareholders, the changes are on the WEST side rather than the SNS side.
The Letter of Intent contemplates that on or prior to closing Western will distribute to its stockholders all of the SNS shares beneficially owned by Western. Further, under the terms of the Letter of Intent, the consideration payable to Western’s stockholders will be based on a net transaction valuation of approximately $22,959,000.00. At closing, each share of Western’s common stock would be converted into the right to receive an amount equal to approximately $8.11 in the principal amount of debentures issued by SNS. It is anticipated that the SNS debentures will have a term of five (5) years, will bear interest at the rate of 14 percent per annum and will be pre-payable without penalty at the option of SNS after one (1) year from the date of issuance.
From Western Sizzlin’s 10Q we know that Western Acquisitions owns 1,5553,545 shares of SNS. Shareholders of WEST own 85.1% of Western Acquisitions. So this means that WEST shareholders control 1,322,066.79 shares of SNS. There are 2.38M shares of Western Sizzlin outstanding.
1 share of WEST = 0.466 shares of SNS + $8.11 in SNS debenture.
The debentures pay a rate of 14% per annum, creating an added incentive for WEST shareholders. For SNS shareholders, I think the real question is going to be whether or not the integration of WEST adds any real benefit to justify the debentures. I would guess that there is a long term benefit from owned Western Sizzlin. Western Sizzlin’s restaurant operations alone will likely add about $2.2M per year in FCF which could be used for accretive investments which would benefit shareholders of Steak N Shake.
Today is the Western Sizzlin annual meeting in New York. I expect that we’ll see some interesting conversations come out there. I’ll be sure to link to any blogs that post up notes from the meeting. I’m sure more details surrounding the proposed merger will be out by then so we can do a more comprehensive analysis.