BH - Biglari Holdings

[goldfinger]

Sanjeev,

 

You probably do not want to talk about it too early, but when is you public vehicle coming - what structure is it going to be?

[Parsad]

Sanjeev,

 

You probably do not want to talk about it too early, but when is you public vehicle coming - what structure is it going to be?

 

Details will be in our 3rd Quarter Letter in October...public, listed company.  Cheers!

[Myth465]

Sanjeev,

 

You probably do not want to talk about it too early, but when is you public vehicle coming - what structure is it going to be?

 

Details will be in our 3rd Quarter Letter in October...public, listed company.  Cheers!

 

Congrats, will have quite a bit of interest on this board.

[Liberty]

That's wonderful news Sanjeev! Congrats, I'm sure it's a lot of work and planning.

 

Question: will the part of the letter about it be released publicly, since it will be a public company? Or will it be just for your private investors? Thanks.

[premfan]

Sanjeev,

 

You probably do not want to talk about it too early, but when is you public vehicle coming - what structure is it going to be?

 

Details will be in our 3rd Quarter Letter in October...public, listed company.  Cheers!

 

 

Awesome news!

[giofranchi]

Sanjeev,

With all due respect I really don't see the leverage problem you are trying to warn us against.

These are the numbers that I see:

Long term debt: $215 million

Obligations under leases: $101 million

Shareholders equity: $553 million

The Company proportionate share of Company stock held by investment partnerships: $65 million

Total equity: $533 + $65 = $618 million

Cash and equivalents: $112 million

Net debt: $215 + $101 - $112 = $201 million

Net debt / Total equity = $201 / $618 = 32.5%.

 

Furthermore, we have $707 million in Land, Buildings, and Equipment, less $355 million of accumulated depreciation on the balance sheet. We know land and buildings mostly don't depreciate, and equipment is barely 30% of those $707 million. Therefore, it is possible the line "Property and equipment, net" understates significantly the true worth of BH's real estate.

 

Of course, the comparison with FFH and MKL doesn't hold... BH started with lots of fcf and is trying to collect float, FFH and MKL started collecting lots of float and are trying to purchase businesses which generate fcf... Those who don't see the difference, simply don't want to... In business you don't choose everything... On the contrary, mostly you react to which opportunities come your way. And Biglari had the opportunity to get control of a business which generates lots of fcf. He seized it. Rightly so.

 

Float is better than debt, of course, but that is not the point: the point is float is riskier than fcf. And companies which enjoy lots of fcf might lever more than companies which use lots of float.

 

Gio

[giofranchi]

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)

 

No, it is actually worth 1.56 x BV.

And if you assume a 10% growth from year 11 onward, with a 10% discount rate, it means that after 10 years BH will cease to create any value... It will then be better to close doors, collect the money, and use it somewhere else (provided, of course, you find something that exceeds your 10% hurdle rate! ;) )... If that will be the outcome, I obviously am completely wrong about BH.

 

Gio

[Hielko]

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)

 

No, it is actually worth 1.56 x BV.

And if you assume a 10% growth from year 11 onward, with a 10% discount rate, it means that after 10 years BH will cease to create any value... It will then be better to close doors, collect the money, and use it somewhere else (provided, of course, you find something that exceeds your 10% hurdle rate! ;) )... If that will be the outcome, I obviously am completely wrong about BH.

 

Gio

Sorry, that 1.4x book value number was the value of BH + the value of the performance fees without Biglari reinvesting the performance fees at the same rate. Would mean that fair BV under the 15% at 10yr assumption would indeed be 1.56x but that they value of the performance fee is just a lot higher.

 

I don't agree with the notion that a business that is earning is cost of capital should close it's doors. Most businesses don't earn more than their cost of capital, doesn't mean that they should all close. If they are earning their cost of capital they are generating a satisfactory return for the majority of investors.

 

PS. How many years do you expect that he will be able to grow at 15%?

[giofranchi]

I don't agree with the notion that a business that is earning is cost of capital should close it's doors. Most businesses don't earn more than their cost of capital, doesn't mean that they should all close. If they are earning their cost of capital they are generating a satisfactory return for the majority of investors.

 

PS. How many years do you expect that he will be able to grow at 15%?

