BH - Biglari Holdings

[Parsad]

You don't have to cook the books to increase book value at an above average rate. There is simply a big difference between trying to grow IV at the highest rate possible, or trying to grow BV at the highest rate possible.

 

Ok, let's talk for once about something different than the way Biglari treats his shareholders: what would have you done differently from an operating and a capital allocation point of view?

Do you think Biglari has made some serious mistakes during the last 5 years?

 

Gio

 

- His original cost basis in Steak'n Shake did not work out as well as expected...paid too much, too early!

- I think leveraging Steak'n Shake was not necessary for the returns he achieved, and is a dangerous game when you bet it all on one stock...while it worked out so far with CBRL, the next one, if it is like his original SNS investment, could go the wrong way and wipe him out.

 

Cheers!

[link01]

Ok, I'm going to try to model this out based on Ragu's previous posts as to why he will stop the compensation package [...]

 

racemize,

 

I truly appreciate your keeping an open mind about this.

 

To reiterate, I believe the incentive agreement will be rescinded in time because of my subjective assessment of Sardar's character.

 

However, I also believe you can't make the argument that Sardar wants the best deal for himself and claim this is a forever plan.

 

Here's how I think about it, with a couple of assumptions thrown in:

 

Let's say that x denotes the book value of BH at any year-end and that y represents the value of Sardar's stake in BH at that same point.

 

I'll assume that Sardar increases BV by 15%, before incentive compensation calculations, in that 1 year from that point of time.

 

If the incentive agreement stands, Sardar will be entitled to an incentive compensation of 2.25% of x (25% * (15%-6%) * x).

 

However, if the incentive agreement were rescinded, I'd expect that the price/book multiple afforded BH will rise in fairly short order. My estimate of that increase is 20%. Book value at the end of year would be 1.15 * y (having advanced 15% for the year).

In that event, the increase in Sardar's net worth from his work at BH for the year will be .23*y (.2 * 1.15 *y).

 

 

If Sardar always chooses the best outcome for himself, there comes a point in time when the increase in net worth from the higher price/book multiple outstrips the incentive compensation that he would have received (ignoring taxes for the sake of simplicity. If we didn't, we'd reach this point in time sooner).

 

i.e. (.23*y) > (2.25% * x)

 

y > 9.78% * x

 

So, mathematically, the point when it makes rational sense for Sardar to rescind the incentive agreement (if he were only acting in his own self-interest) will be reached when the value of his stake in BH gets to be more than 9.8% of BH's book value.

 

A quick model based on current ownership and book value and the assumption of 15% increase in book value per share annually, suggests that 2022 (8 years from now) is when this point will be reached.

 

Best,

Ragu

 

to a long term thinker/owner/shareholder, which biglari is, the value of one's investment based on a higher multiple accorded by the market is not necessarily something that can that can be relied upon. its an ever-changing chimera. only growth in earnings power & book val matter in the long run.

 

my own hunch (maybe even more based on subjectivity than yours) is that much of sardars moves to entrench himself is borne of a very real fear that he is vulnerable. how? (1)his direct ownership in bh (sns) relative to his ownership & income is low, not withstanding his indirect control via his lions funds which could evaporate on a dime if certain things beyond his control go south like a market crash or a prolonged recession that causes partners to pull their funds in size out of fear or need (2) he's vulnerable to the short term opportunism of the icahns & other hedge fund/ corporate raider types riding a wave of success & popularity on the crest of todays easy money bull market. mr big has a lot of faults but he's patient in his confident vision of what it takes to create enduring value, the icahns & others hedgies aren't, imo (3) rightly or wrongly he considers himself as the guy responsible for saving sns, rejuvenating it, & building & even improving on the original founders vision to make sns into something special but until the rest of the investment community wakes up to that "fact" he'll continue to feel the need to cement his position & safeguard his "rightful" legacy as captain of the old sns ship

 

like you I do believe he'll eventually ease back on his aggressive entrenchment tactics but it may be a while yet. maybe when he's able to jam thru his ardently hoped for dual class structure we'll see him relent sooner rather than later

[giofranchi]

- I think leveraging Steak'n Shake was not necessary for the returns he achieved, and is a dangerous game when you bet it all on one stock...while it worked out so far with CBRL, the next one, if it is like his original SNS investment, could go the wrong way and wipe him out.

