BH - Biglari Holdings

[muscleman]

 

I would like to do a deep dive on any possible accounting issues, just to be safe. Would you please send me the links of his posts about these issues? They could either be gossips or tip of the ice berg. Better to be safe than sorry.

 

Regarding the complaints.... It is quite common. A large number of employees hate Jeff Bezo and said he is too cheap on everything. I heard the same complaints for VRX and other companies.

 

It was during a phone call, so nothing in writing to speak of.  In addition, there was nothing overly specific alleged.  Just that the guy (who happened to be a CPA) felt SNS costs were being allocated to BH corporate.

 

Thanks! I will do my best to look into it and share with you if I find anything.

[mateo999]

Thanks! I will do my best to look into it and share with you if I find anything.

 

Thanks, I'd love to hear if you find anything of note.  Regarding the Bezos comment, I hear you.  But as I mentioned in a response to Gio, I think employees and franchisees need to be thought of as separate beings.  If the economics don't work out for franchisees, sooner or later, franchisees go away.  How does BH/SNS hope to grow via a franchising model if the most rudimentary due diligence phone calls invariably go something like this: "You want to open a SNS???  Really??  Have you seen any of the legal disputes?  Are you crazy?  Actually... disregard everything I just said...  Would you like to buy my location(s)?"

[muscleman]

Will the Lion fund charge the typical 2/20 fee and then on top of that, Baglari himself charges the incentive bonus based on book value growth once again? That would be a double charge if that's the case.

 

No, Biglari will be compensated based on the growth in BVPS due solely to operating earnings, The Lion Fund compensation instead will be based solely upon investment results. What I don’t know is how much The Lion Fund will be paid…

 

Gio

 

Thanks Gio. The only thing I found was this:

http://www.otcmarkets.com/edgar/GetFilingPdf?FilingID=10140387

"Biglari Capital, will earn an incentive reallocation fee for the Company’s investments equal to 25% of the net profits

above an annual hurdle rate of 6%."

 

Is there no management fees based on asset size? I think this fee structure is more fair than the 2/20.

[muscleman]

Thanks! I will do my best to look into it and share with you if I find anything.

 

Thanks, I'd love to hear if you find anything of note.  Regarding the Bezos comment, I hear you.  But as I mentioned in a response to Gio, I think employees and franchisees need to be thought of as separate beings.  If the economics don't work out for franchisees, sooner or later, franchisees go away.  How does BH/SNS hope to grow via a franchising model if the most rudimentary due diligence phone calls invariably go something like this: "You want to open a SNS???  Really??  Have you seen any of the legal disputes?  Are you crazy?  Actually... disregard everything I just said...  Would you like to buy my location(s)?"

 

I agree. This is certainly concerning. When is the next shareholder meetings? I wish we could voice the concern to the board.

[muscleman]

A few questions:

1. Biglari's return on Steak n shake seems pretty low. He bought at $16. As I understand, the company was later renamed as BH and had a 20:1 reverse split. So he essentially bought at $320. Today's share price is $348, and that's after 6 years. Am I wrong? He has done a good job to turnaround the company, but he paid too high for the shares at the beginning, so he is not able to profit from the turnaround.

2. What's Lion Fund's management fee? I can't find it anywhere. I know the 10-k says the incentive fee is 25% of the profit with 6% hurdle rate. But I can't find any info about the management fees.

3. Who are the investors of this Lion fund? Any redemption risks if certain shareholders want to get out? I know there is Lion fund I and Lion fund II. BH seems to have invested in both.

4. While there is a bonus cap of 10 Million for Bigalri on the BH level, there seems to be no cap for the incentive fee on the Lion fund level. Why did he funnel most of the investment assets from BH to Lion Fund last year? Is that a way to by pass the $10 Million cap?

[cheerlee]

At least you didn't count share right issuance, recently $250 per share issuance means per existing share can benefit about $50 like option.

[giofranchi]

1. Biglari's return on Steak n shake seems pretty low. He bought at $16. As I understand, the company was later renamed as BH and had a 20:1 reverse split. So he essentially bought at $320. Today's share price is $348, and that's after 6 years. Am I wrong? He has done a good job to turnaround the company, but he paid too high for the shares at the beginning, so he is not able to profit from the turnaround.