 

Well, I might be wrong about the notion of "cost of capital in general"... But I know very well what's MY cost of capital:

 

Chosen a risk profile, let's say for instance equity investing, my cost of capital is the return I could achieve "without getting out of bed"... That's why I look at page 1 of the latest BRK AR, and use the annualized return of the S&P500 as my cost of capital.

 

Then, if I am to invest in let's say BH, I try to reason about two things:

1) is BH higher quality than the average S&P500 company, or lower quality?

2) How much work is necessary for me to muster the confidence to invest in BH for the long term?

 

Depending on the answers to 1) and 2), I decide which premium to my cost of capital I demand.

Be sure a premium I demand always... And, if I don't see it, I always look somewhere else.

 

PS

My idea is BH has the opportunity to achieve a CAGR around 20% for the next 10 years. And 15% for the decade after that. My idea of long term is more or less 20 years.

 

Gio

[giofranchi]

I was reading Lao Tzu's "Tao Te Ching" and was struck by these lines:

 

...

If you want to grab the world and run it

I can see that you will not succeed.

...

Manipulators mess things up.

Grabbers lose it. Therefore:

...

Sometimes you destroy

Sometimes you are destroyed.

...

 

Hence, the sage shuns excess

Shuns grandiosity

Shuns arrogance.

 

Shalab,

I couldn't agree more!

 

The problem is:

 

1) where you see "grandiosity" and "arrogance" - the change of name into Biglari Holdings - I see a simple and rational business reason - control.

 

2) where you see a "grabbing" and "manipulating" business reason - control for selfish reasons - I see a business reason that will benefit all shareholders - I have experienced trying to run a company both without and with full control... And I would never go back to the former!

 

Maybe you are right and I am wrong. I don't know for sure.

 

Surely, instead, we both agree the Tao Te Ching is a wonderful read! :)

 

Gio

[writser]

PS

My idea is BH has the opportunity to achieve a CAGR around 20% for the next 10 years. And 15% for the decade after that. My idea of long term is more or less 20 years.

 

Gio

 

Just to be sure, this is after fees?

[giofranchi]

Just to be sure, this is after fees?

 

Yes. When I say CAGR, I mean in BVPS. And that is necessarily after fees, because they are a cost.

 

Before you make too much fun of my wishful thinking, let me add I spoke of "opportunity". Meaning that if:

1) Biglari keeps behaving like the very shrewd entrepreneur he has proved himself to be until now,

2) he doesn't screw his shareholders,

Then I think those results, though it won't certainly be a smooth ride, are achievable.

 

Gio

[writser]

No worries, I'm in a great mood  ;) . 20% after fees is impressive, just wanted to make sure I didn't misunderstand you. That's ballpark 28% gross investment returns, right? Is that your base case or optimistic scenario?

[ERICOPOLY]

1) where you see "grandiosity" and "arrogance" - the change of name into Biglari Holdings - I see a simple and rational business reason - control.

 

What sort of control does a name change achieve?  Fairfax was out of control 10 years ago, perhaps they could have pulled things together faster if the name had been changed to Watsa Holdings?

 

Clearly, that's silly so you must be speaking of control in another sense.  Like having multiple subsidiaries, you want to maintain control, make everyone know who is the big honcho around here.  Berkshire Hathaway could do better in this regard if renamed to Buffett Holdings, for example.

 

Or what kind of control if not either of those?

[Fat Pitch]

PS

My idea is BH has the opportunity to achieve a CAGR around 20% for the next 10 years. And 15% for the decade after that. My idea of long term is more or less 20 years.

 

Gio

 

Gio,

I'm trying to understand the rational for 20% CAGR  growth and leveling off to 15%. Sure predicting the future is quite difficult, but I guess we can look at past performance to gauge an idea of what a company might achieve.

 

I just quickly glanced at the book value growth for BH from morningstar. From 2004 to 2013 BV increased from $159 to $355, that's a growth rate of 9.355% Berkshire's growth was 10.389% and MKL 12.282%

 

I looked from 2008 to 2013 and BH book value growth clocked in at 12.39%, Berkshire's at 13.97% and MKL at 16.51%.

 

Am I missing anything? As investors we want 15%+ returns, but getting such returns for long periods of time is very elusive at best. Actually as it turns out very few companies can even achieve such rates of returns. Check out http://invest.kleinnet.com/bmw1/xref.html to get an idea how many underperformed.