 

Sanjeev,

I think this is what entrepreneurs do: they are interested in very few businesses they know very well and want to hold for the very long term. If they can, they buy those whole businesses, and get actively involved in their management. They believe those businesses can create much value in the future, and want to maximize their potential.

 

You cannot do that with 20 different businesses...

 

Sincerely, the way Biglari concentrates his efforts on very few businesses at a time, is one of the reasons I like BH so much! ;)

 

Cheers,

 

Gio

[augustabound]

This guy says get on board the Biglari train now before it's too late.  ;D

 

http://www.gurufocus.com/news/271349/buying-the-next-legend-of-holding-companies-before-he-becomes-more-famous-and-a-lot-richer

 

Oh that's right, you see the word, "Legend" in there.

[giofranchi]

to a long term thinker/owner/shareholder, which biglari is, the value of one's investment based on a higher multiple accorded by the market is not necessarily something that can that can be relied upon. its an ever-changing chimera. only growth in earnings power & book val matter in the long run.

 

my own hunch (maybe even more based on subjectivity than yours) is that much of sardars moves to entrench himself is borne of a very real fear that he is vulnerable. how? (1)his direct ownership in bh (sns) relative to his ownership & income is low, not withstanding his indirect control via his lions funds which could evaporate on a dime if certain things beyond his control go south like a market crash or a prolonged recession that causes partners to pull their funds in size out of fear or need (2) he's vulnerable to the short term opportunism of the icahns & other hedge fund/ corporate raider types riding a wave of success & popularity on the crest of todays easy money bull market. mr big has a lot of faults but he's patient in his confident vision of what it takes to create enduring value, the icahns & others hedgies aren't, imo (3) rightly or wrongly he considers himself as the guy responsible for saving sns, rejuvenating it, & building & even improving on the original founders vision to make sns into something special but until the rest of the investment community wakes up to that "fact" he'll continue to feel the need to cement his position & safeguard his "rightful" legacy as captain of the old sns ship

 

like you I do believe he'll eventually ease back on his aggressive entrenchment tactics but it may be a while yet. maybe when he's able to jam thru his ardently hoped for dual class structure we'll see him relent sooner rather than later

 

I agree. And that's why I go on repeating I want him to feel safe and in full control. The sooner the better.

 

IMO though I think market valuation cannot be completely overlooked even by an entrepreneur with a very long term view of value creation: basically, if I were him, I would like to see the market pricing BH as close to FV as possible.

The reasons might be many and different, but at least some of them surely are rational.

 

Gio

[gfp]

The author seems to think First Guard is a big float generator.  My impression was that it was not.

 

This guy says get on board the Biglari train now before it's too late.  ;D

 

http://www.gurufocus.com/news/271349/buying-the-next-legend-of-holding-companies-before-he-becomes-more-famous-and-a-lot-richer

 

Oh that's right, you see the word, "Legend" in there.

[giofranchi]

My impression was that it was not.

 

+1 ;)

 

Gio

[bookie71]

FYI

http://seekingalpha.com/article/2382615-biglari-holdings-this-aint-no-berkshire-hathaway?uprof=11

[rayfinkle]

quarter out

 

http://www.sec.gov/Archives/edgar/data/93859/000092189514001734/form10q07428007_07022014.htm

[gfp]

Why would a company ever want to hold its own shares through a hedge fund vs. canceling them or classifying them as treasury shares directly?  It sounds like Biglari Holdings pays a performance fee on any appreciation in BH shares held by the Lion Fund.  Is there ANY benefit to the company to holding them this way?  If not, isn't that a violation of management's fiduciary duty to shareholders?

[giofranchi]

Why would a company ever want to hold its own shares through a hedge fund vs. canceling them or classifying them as treasury shares directly?  It sounds like Biglari Holdings pays a performance fee on any appreciation in BH shares held by the Lion Fund.  Is there ANY benefit to the company to holding them this way?  If not, isn't that a violation of management's fiduciary duty to shareholders?