 

Of course I cannot say why the stock price behaves like it does, nor for how long it will continue doing so. What I know instead is that in 2008 BH had $6.9 million in investments, while at the end of 2013 investments were worth $635.4 million (of which $89.6 million came from increase in debt, and $75.6 million came from equity offering). $463.3 million due to investment gains and net results of operating businesses.

In the meantime the earning power of operating businesses has increased too.

Now we are waiting for 2014 results next December.

 

I think a lot of value has been created, without the share price reflecting it. Maybe Mr. Market simply doesn’t trust Biglari like the majority of people on the board… If Mr. Market and they are right, the amazing increase in value of BH’s investment will soon come to an end!

 

We will see.

 

Gio

 

[muscleman]

1. Biglari's return on Steak n shake seems pretty low. He bought at $16. As I understand, the company was later renamed as BH and had a 20:1 reverse split. So he essentially bought at $320. Today's share price is $348, and that's after 6 years. Am I wrong? He has done a good job to turnaround the company, but he paid too high for the shares at the beginning, so he is not able to profit from the turnaround.

 

Of course I cannot say why the stock price behaves like it does, nor for how long it will continue doing so. What I know instead is that in 2008 BH had $6.9 million in investments, while at the end of 2013 investments were worth $635.4 million (of which $89.6 million came from increase in debt, and $75.6 million came from equity offering). $463.3 million due to investment gains and net results of operating businesses.

In the meantime the earning power of operating businesses has increased too.

Now we are waiting for 2014 results next December.

 

I think a lot of value has been created, without the share price reflecting it. Maybe Mr. Market simply doesn’t trust Biglari like the majority of people on the board… If Mr. Market and they are right, the amazing increase in value of BH’s investment will soon come to an end!

 

We will see.

 

Gio

 

What's your thought on the other questions?

I do see that the incentive fee structure is exactly the same as the Buffet partnership, but no one seems to criticize the Buffet Partnership. I prefer this structure to the typical hedge fund 2/20 with no hurdle rate. And he has no stock options.

 

How would you compare BH with TPRE? I assume your primary consideration for exchanging your TPRE shares for BH was because Biglari is much smaller, so the opportunity space is larger?

 

Regarding accounting issues, I think the owner earnings for restaurants seem to be always higher than the GAAP earnings. Therefore the book value increase should be less than the intrinsic value increase. Therefore 25% of bonus paid above the 6% hurdle rate is not too bad. However, I will deep dive to check if Biglari is manipulating GAAP earnings so he can earn a larger bonus. If that's the case, I would be very concerned.

[giofranchi]

I do see that the incentive fee structure is exactly the same as the Buffet partnership, but no one seems to criticize the Buffet Partnership. I prefer this structure to the typical hedge fund 2/20 with no hurdle rate. And he has no stock options.

 

I have often repeated in this thread I far prefer the incentive fee structure to the typical hedge fund 2/20! ;)

 

How would you compare BH with TPRE? I assume your primary consideration for exchanging your TPRE shares for BH was because Biglari is much smaller, so the opportunity space is larger?

 

I like both and I hope to own both in the future. I am already much exposed to insurance through Fairfax and GreenlightRe, therefore fast food franchising right now seems a good way to diversify a bit. That's it!

 

However, I will deep dive to check if Biglari is manipulating GAAP earnings so he can earn a larger bonus. If that's the case, I would be very concerned.

 

+1!!

 

But I might say I am not very concerned about it. One of the reasons I like BH is that Biglari imo comunicates with shareholders very clearly. And usually you don't do that, if you have something to hide! ;)

 

Gio

 

[muscleman]

I haven't discovered any accounting issues, except that the Days sales outstanding jumped from 3.4 days to 5.5 days.

I think it is because of the acquisitions of Maxim and First Guard.

 

The fact that BH expenses the franchise training expenses instead of capitalizing it means the accounting is conservative. Biglari could have used accounting gimmicks to boost earnings and therefore book value increase, to get himself more bonuses, but he isn't doing that right now. I think this guy is an honest bloody capitalist. He takes your money, and he let you know. He doesn't steal money like other executives do, using stock options and accounting gimmicks and stock buybacks at lofty prices to pump up the price.

