Fat Brands gets a loan from Steak ‘n Shake’s owner

A hedge fund owned by the CEO of Biglari Holdings made a $20 million loan to the operator of Fatburger, says RB’s The Bottom Line.
Photograph courtesy of Steak 'n Shake

the bottom line

We recently wrote that the hedge fund run by Sardar Biglari, who controls Steak ‘n Shake owner Biglari Holdings, has started selling its massive interest in highwayside dining chain Cracker Barrel.

Now, it seems, The Lion Fund has set its sights on a different company, Fatburger owner Fat Brands, but in a different manner than activist investing Biglari has been known for.

The hedge fund recently agreed to loan Fat Brands $20 million. Fat will use the money to pay off an existing $16 million loan.

But the terms of The Lion Fund’s loan are more interesting.

First, the loan carries a 20% interest rate, which is roughly the same rate you pay on your credit card if you carry a balance. The rate is payable quarterly. The loan matures on June 30, 2020, and can be repaid “without penalty,” provided that Fat Brands pays a minimum of six months’ interest.

Second, if the loan isn’t repaid by October of this year, The Lion Fund has the right to buy as much as 1.1 million shares of Fat Brands at 1 cent per share. That would be nearly 10% of Fat Brands’ stock.

Fat Brands has had an insatiable appetite for fundraising over the past two years as it has sought to buy up smaller, franchised-focused brands and build its portfolio and expand outside the U.S.

The company raised $24 million in 2017 by selling 2 million shares at $12 per share in a Regulation A+ or mini IPO that took Fat Brands public.

But the value of the company’s shares has been cut in half since then; on Friday, shares were valued at less than $6.

Fat Brands, 82% of which is controlled by CEO Andy Wiederhorn’s Fog Cutter Capital Group, has used its funds to acquire Ponderosa and Bonanza, Hurricane Grill & Wings and more recently Yalla Mediterranean.

The chains’ same-store sales have been strong, and the company reported $2.1 million in adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, in the quarter ended Sept. 30, on $5.9 million in quarterly revenue.

But fundraising has come at a cost. The loan from The Lion Fund replaced an existing term loan from FB Lending that itself carried a 15% interest.

In Biglari’s case, he’s sold about 400,000 shares worth of Cracker Barrel in recent months and seems to have used at least some of the funds to make the Fat Brands loan.

That loan promises Biglari a quick return or, at the very least, shares in the owner of a group of smaller brands.

Biglari made a name for himself by buying up stakes in restaurant companies, including Steak ‘n Shake, taking seats on the board and then taking full control of the companies.

“Simply put, [Biglari Holdings] is in the business of owning other businesses in whole and in part,” he wrote in 2010. “We are control investors.”

He never got that control with Cracker Barrel despite several efforts to get seats on the board, but that investment has worked wonders for the hedge fund and for Biglari Holdings. The company has expanded into magazines and insurance, and now, apparently, is getting into the lending business.

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