 

I guess it is always a matter of control: if those shares were cancelled, which percentage of BH would Biglari control?

I agree direct ownership is different than ownership through a fund... Anyway, through the Lion Fund Biglari controls almost 20% of BH. Solely through direct ownership the percentage would be far less...

You might not like it, but I guess this is the reason.

As always I might be wrong. ;)

 

Gio

[krazeenyc]

Why would a company ever want to hold its own shares through a hedge fund vs. canceling them or classifying them as treasury shares directly?  It sounds like Biglari Holdings pays a performance fee on any appreciation in BH shares held by the Lion Fund.  Is there ANY benefit to the company to holding them this way?  If not, isn't that a violation of management's fiduciary duty to shareholders?

 

I guess it is always a matter of control: if those shares were cancelled, which percentage of BH would Biglari control?

I agree direct ownership is different than ownership through a fund... Anyway, through the Lion Fund Biglari controls almost 20% of BH. Solely through direct ownership the percentage would be far less...

You might not like it, but I guess this is the reason.

As always I might be wrong. ;)

 

Gio

 

 

You don't think the reason is.... to enrich the fund manager (in this case also the CEO).

[Parsad]

Why would a company ever want to hold its own shares through a hedge fund vs. canceling them or classifying them as treasury shares directly?  It sounds like Biglari Holdings pays a performance fee on any appreciation in BH shares held by the Lion Fund.  Is there ANY benefit to the company to holding them this way?  If not, isn't that a violation of management's fiduciary duty to shareholders?

 

I guess it is always a matter of control: if those shares were cancelled, which percentage of BH would Biglari control?

I agree direct ownership is different than ownership through a fund... Anyway, through the Lion Fund Biglari controls almost 20% of BH. Solely through direct ownership the percentage would be far less...

You might not like it, but I guess this is the reason.

As always I might be wrong. ;)

 

Gio

 

 

You don't think the reason is.... to enrich the fund manager (in this case also the CEO).

 

Well, he's also both directly and indirectly leveraged the shit out of the company.  If Biglari Holdings price drops, how will that affect the "Various Partnership" assets on the balance sheet?  He's also increased debt from $110M to $215M...combine that with long-term leases of $100M and debt to equity is about 60%...this is no Berkshire Hathaway, Fairfax Financial or Markel.  In his haste, he may increase leverage even further...thus the fear of the potential for a one-time implosion.  One big bet combined with one massive ego and a complicit board...kaboom!  Cheers!

[carson]

Why would a company ever want to hold its own shares through a hedge fund vs. canceling them or classifying them as treasury shares directly?  It sounds like Biglari Holdings pays a performance fee on any appreciation in BH shares held by the Lion Fund.  Is there ANY benefit to the company to holding them this way?  If not, isn't that a violation of management's fiduciary duty to shareholders?

 

I guess it is always a matter of control: if those shares were cancelled, which percentage of BH would Biglari control?

I agree direct ownership is different than ownership through a fund... Anyway, through the Lion Fund Biglari controls almost 20% of BH. Solely through direct ownership the percentage would be far less...

You might not like it, but I guess this is the reason.

As always I might be wrong. ;)

 

Gio

 

 

You don't think the reason is.... to enrich the fund manager (in this case also the CEO).

 

Well, he's also both directly and indirectly leveraged the shit out of the company.  If Biglari Holdings price drops, how will that affect the "Various Partnership" assets on the balance sheet?  He's also increased debt from $110M to $215M...combine that with long-term leases of $100M and debt to equity is about 60%...this is no Berkshire Hathaway, Fairfax Financial or Markel.  In his haste, he may increase leverage even further...thus the fear of the potential for a one-time implosion.  One big bet combined with one massive ego and a complicit board...kaboom!  Cheers!

