BH letter to the board or shareholder proposal to remove the trademark deal

[giofranchi]

Draft letter is attached - please comment.

 

shalab,

you asked to comment, so I will do it:

I am not interested in this subject at all. As I have said I judge Biglari to be a star at what he does. The only thing I am interested in is that he goes on doing what he does best, taking entrepreneurial decisions, for as long a time as possible.

How could I be interested in this subject? If Biglari is forced to leave the company against his will, I will surely be gone too! BH would simply cease to be what I look for. And I will be looking somewhere else. Why should I be interested in what happens to BH afterwards?

 

The only other thing I am interested in is that BH stock price stays near BVPS for a very long time, so that I can go on purchasing more and more! ;)

 

Gio

 

[giofranchi]

As I've mentioned in the BH thread, I prefer Performance Based Compensation (work get paid, don't work don't get paid).  That's how I make a living (commission based), so I'm a firm believer in it.  People are motivated by making more money.  As a shareholder I would be pissed if I was paying my manager some outrageous salary and he didn't do anything (increase value) to deserve it.  He would be too content on not doing anything if his salary was $10mm.  That would be personal gaining.

 

Well, I guess that is exactly what I meant when I said the worst part of a 2 + 20 compensation plan is imo the 2 by far... You just used different words! ;)

 

Gio

 

[frugalchief]

Draft letter is attached - please comment.

 

shalab,

you asked to comment, so I will do it:

I am not interested in this subject at all. As I have said I judge Biglari to be a star at what he does. The only thing I am interested in is that he goes on doing what he does best, taking entrepreneurial decisions, for as long a time as possible.

How could I be interested in this subject? If Biglari is forced to leave the company against his will, I will surely be gone too! BH would simply cease to be what I look for. And I will be looking somewhere else. Why should I be interested in what happens to BH afterwards?

 

 

IMO, investors since 2005 have invested in Western Sizzlin, and since 2008 in Steak n Shake (now BH) because of Biglari.  He is the reason, again IMO, that many invested in BH.  Until BH becomes a more diversified company with more earnings, more investments, etc., HE is the reason BH has become what it is.  Any other CEO would just be managing SNS, and probably not as well as SB has.

 

I really hate to say this.....because I'm all about shareholder's owning the company and management answering to shareholders, but most of us are not buying BH stock b/c of SNS (or now Maxim, First Guard, or CBRL stock holdings)...we are buying because most of us believe SB will create the most value through his management of operating businesses, acquisitions, and other investments.  If a plan like this doesn't taste good to you, then there is no purpose in holding the stock.  Without SB, BH is just SNS....but without SB....a failing brand.  We wouldn't be talking about it.

[giofranchi]

I really hate to say this.....because I'm all about shareholder's owning the company and management answering to shareholders, but most of us are not buying BH stock b/c of SNS (or now Maxim, First Guard, or CBRL stock holdings)...we are buying because most of us believe SB will create the most value through his management of operating businesses, acquisitions, and other investments.  If a plan like this doesn't taste good to you, then there is no purpose in holding the stock.  Without SB, BH is just SNS....but without SB....a failing brand.  We wouldn't be talking about it.

 

In any investment of mine I require always both a great entrepreneur and a good business. I regard a chain of fast-food restaurants and fast-food franchising to be good businesses, but of course the fact I admire what Biglari has accomplished until now as an entrepreneur is also very important: I wouldn’t invest, for instance, in CBRL…

But, let’s say, Biglari at the helm of an obsolete technological company? It surely wouldn’t interest me either.

 

Gio

 

[ragu]

Hi Gio/Ragu and other BH shareholders,

 

I got a small position in the last couple of days [...]

 

shalab,

 

Just got the chance to respond to this. Welcome aboard!

 

 

how about a share holder proposal to terminate this? I also like Biglari to give up his CEO position and he becomes a CIO.

 

Safe to say that I disagree with both proposals. I want Sardar in control of BH.

 

He doesn't have the shares he needs for outright control. Neither does he have shareholders that trust him. This deal at least removes the possibility of a coup against Sardar.

 

Re. letter to the board, here's a thought: There's much brouhaha over how the sale of the Lion Fund to Sardar effectively eliminates the compensation cap. In fact, there's a far bigger implication for BH shareholders and it's one that has been (unsurprisingly) overlooked.

 

The vast majority of Sardar's compensation going forward is going to accrue from the fees that BH pays to Biglari Capital for investment management. This amount is not subject to the agreement that requires Sardar to buy BH stock. Given that this is a significant departure from the original incentive agreement, how does the board think about it?

 

FWIW, I fully expect Sardar to continue to be a buyer of BH stock over time (agreement or not), but this sale removes the requirement that the original agreement enforced. Certainly worth watching what he does going forward in this regard.

