BH question

[investor99]

I am a little confused.  Did Biglari sell his shares in BH before he announced his compensation package?  I can't tell from the language in the report, which is probably the way he wanted it.

 

Thanks

[tiddman]

My interpretation is something like this.

 

Biglari owned 100% of Biglari Capital, which is the GP (general partner) for The Lion Fund.  The LP (limited partner) side of the fund holds the assets owned by Lion Fund clients.  Included in those assets are about 76k shares of BH, some WEST debentures, and other stocks.  Biglari was also a limited partner of the fund (the quantity or percentage of this is not disclosed).

 

On April 30, Biglari sold Biglari Capital to BH in exchange for $1 plus the value of Biglari Capital.  In the 10-Q this was disclosed to be about $4.175M.  This goes 100% to Biglari since he owned 100% of the GP.  So Biglari personally earned $4.175M in this transaction.

 

BH stock closed at $391 on April 30, and the transaction amount was based on that price.  The stock has since fallen around 30% to $275.  However the deal is still done so Biglari gets his $4.175M pay day even though the stock has fallen, unless there is a claw back provision in the fund's compensation arrangement or something like that.

 

The shares of BH that were held in the LP side of the fund are presumably still there (nothing further has been disclosed).  As far as has been disclosed, the Lion Fund still exists and is operating with BH (not Biglari) as the GP.  So clients of The Lion Fund are invested in shares of BH that are held in an investment partnership for which BH is the general partner.  This is obviously an unusual and convoluted structure which, to be fair to Lion Fund clients, should probably be remedied by either buying in the stock or distributing those shares to clients directly so they don't have to pay two layers of fees on them (one layer for the 25% performance allocation to the GP, and a second layer for Biglari's 25% of BH book value incentive).

 

The WEST debentures are also held in the LP side of the fund, and BH issued those debentures.  So, BH is the GP for an investment partnership, and the LP of the fund is the largest creditor to BH.  When BH pays interest on those debentures, it pays that money into the LP side of a fund for which it is the GP.  Whew!

 

One could also ask what value BH received in exchange for the $4.175M it paid for Biglari Capital -- it bought an asset management business that is invested in itself, and now is 30% below a high water mark which it must regain before it makes any money.  If the shares of BH that are held in the fund are distributed to the LP's as I think would be fair, it would constitute distributing a large portion of the fund's assets.

 

Imagine that I sell you an asset management business for $4 million, then the value of the assets falls by 30% and then I distribute 50% of those assets to former clients.  You are left with an asset management business with a fraction of its former asset level, for which you paid $4 million.  This is the deal that BH shareholders got in this transaction.