 

In addition, Maxim is bleeding cash (net losses of $4.5M attributable to Maxim in q3), SNS customer traffic growth is waning (.5% in q3), the total number of franchised units actually declined on a sequential quarter basis (195 on 4/9/14, 191 on 7/2/14), the margins have already been squeezed out of the SNS menu leaving little to no room to boost customer traffic or entice franchisees, Western Sizzlin tapped its revolver ($1M), First Guard is neither a float business (per Biglari at AM) nor materially contributing to earnings (other revenue was $7.2M of which $4.7M was attributable to Maxim, leaving $2.5M attributable to First Guard (?) * (1 - guesstimate combined ratio of .9) = $250,000), and BH appears no closer to unlocking the CBRL handcuffs.  Of course, this is all coming together just in time to dissuade weary shareholders from exercising their stock purchase rights, creating more opportunity for SB and BH(!) to increase their ownership of BH through the exercise of oversubscription privileges. :o

[augustabound]

One big bet combined with one massive ego and a complicit board...kaboom!  Cheers!

Is it wrong of me to want to see this happen to him?  :P

 

 

[Parsad]

One big bet combined with one massive ego and a complicit board...kaboom!  Cheers!

Is it wrong of me to want to see this happen to him?  :P

 

Yes, but we won't condemn you!  ;D  Cheers!

[link01]

Why would a company ever want to hold its own shares through a hedge fund vs. canceling them or classifying them as treasury shares directly?  It sounds like Biglari Holdings pays a performance fee on any appreciation in BH shares held by the Lion Fund.  Is there ANY benefit to the company to holding them this way?  If not, isn't that a violation of management's fiduciary duty to shareholders?

 

I guess it is always a matter of control: if those shares were cancelled, which percentage of BH would Biglari control?

I agree direct ownership is different than ownership through a fund... Anyway, through the Lion Fund Biglari controls almost 20% of BH. Solely through direct ownership the percentage would be far less...

You might not like it, but I guess this is the reason.

As always I might be wrong. ;)

 

Gio

 

 

You don't think the reason is.... to enrich the fund manager (in this case also the CEO).

 

Well, he's also both directly and indirectly leveraged the shit out of the company.  If Biglari Holdings price drops, how will that affect the "Various Partnership" assets on the balance sheet?  He's also increased debt from $110M to $215M...combine that with long-term leases of $100M and debt to equity is about 60%...this is no Berkshire Hathaway, Fairfax Financial or Markel.  In his haste, he may increase leverage even further...thus the fear of the potential for a one-time implosion.  One big bet combined with one massive ego and a complicit board...kaboom!  Cheers!

 

In addition, Maxim is bleeding cash (net losses of $4.5M attributable to Maxim in q3),

 

well, a little perspective, not without a bit of snark, & not entirely undeserved, but still, it looks like it could be a bargain in the hands  of a smart, talented operator, which I think mr big has proven himself to be despite his other well-publisized faults:

 

<<A private-equity fund bought Alpha Media Group, owner of Maxim and music magazine Blender, a much smaller property, for $250 million in 2007, the Wall Street Journal reported.

 

When Alpha Media put Maxim up for sale last year, the last offer before Biglari's was for $28 million. The deal collapsed when it reportedly was discovered the would-be buyer had forged his father's signature to line up loans for the acquisition.

 

Between 2007 and now, the magazine industry has been knocked off balance by the fall in print advertising revenue, brought on by the Internet onslaught and less-than-awesome economy.

 

If the New York Post was even close to correct, Biglari followed one of Buffett's key teachings — buy good assets cheap.

 

The question is whether Maxim is a good asset.

 

In 2012, revenue for the magazine's print advertising dropped 18 percent to $112.1 million, according to published reports. On the other hand, online ad sales were said to be revving up.

 

This is what Biglari had to say in the Maxim news release:

 

“As the new owner, we look forward enthusiastically to making long-term investments in pursuit of revitalizing the Maxim brand. Maxim's inclusion into our collection of companies will benefit from our financial strength. We plan to build the business on multiple dimensions, thereby energizing our readership and viewership.”

 

If that sounds to you like he's willing to spend to revamp the title, he indicated where the money could come from in his letter to shareholders, posted on Biglari Holdings' website more than two months ahead of the deal.