 

Best,

Ragu

 

 

 

[giofranchi]

The vast majority of Sardar's compensation going forward is going to accrue from the fees that BH pays to Biglari Capital for investment management. This amount is not subject to the agreement that requires Sardar to buy BH stock. Given that this is a significant departure from the original incentive agreement, how does the board think about it?

 

FWIW, I fully expect Sardar to continue to be a buyer of BH stock over time (agreement or not), but this sale removes the requirement that the original agreement enforced. Certainly worth watching what he does going forward in this regard.

 

Ragu,

if it really is like you seem to suggest, my question is: why the compensation agreement that is downloadable from the BH website is still the old one? I mean, still the same compensation agreement that was present before the sale of the Lion Fund to Biglari? And therefore we still can read there is a compensation cap and that 30% of the incentive received must be used to buy BH shares? Isn’t this misleading? ???

 

Thank you,

 

Gio

 

[ragu]

Ragu,

if it really is like you seem to suggest [...]

 

gio,

 

There is no ambiguity about this. It's pretty clear.

 

From the filing announcing the sale of Biglari Capital back to Sardar:

 

The modification of the Incentive Bonus Agreement between BH and Mr. Biglari to give effect to the transactions, inter alia, by providing that Mr. Biglari’s incentive compensation will thereafter be calculated without reference to any investments by BH and its subsidiaries in investment partnerships (including the Lion Fund and the Lion Fund II), of which Biglari Capital or Mr. Biglari is the general partner.

(emphasis supplied)

 

and

 

Excludes from the calculation of BH’s adjusted book value, and therefore from the calculation of Mr. Biglari’s incentive compensation, commencing with the period after the closing of the Biglari Capital Transaction, any realized or unrealized gains or losses, earnings and all other amounts attributable to any investments by BH and its subsidiaries in “Outside Investment Partnerships,” defined as investment partnerships (or the equivalent) in which BH or a subsidiary is a limited partner (or the equivalent) and Mr. Biglari or his affiliate (other than BH or a subsidiary) is the general partner (or the equivalent).  As a result of the Biglari Capital Transaction, the Lion Fund and the Lion Fund II now constitute Outside Investment Partnerships and all amounts attributable to their investments in securities (including the securities contributed by BH) will be excluded from the calculation of Mr. Biglari’s incentive compensation.

(emphasis supplied)

 

 

Isn’t this misleading? ???

 

Seeing as the amendment is filed with the SEC and is public information, I'd suggest this is an oversight rather than an attempt to mislead. I wouldn't be surprised to see the amendment make it to the website.

 

Best,

Ragu

[giofranchi]

Seeing as the amendment is filed with the SEC and is public information, I'd suggest this is an oversight rather than an attempt to mislead. I wouldn't be surprised to see the amendment make it to the website.

 

Ok! Thank you! :)

 

Cheers,

 

Gio

[giofranchi]

Ragu,

Today it has been a very long day… and now I am tired… probably, that's why I am encountering some difficulties in understanding the Incentive Agreement Amendment… in particular:

1) where is it written there is no more a cap to Biglari’s compensation?

2) where is it written Biglari doesn’t have to invest 30% of the incentive received in BH stocks?

 

Thank you in advance,

 

Gio

 

[giofranchi]

It seems to me the Amendment just makes a better distinction between operating earnings and investment earnings. For operating earnings the old Incentive Agreement remains in place basically unchanged. For investment earnings, instead, there is no clear evidence of the new compensation structure. What also changes, of course, is the “high water mark” of BH’s adjusted book value used to calculate Biglari’s incentive compensation.

That’s all I can find… What am I missing?

 

Thank you! :)

 

Gio

 

[AzCactus]

Hi All,

 

I don't claim to know an awful lot about BH (but definitely am doing some digging).  To me it seems that there are a camp of people who seemingly defend Sardar Biglari with a vengeance and those who feel he is way overcompensated given the size of his company.    If I understand correctly he earns a base of around 900K, which can end up being about 10 MM if BVPS increases at least 6% and then he is required to use 30% of that bonus to buy BH shares.  Hopefully, most of this is correct.  I apologize in advance if it isn't. 

 

However, from what I have seen, since the company has been public he has earned a lot of money and the stock has significantly under-performed the S&P 500 while he is still earning a lot of money. As a long term investor this is not necessarily a huge deal, but if Sardar is as brilliant as some people think does anyone have insight into the performance since 12/2009.  While this is not an investment lifetime 5 years of significant under-performance is not exactly negligible. 

 

Any feedback/guidance is appreciated.

