On July 17th, I had this to say about IHOP's (NYSE: IHP) deal to acquire to buy Applebee's (NASDAQ: APPB): "iHop shares soared on the news -- it's one of the only times I can think of that shares of an acquiring company have risen 3 times as much as those of the company being acquired. The premium was tiny -- the stock traded higher a month ago -- and represented a paltry return for the company's shareholders... I'm surprised none of the big institutional shareholders haven't spoken up yet."

Well none of the big institutional shareholders has spoken up, but a small yet feisty one has. Sardar Biglari, the Chairman and CEO of The Lion Fund and Western Sizzlin (OTC BB: WSZL), issued a press release blasting the deal:

Whenever an activist makes a 13D filing in a company, I'm interested. When an activist goes further and presses for change or board seats via a 13D or 13D/A filing, I become even more interested. And when an activist goes to the next level and creates a website to promote their message and cause, I need to research the idea. One such idea is Friendly's (AMEX:FRN), a company held by value investor Sardar Biglari of the Lion Fund. I highly recommend interested readers visit the activist's website and read all the letters and articles I reference throughout this article before making any investment decisions.

Biglari and his investment funds own about 15% of Friendly's. He is seeking to get himself and Philip Cooley elected onto the company's board. One of Biglari's most interesting letters to shareholders was written on Tuesday (3/6). Throughout the four page letter he highlights his core beliefs regarding Friendly's.

First off, Mr. Biglari took apart the company's argument that he and Mr. Cooley are looking to "control the board" quite easily by pointing out the quite obvious fact that two-sixths does not represent a majority and, therefore, control would not be had with their election. He also went on to point out the fact that Friendly's "in aggregate, has generated negative cash flows...Phil and I will strenuously lobby the board to focus on cash flows to increase the intrinsic value of the company. If we can increase intrinsic value per share, the stock price will eventually follow suit."

Then Biglari discussed the company's capital structure -- mainly the company's debt-heavy balance sheet. The obvious risk of this capital structure is that any small problem with the business could cause the company to return to "near insolvency." Biglari goes on to say that "I believe the company will become bankrupt if it does not attempt to delever the balance sheet." He even pledges that he and Mr. Cooley will "champion a disciplined financial structure to increase shareholder wealth."

Also, Biglari believes the company should shift its strategy by decreasing the number of company-owned and operated units allowing it to "distribute more of its resources to the creation of better products, better quality control, shrewder, more effective marketing practices, more effective franchisee training - all with the objective of becoming a forceful franchiser capable of efficiently enhancing the brand." He also points to the irrefutable fact that returns on capital are higher from franchising than from ownership. He believes that the company could use the money from selling company-owned units to franchisers (re-franchising) to pay off the debt-load.