 

“Our subsidiaries are cash machines — generating cash beyond their capital requirements — with cash sent upstairs to fund the growth of Biglari Holdings, a dynamic value-building machine.”

 

So Maxim might be remade with levies that Steak 'n Shake and Western Sizzlin pay to the holding company.

 

For what that means, look at a credit-rating report that Moody's Investors Service issued Wednesday.

 

Steak 'n Shake was seeking a $220 million term loan — $50 million of which would fund a cash dividend to Biglari Holdings, according to Moody's. The report noted the subsidiary had a “history of paying significant dividends” to its owner.

 

The agency's analysts added: “The company is once again increasing leverage to bring future cash flow forward in order to fund a dividend to BH and make other payments.”

 

For Steak 'n Shake, that's the price of being owned by a dynamic, value-building machine.

 

http://www.expressnews.com/business/business_columnists/greg_jefferson/article/Biglari-s-Maxim-purchase-is-a-classic-5298580.php

 

 

 

[link01]

SNS customer traffic growth is waning (.5% in q3), the total number of franchised units actually declined on a sequential quarter basis (195 on 4/9/14, 191 on 7/2/14), the margins have already been squeezed out of the SNS menu leaving little to no room to boost customer traffic or entice franchisees,

 

in 2014 Q3 sns open 2 co owned & 3 franchise restaurants, & closed 6 western franchised restaurants (-1 total). there's little doubt that western sizzling is weaker brand that's being slowly wound down as its fortunes wane more than they wax

[link01]

...the margins have already been squeezed out of the SNS menu leaving little to no room to boost customer traffic or entice franchisees,

 

I believe sb said that he could justify & entice potential franchisees to invest at a 1.5m per store annual revenue rate. its in 1 of his letters to shareholders, tho i'll pass on trying to find it right now.

 

here are the avg sns co owned store revenues for these years (i'll exclude sns franchise stores grossed up sales per store since, among other things, its mixed up a bit with western sizzling franchised sales, & franchise fees are mixed with royalties) :

 

2009: 1.512m/store

2010: 1.599m/store

2011: 1.656/store

2012: 1.719/store

2013: 1.755/store

2014: 1.784/ store annualized Q1 thru Q3

 

franchised store rev yoy growth rates:

2013: 34% vs 2012

2014 Q1: 39.7% annualized vs 2013

2014 Q2: 79.4% annualized vs 2013

2014 Q3: 82.7% annualized vs 2013

 

 

sardar def is leveraging bh up financially as sanjeev has said, but its somewhat offset by a quite conservative, measured, rational approach to sustainable, efficient growth in sns operations at a low risk adjusted cost, imo

 

 

 

 

[Parsad]

...the margins have already been squeezed out of the SNS menu leaving little to no room to boost customer traffic or entice franchisees,

 

I believe sb said that he could justify & entice potential franchisees to invest at a 1.5m per store annual revenue rate. its in 1 of his letters to shareholders, tho i'll pass on trying to find it right now.

 

here are the avg sns co owned store revenues for these years (i'll exclude sns franchise stores grossed up sales per store since, among other things, its mixed up a bit with western sizzling franchised sales, & franchise fees are mixed with royalties) :

 

2009: 1.512m/store

2010: 1.599m/store

2011: 1.656/store

2012: 1.719/store

2013: 1.755/store

2014: 1.784/ store annualized Q1 thru Q3

 

franchised store rev yoy growth rates:

2013: 34% vs 2012

2014 Q1: 39.7% annualized vs 2013

2014 Q2: 79.4% annualized vs 2013

2014 Q3: 82.7% annualized vs 2013

 

 

sardar def is leveraging bh up financially as sanjeev has said, but its somewhat offset by a quite conservative, measured, rational approach to sustainable, efficient growth in sns operations at a low risk adjusted cost, imo

 

It would be low risk if he was diversifying the dividends being distributed, but they are pretty much going into maximum-sized bets...such as CBRL.  CBRL itself was not a particularly risky bet when made, because cash flows were good, debt levels were good and it was not in turnaround or distressed mode.  But if he made such a bet as SNS in an all or nothing venture again, and it turned out differently than the original, imagine the repercussions.  You would have the acquisition company stock collapsing, which in turn would collapse the price in BH, in particular BH held in the Partnership Assets.  BH shareholders would be in for one hell of a surprise from this leverage, regardless of how big of a cash machine BH apparently is!  Cheers!