 

Thank You

[giofranchi]

The text of the “First Amendment to Amended and Restated Incentive Agreement”:

http://www.sec.gov/Archives/edgar/data/93859/000152153613000580/ex103to8k07428_07012013.htm

In it there is no amendment to Section 3 “Purchase of Company Stock” of the Amended and Restated Incentive Agreement.

Therefore, imo Biglari is still to purchase BH shares for an amount equal to at least 30% of his incentive compensation tied to BH operating results.

Am I wrong?

 

Gio

 

[ragu]

[...]1) where is it written there is no more a cap to Biglari’s compensation?

2) where is it written Biglari doesn’t have to invest 30% of the incentive received in BH stocks?

 

gio,

 

Re. (1), there isn't. The cap is still there, albeit tied to operating results (mostly). However, by moving the securities from BH  in exchange for an LP interest in Biglari Capital, Sardar has effectively eliminated the cap on the investment side. His incentive fees via Biglari Capital are not subject to a cap of $10 million/yr.

 

Re. (2), again it doesn't say he doesn't have to reinvest in BH stock.

 

Think of it this way: Sardar's incentive compensation used to be determined on the entire equity of BH.  His compensation is now determined with the investments committed to Biglari Capital removed from that equity.

 

Naturally, the incentive payments to Sardar as CEO of BH will be less (far less, in fact) under the new arrangement than under the original arrangement, even if the total payment to him from BH will be roughly similar.

 

So, even though he is still tied to the requirement to buy BH stock, it will be an amount that is far less than that stipulated by the original agreement.

 

Hope this clarifies.

 

Best,

Ragu

[giofranchi]

Hope this clarifies.

 

Yes, this is clearer now… but again I don’t see what’s wrong with it…! ???

- For his job as CEO of BH he gets a compensation based on BH operating earnings, a compensation that is still capped to a maximum of $10 million,

- For his work as a fund manager he gets a compensation based on how well the investments he chooses will perform, which is exactly how any fund manager gets paid!

- How much does the Lion Fund charge BH for managing its investments? Where can we find that agreement?

- I think (or at least I hope…) the 2% in the classical 2 & 20 formula is still not there. If it is like I think (hope), the Lion Fund remains cheaper than most hedge funds out there.

- I wouldn’t underestimate the importance of operating earnings: from 2008 to 2013 they amounted to $194.3 million, while investment earnings were $269 million. In other words, operating earnings have been circa 42% of total earnings. As Biglari keeps buying whole businesses, operating earnings might even get a larger percentage of total earnings. This means the share of the compensation incentive he receives as CEO of BH, that he has to invest in BH shares, won’t be negligible.

 

Gio

 

[ragu]

Yes, this is clearer now… but again I don’t see what’s wrong with it…! ???

- For his job as CEO of BH he gets a compensation based on BH operating earnings, a compensation that is still capped to a maximum of $10 million,

- For his work as a fund manager he gets a compensation based on how well the investments he chooses will perform, which is exactly how any fund manager gets paid!

 

Gio,

 

I didn't imply there was anything wrong with it. FWIW, I didn't have a problem with the original incentive agreement (5% hurdle and no cap).

 

 

- How much does the Lion Fund charge BH for managing its investments? Where can we find that agreement?

 

6% hurdle for BH, 5% for other LP's. The agreement should be in the filing I linked to a couple of posts back.

 

- I think (or at least I hope…) the 2% in the classical 2 & 20 formula is still not there. If it is like I think (hope), the Lion Fund remains cheaper than most hedge funds out there.

 

No need to hope:-). Sardar continues to charge the same incentive fees as the Lion Fund originally. The only change, as far as I can tell, is that these incentive fees are assessed quarterly instead of annually.

 

- I wouldn’t underestimate the importance of operating earnings: from 2008 to 2013 they amounted to $194.3 million, while investment earnings were $269 million. In other words, operating earnings have been circa 42% of total earnings.

 

Right. What matters though for the incentive calculation is not just the amount of earnings, but the equity employed to achieve those earnings. SNS' equity at the end of FY 2008 was $283.5 million. All of this equity was required to produce these operating results, whereas the investment earnings have come from a far smaller combination of equity produced by operations and debt. And, they've still outpaced operating earnings.

 

As Biglari keeps buying whole businesses, operating earnings might even get a larger percentage of total earnings. This means the share of the compensation incentive he receives as CEO of BH, that he has to invest in BH shares, won’t be negligible.

 

Never said it would be negligible. Just that it'd be less (and I expect far less) than if he'd kept the Lion Fund within BH. It is a significant departure from the original agreement, IMO. As I said, it will be interesting to see what he does with the cash he receives from running the Lion Fund.

 

Best,

Ragu