Burger chain’s suit cites takeover

Steak n Shake, owned by San Antonio’s Biglari Holdings Inc., alleges in a lawsuit that its confidential information was used by a New York investment firm to plot a takeover of the struggling restaurant chain.

The chain known for its burgers and milkshakes alleges Fortress Investment Group LLC “threatened to force Steak n Shake into bankruptcy” and then bid on the assets so it could “take the keys” to the company.

Steak n Shake had more than $181 million in loans outstanding when Fortress and affiliates acquired more than $89 million in the face amount of the loans. Steak n Shake repurchased Fortress’ loans for $102.3 million Friday but says the investment firm’s threat drove up the cost to retire the loans.

The loans were secured by most of the chain’s assets.

The loans were set to mature next month and sparked speculation that Steak n Shake might have to seek bankruptcy protection if it couldn’t refinance them.

Fortress managing director Gordon Runté called the lawsuit “baseless,” adding that the firm did not “engage in any wrongdoing whatsoever.”

“We look forward to facts prevailing in this matter,” he added in an email Monday. Fortress has about $50 billion in assets under management.

Steak n Shake attorneys didn’t respond to a request for comment.

The breach-of-contract lawsuit was filed Friday in Marion Superior Court in Indiana. Steak n Shake, which is based in Indianapolis, didn’t specify how much it seeks in damages.

Sales at Steak n Shake have been in a four-year slide. Biglari Holdings Chairman and CEO Sardar Biglari initially blamed the drop in sales on “our own lack of execution.”

In 2019, Steak n Shake started transitioning company-owned restaurants to single-unit franchise partnerships. It also began closing more than a third of its 282 company-operated stores.

The spread of COVID-19 further hammered Steak n Shake as the chain was transitioning from table service to counter service.

In April, Moody’s Investors Service downgraded its credit rating on the Steak n Shake loans to “likely in, or very near, default.” That caused the loans to trade at a greater discount.

Last summer, Steak n Shake explored raising cash by selling 15 restaurants and their real estate. Fortress expressed an interest in

purchasing the properties.

Steak n Shake now alleges Fortress used its supposed interest in the properties as a “Trojan horse to obtain confidential information about Steak n Shake as part of its strategy to take over the entire company.”

Fortress signed a nondisclosure agreement meant to preclude it from using any confidential information to Steak n Shake’s detriment. Runté said Fortress did not breach the agreement.

Fortress was provided access to a digital data room, which included information that allowed

it to “extrapolate” the value of the chain’s entire real estate portfolio, Steak n Shake says.

Around the time Fortress started receiving confidential information, it “surreptitiously” began buying Steak n Shake’s loans from other investors through an “opaquely named affiliate that obscured Fortress’ involvement,” the suit says.

Fortress paid an average price of 90 percent of the face amount of the loans, which was a significant premium over where they had been trading, the complaint adds.

The loans had been trading at a

discount because investors believed there was a significant risk that the collateral securing the loans was not sufficient to pay the loan holders in full in the event of a default, Steak n Shake says.

“Fortress’ willingness to pay more than other investors strongly suggests that Fortress had information that other sophisticated market participants did not,” the suit adds.

The investment firm later announced it would not accept a negotiated repayment of the loans. Rather, it said, it would either force Steak n Shake to repay the loans or to file for bankruptcy, the suit alleges.

If Steak n Shake entered bankruptcy, Fortress intended to make a “credit bid” for the chain’s assets, the chain says. A credit bid is offering the face amount of what it’s owed in lieu of cash.

Steak n Shake alleges Fortress followed the same strategy in acquiring other restaurant chains, including Logan’s Roadhouse and Krystal.

Steak n Shake did not disclose how it was able to repurchase the loans from Fortress.