The Restaurant Space Is Cooking

 | Dec 09, 2011 | 10:30 AM EST
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Some interesting situations are brewing in restaurant land these days. In truth, though, I can't think of a moment in the past three years when that was not the case for the sector, which has performed exceedingly well for investors through some difficult economic times.

Last week Wendy's (WEN) announced it had reached an agreement with Trian Partners that will allow the latter to increase its Wendy's stake up to 32.5%. Trian currently owns just over 26% of the company. Wendy's Chairman Nelson Peltz, along with fellow board members Peter May and Edward Garden, are the controlling members of Trian. It was Peltz who was the mastermind behind the Wendy's/Arby's deal back in 2008, as the chairman of Triarc, which had owned Arby's at the time of the merger. Ultimately the Wendy's/Arby's marriage did not work and Arby's was jettisoned -- and Peltz and company have ended up with the better of the two assets, in my opinion.

While I've had a love-hate relationship with Wendy's due to what I've viewed as extremely slow progress, I am now seeing signs of encouragement. Arby's is no longer a weight on performance, it's got a new CEO, Emil Brolick, and I've been somewhat impressed by the new menu. I try and stay away from fast food, but the revamped "Dave's Hot 'N Juicy" burger line is growing on me -- perhaps a little too much so, as my Wendy's run last night can attest.

Turning to another corner of the restaurant space, the Cracker Barrel (CBRL) proxy fight is heating up. On Thursday, Institutional Shareholder Services (ISS) recommended shareholders vote for the slate of directors nominated by Cracker Barrel. That implies voting against Sardar Biglari, chairman and CEO of Biglari Holdings (BH), which owns about 10% of Cracker Barrel. Mr. Biglari is unhappy with the company's performance and disclosure, and he wants a voice on the board. While he's shown prowess in helping to turn around Steak 'n Shake, which is owned by Biglari Holdings, Cracker Barrel may be a different animal. It has its own unique culture, from the restaurant walls, festooned with all sort of old-time memorabilia, to the country store, which serves as a de facto waiting room.

I still hold shares in Biglari Holdings and believe Mr. Biglari is a bright guy. He's certainly shown evidence that he is adept at capital allocation. But, frankly, his direct style is off-putting to the boards of the companies he has in his sights. Sometimes the "bull in a china shop" approach to activism may be necessary, but sometimes it just does not work. It's a shame too, because Mr. Biglari could be an asset to the board.

Finally, there has not been much word lately on Brad Blum's attempts to take the reigns as CEO of the troubled Cosi (COSI) chain. Mr. Blum, of Blum Growth Fund, has attempted to engage shareholders in his efforts, even to the extent of running a shareholder survey. However, the Cosi board has been chilly at best to Blum's overtures. The letter to Mr. Blum, filed in a recent 8-K filing with the Securities and Exchange Commission, is perhaps best described as scathing.

Cosi could be a great little chain if it got its costs in line and simplified its menu. The food is very good, in my view, and my "channel checks" at a local store recently have revealed decent lunch crowds. In fact, I recently initiated a small position in this name -- one that I view as an option on the company's future. I call it an option because Cosi could easily fail if does not start generating a bottom line. The board has its work cut out for it, and perhaps should consider engaging Mr. Blum more constructively.

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