 

[giofranchi]

20% is not a number I invented... I try to never invent numbers!!! :)... It is simply Biglari's track record since the inception of the Lion Fund.

 

Fat Pitch,

It doesn't make sense to look at how BVPS grew since 2008: SNS was a turn-around, and it was bought for a fraction of BV. If you look at BH's investments in 2008, 2009, and 2010 they were clearly still too small... There was no way in those years to increase BV at high rates... But what matters, of course, is the return on the capital Biglari used to get control of SNS, which was very satisfactory.

Then in 2011 BH's investments became comparable to BV and in 2011, 2012, and 2013 BVPS has grown at a CAGR of 20%.

 

You might point out a track record of 13 years is too short... And I would agree. With Biglari that's all we have. I level off to 15% not because BH will be too large, nor Biglari too old... Just because even my optimistic scenario would be "too optimistic" to consider a 20% CAGR for 20 years...

 

Anyway, this is only theory.

A CAGR in the low teens for the next two decades purchased at 1.2 x BVPS would yield an investment result very few of you will be able to match buying and selling equity. ;)

 

Cheers,

 

Gio

[Hielko]

Gio, I'm sorry but I have a hard time taking your 20% CAGR after fees serious... It implies a ridiculous that growth rate before fees that even Warren Buffett would have had troubles to match in his best years. And how you justify that rate is imo also not very convincing. You cherry pick a period in which a monkey would have been able to generate those returns. In addition to that: how are the earlier results not relevant? If anything growing book value at a high rate is easier when you start with a small number.

[giofranchi]

Hielko,

The Lion Fund started in 2001... These 13 years have been the second most difficult 13 years after those in the middle of the GD to generate satisfactory investment returns!!

 

It doesn't mean it will get easier anytime soon... Actually, I don't think it will... But the fact remains Biglari generated great results in a very difficult environment.

 

Listen, as I have said, I always look for something with the "opportunity" or "possibility" to compound BV at very high rates... Because I then will be satisfied even if results would turn out to be much less than what they might have been.

 

Gio

[tombgrt]

20% is not a number I invented... I try to never invent numbers!!! :)... It is simply Biglari's track record since the inception of the Lion Fund.

 

Fat Pitch,

It doesn't make sense to look at how BVPS grew since 2008: SNS was a turn-around, and it was bought for a fraction of BV. If you look at BH's investments in 2008, 2009, and 2010 they were clearly still too small... There was no way in those years to increase BV at high rates... But what matters, of course, is the return on the capital Biglari used to get control of SNS, which was very satisfactory.

Then in 2011 BH's investments became comparable to BV and in 2011, 2012, and 2013 BVPS has grown at a CAGR of 20%.

 

You might point out a track record of 13 years is too short... And I would agree. With Biglari that's all we have. I level off to 15% not because BH will be too large, nor Biglari too old... Just because even my optimistic scenario would be "too optimistic" to consider a 20% CAGR for 20 years...

 

Anyway, this is only theory.

A CAGR in the low teens for the next two decades purchased at 1.2 x BVPS would yield an investment result very few of you will be able to match buying and selling equity. ;)

Cheers,

 

Gio

 

Hielko,

The Lion Fund started in 2001... These 13 years have been the second most difficult 13 years after those in the middle of the GD to generate satisfactory investment returns!!

 

It doesn't mean it will get easier anytime soon... Actually, I don't think it will... But the fact remains Biglari generated great results in a very difficult environment.

 

Listen, as I have said, I always look for something with the "opportunity" or "possibility" to compound BV at very high rates... Because I then will be satisfied even if results would turn out to be much less than what they might have been.

 

Gio

 

Bold statements.

 

From 2000 to 2013 Mohnish got +- a 20% cagr. Some board members here got a 30%+ cagr over that period. I guess we can expect at least that return for Mohnish' investment vehicle considering what a "hard investing environment" it was?

 

If that is the simple logic you use to find investments, you will find "opportunity" and "possibility" behind each corner. The question is whether you are fooling yourself or not. You will only know in hindsight. If you're really going for that 40-year goal of a 15% CAGR with $2M as a base, you better not waste any time! I still hope you were trolling when you said that. 

[giofranchi]

Tom,

I still don't understand why you keep reading my posts... Is it so difficult to leave me alone? Just ignore me, won't you?... Or are you interested in platitudes??!