[giofranchi]

It would be low risk if he was diversifying the dividends being distributed, but they are pretty much going into maximum-sized bets...such as CBRL.  CBRL itself was not a particularly risky bet when made, because cash flows were good, debt levels were good and it was not in turnaround or distressed mode.  But if he made such a bet as SNS in an all or nothing venture again, and it turned out differently than the original, imagine the repercussions.  You would have the acquisition company stock collapsing, which in turn would collapse the price in BH, in particular BH held in the Partnership Assets.  BH shareholders would be in for one hell of a surprise from this leverage, regardless of how big of a cash machine BH apparently is!  Cheers!

 

Well, regarding debt I think Biglari is behaving consistently with what he has often said to CBRL's management:

 

Paying down debt when the financing environment is favorable is also asinine.

 

Take for instance CBRL: it has equity of $487 million and long term debt of $381 million, 78%. And Biglari advised CBRL's management to increase debt up to $750 million, showing how that change would put CBRL's leverage in line with its peers!

 

Furthermore, BH is much more diversified than CBRL! ;)

 

The comparison with FFH and MKL doesn't hold, because they enjoy lots of float, and very little fcf. The exact opposite of BH!

 

Gio

 

[link01]

 

It would be low risk if he was diversifying the dividends being distributed, but they are pretty much going into maximum-sized bets...such as CBRL.  CBRL itself was not a particularly risky bet when made, because cash flows were good, debt levels were good and it was not in turnaround or distressed mode.  But if he made such a bet as SNS in an all or nothing venture again, and it turned out differently than the original, imagine the repercussions.  You would have the acquisition company stock collapsing, which in turn would collapse the price in BH, in particular BH held in the Partnership Assets.  BH shareholders would be in for one hell of a surprise from this leverage, regardless of how big of a cash machine BH apparently is!  Cheers!

 

yea, I think cbrl is a fundamentally stronger co than sns was back in the day. there's no doubt sb was surprised at the disparity of the actual disarray & deterioration of the biz at sns that he had first envisioned from a reading of publically available docs/filings back then & what he found when he gained control & was able to view the books in full. but in the end, he pulled up his sleeves, jumped into the trenches, didn't panic, took time to analyze things top to bottom, formulate a plan of action, & ultimately execute on that plan & pull off a pretty remarkable turn around. was also he lucky? yes! does his ego prevent him from seeing it that way? probably only in terms of the degree that others might, but not entirely. i'll bet that he's taken away a valuable lesson to go along with the experience. and its one that i'll also bet that he's chomping at the bit to apply to a less damaged diamond in the rough like cbrl, most ideally as a member of the board, whose experience & talent can win over the doubters & exert an increasing influence over time. he'll only punt, sell, & go away as a last option. he gets another big swing at the board in less than a year between now & apr 2015 when the poison pill is due to expire. it will be harder for them to deny him & his dogged confidence, self belief, & determination, not to mention the been there done that soundness of his vision, if he's found to be still around despite the spectre of adverse price movements or loss momentum in its fundamentals which would likely drive most hedgie punters to take their ball & go home.

[bookie71]

Don't forget that levers work in two directions.

[Hielko]

Ok, I'm going to try to model this out based on Ragu's previous posts as to why he will stop the compensation package [...]

 

racemize,

 

I truly appreciate your keeping an open mind about this.

 

To reiterate, I believe the incentive agreement will be rescinded in time because of my subjective assessment of Sardar's character.

 

However, I also believe you can't make the argument that Sardar wants the best deal for himself and claim this is a forever plan.

 

Here's how I think about it, with a couple of assumptions thrown in:

 

Let's say that x denotes the book value of BH at any year-end and that y represents the value of Sardar's stake in BH at that same point.