 

Anyway, listen, a franchise business, led by an outstanding capital allocator, bought at 1.2 x BV is one of the best way to compound capital at 15% for a long time. Because it's a great business purchased very cheap.

 

And if you think you can find such a thing behind every corner, good for you! I cannot. But I am always open for good suggestions!

 

Gio

[Parsad]

Gio - now that Parsad Financial is about to be public, next it must surely be Gio Holdings  ;D. Now, I don't have issues if you name your company Gio Holdings but if you buy Biglari Holdings and call it Gio Holdings and then attach a fee for your name, it looks a bit odd.

 

I was reading Lao Tzu's "Tao Te Ching" and was struck by these lines:

 

...

If you want to grab the world and run it

I can see that you will not succeed.

...

Manipulators mess things up.

Grabbers lose it. Therefore:

...

Sometimes you destroy

Sometimes you are destroyed.

...

 

Hence, the sage shuns excess

Shuns grandiosity

Shuns arrogance.

 

Shalab,

I couldn't agree more!

 

...

 

Surely, instead, we both agree the Tao Te Ching is a wonderful read! :)

 

Gio

 

Won't be called "Parsad Financial" or anything to do with my name.  I don't think changing names makes one bit of difference to knowledgeable investors or investee companies.  It will only make a difference to the ignorant ones and we won't be soliciting them.  As long as the investee company knows the check will clear, they shouldn't worry about anything else.  Cheers!

[writser]

Tom,

I still don't understand why you keep reading my posts... Is it so difficult to leave me alone? Just ignore me, won't you?... Or are you interested in platitudes??!

 

off-topic: I think it's about time for a CoBF Europe meeting :) . Maybe we can rent a fight club for a couple of hours.

[frugalchief]

 

This is the only reason why I like contributing to the board so much: because I have found out that the process of a) writing about an investment thesis of mine, b) receiving feedbacks from many people around the world, with different cultural and working backgrounds, and c) reasoning about their responses and answering back, is a great way to get “clearness” of mind, and therefore conviction about an investment opportunity.

 

Besides this, I really don’t care about approval and validation, I don’t care about public fame or a public track-record, I certainly don’t care about forcing the way I see the world on anyone (I even doubt there is a “way” I look at the world…), and of course I couldn’t care less about teaching platitudes to anyone!! ;)

 

All I care for:

1) To live many joyful moments with the people I love

2) To compound my capital at 15% annual for the next 45 years

 

PS

I must admit I also find arguing with people who disagree with me… until they finally agree with me… to be much fun!! ;D ;D ;D

 

Gio

 

I've been casually watching this discussion about BH for a few months and felt it was time to join the board and contribute and get feedback just like Gio stated.  So this is my first post....be gentle  :D

 

Personally, I had followed SB when I was in college but didn't invest until after the Performance-Based Compensation plan was approved.  Initially, I didn't agree but after researching more I felt it was appropriate.  Being a Buffett follower and appreciating his low compensation package and growing net worth with shareholders, an excessive compensation plan doesn't sound appropriate for a smaller holding company, with no track record. 

 

Humans are enticed by money.  If SB gets paid handsomely to make BH shareholders more money, I'm game.  AND he participates as a shareholder.  As we all know, SB is required to use parts of bonus to re-purchase shares, but even with the rights-offerings he is doing, he is having to invest more of his cash to keep his same share of the company.  So he is putting skin in the game.

 

Everyone's different, but if my manager gets paid handsomely to make me wealthier than I could investing in an index fund or mutual fund, he deserves to be paid this way.  Share price hasn't necessarily beaten the market, but the intrinsic value of the company has, and the share price will eventually follow suit.

 

I guess I'm bias towards a work - get paid, don't work - don't get paid, mentality, since that's how I earn my living.  SB is enticed to raise BH's book value, and I'm sure decades from now it will be exponentially higher than it is now.

[giofranchi]

So this is my first post....be gentle  :D

 

I am on holidays, and I had missed your first post until now... ;D

 

Anyway, welcome to the board!

 

Cheers,

 

Gio

[Vish_ram]

I dont know if this issue was discussed already. With Biglari's name inextricably linked to all the company's brands, what will happen (if God forbid) his reputation is soiled? say he got caught up in some scandal, or his long lost cousin in Iran sets up a terrorist plot?

 

The company may quickly distance itself from Biglari, but the brands cannot. Would anyone go to Subway by Bin Laden?