 

I'll assume that Sardar increases BV by 15%, before incentive compensation calculations, in that 1 year from that point of time.

 

If the incentive agreement stands, Sardar will be entitled to an incentive compensation of 2.25% of x (25% * (15%-6%) * x).

 

However, if the incentive agreement were rescinded, I'd expect that the price/book multiple afforded BH will rise in fairly short order. My estimate of that increase is 20%. Book value at the end of year would be 1.15 * y (having advanced 15% for the year).

In that event, the increase in Sardar's net worth from his work at BH for the year will be .23*y (.2 * 1.15 *y).

 

 

If Sardar always chooses the best outcome for himself, there comes a point in time when the increase in net worth from the higher price/book multiple outstrips the incentive compensation that he would have received (ignoring taxes for the sake of simplicity. If we didn't, we'd reach this point in time sooner).

 

i.e. (.23*y) > (2.25% * x)

 

y > 9.78% * x

 

So, mathematically, the point when it makes rational sense for Sardar to rescind the incentive agreement (if he were only acting in his own self-interest) will be reached when the value of his stake in BH gets to be more than 9.8% of BH's book value.

 

A quick model based on current ownership and book value and the assumption of 15% increase in book value per share annually, suggests that 2022 (8 years from now) is when this point will be reached.

 

Best,

Ragu

This does not make any sense at all. The market value of BH = (value of the underlying assets + value added by manager) minus a discount for the value subtraced from the company by the manager. Reducing his fees isn't a move that will create value: the only result is that instead of getting 100% of his fees he will now get a lower percentage and that other shareholders will get a piece of this as well.

 

And what you are specifically missing in your 'math' example is the fact that his incentive compensation is a revenue steam, not a one time event. I did some quick and dirty math, and let's say Biglari is able to grow BH at 15% for 10 years in a row and after that growth goes to 10%. That would mean that the company is worth ~1.4x book value without management fees (using a 10% discount rate) and that the value of the management fees is approximately 0.27x book value. So he effectively already has a 20% economic interest in the business if he is indeed able to hit that 15% return pre fees.

[Parsad]

Take for instance CBRL: it has equity of $487 million and long term debt of $381 million, 78%. And Biglari advised CBRL's management to increase debt up to $750 million, showing how that change would put CBRL's leverage in line with its peers!

 

And this makes sense to you?!  1.75 debt to equity?  How much debt did Berkshire leverage Dairy Queen with?  How much debt did he leverage Berkshire with?

 

The comparison with FFH and MKL doesn't hold, because they enjoy lots of float, and very little fcf. The exact opposite of BH!

 

Of course the comparison is valid.  Float is a much better alternative to debt if it is low cost or no cost.  Both companies will be adding more and more operating businesses over time...do you see them adding more leverage to those operating businesses?  No.

 

You guys will accept the dumbest propositions if it is written or spoken by Sardar, and assume it to be coming out of Ben Graham's arse...so it must be valid...here are the dumbed down facts:

 

- Let's get control of a company and alienate the people who helped me get control by naming it after me

- Let's implement a licensing agreement, where I will get paid an exorbitant amount if the company retains my name

- Let's change the share class structure so that my votes don't get diluted as I acquire more companies

- Let's issue warrants that are tradeable, and then I can exercise my over allotment and increase my position

- Let's change my compensation package three times and then implement a hedge fund structure within a corporation...if it doesn't work, I'll find another way around the shareholder vote

- Let's buy stock through the company, not retire it, so I can retain the votes

- Let's lever up this sucker because I'm impatient, but we'll tell shareholders that it is built like a rock

- Let's run it lean, but we'll have a few jets on standby

 

What I can't wait to see in the future, is how much more you guys will bend and take it from behind before actually saying, "Enough is enough"..."You've got to go MF'er!" 

 

My public company vehicle is around the corner, as is Mohnish's but much larger...why don't you guys use those two as measuring sticks for returns, leverage and ethics when the time comes.  You guys have already eschewed the lessons from the likes of Berkshire, Fairfax & Markel.  Hopefully, we can awake you from this dreadful slumber!  Cheers!