 

My knowledge about accounting gimmicks is limited though. Please let me know if you have some insights. :)

[muscleman]

I checked Biglari Capital's history of 13-HR. He increased the CRBL holdings between 3/30-6/30 2014. The price was around $94-99 at that time. What's the rational for buying at such high P/E multiples when he has no way to get into CRBL board anyway? Does he plan to offer a buy out of CRBL once the 5 year restriction is over? (which is 2 years from now).

 

On the other hand, he bought over 53,000 shares of BH between 6/30-9/30 2014. I assume he bought mostly after the rights offering price tank.  So he used last year's rights offering money to increase his holdings in BH and CRBL. If that's the case, I assume he is buying a lot of BH right now with this year's rights offering money.

 

Did he ever say he will keep doing rights offerings until people agree to vote for the A/B share structure? That would be a little annoying.

 

 

[giofranchi]

If he is buying, the stock price doesn’t seem to notice…

 

I think, until a A/B share structure gets approved, he will continue devising strategies to protect his role inside the company… But I don’t see what rights offerings might have to do with that… Instead, I think he will keep doing rights offering whenever he sees good opportunities to deploy new capital…

 

At least, that’s what I would be doing if I were in his shoes! ;)

 

Gio

 

[muscleman]

If he is buying, the stock price doesn’t seem to notice…

 

I think, until a A/B share structure gets approved, he will continue devising strategies to protect his role inside the company… But I don’t see what rights offerings might have to do with that… Instead, I think he will keep doing rights offering whenever he sees good opportunities to deploy new capital…

 

At least, that’s what I would be doing if I were in his shoes! ;)

 

Gio

 

I was trying to figure out what's the end game for CRBL and why is he buying at such high P/E.

[giofranchi]

I was trying to figure out what's the end game for CRBL and why is he buying at such high P/E.

 

Well, I think next April Biglari has another chance of getting inside CBRL board. He has often repeated at these prices CBRL is no longer undervalued, but much value can be created going forward through the improvement of its operations.

I think he is still after a seat on the board, because he has ideas about how to improve CBRL operations, and a larger stake in the company cannot but help.

 

Gio

 

[gfp]

The 53k or so BH shares were all purchased at $250 in the rights offering and the over-allotment. He was not buying in the open market and would have to file a form 4 if he did so.  It's no surprise that he exercised the lion fund's rights in the offering.

 

I checked Biglari Capital's history of 13-HR. He increased the CRBL holdings between 3/30-6/30 2014. The price was around $94-99 at that time. What's the rational for buying at such high P/E multiples when he has no way to get into CRBL board anyway? Does he plan to offer a buy out of CRBL once the 5 year restriction is over? (which is 2 years from now).

 

On the other hand, he bought over 53,000 shares of BH between 6/30-9/30 2014. I assume he bought mostly after the rights offering price tank.  So he used last year's rights offering money to increase his holdings in BH and CRBL. If that's the case, I assume he is buying a lot of BH right now with this year's rights offering money.

 

Did he ever say he will keep doing rights offerings until people agree to vote for the A/B share structure? That would be a little annoying.

[muscleman]

The 53k or so BH shares were all purchased at $250 in the rights offering and the over-allotment. He was not buying in the open market and would have to file a form 4 if he did so.  It's no surprise that he exercised the lion fund's rights in the offering.

 

I checked Biglari Capital's history of 13-HR. He increased the CRBL holdings between 3/30-6/30 2014. The price was around $94-99 at that time. What's the rational for buying at such high P/E multiples when he has no way to get into CRBL board anyway? Does he plan to offer a buy out of CRBL once the 5 year restriction is over? (which is 2 years from now).

 

On the other hand, he bought over 53,000 shares of BH between 6/30-9/30 2014. I assume he bought mostly after the rights offering price tank.  So he used last year's rights offering money to increase his holdings in BH and CRBL. If that's the case, I assume he is buying a lot of BH right now with this year's rights offering money.

 

Did he ever say he will keep doing rights offerings until people agree to vote for the A/B share structure? That would be a little annoying.

 

Thanks!

I have also found that I was completely wrong when I said Lion fund purchased CRBL shares.

I found that in his 2013 letter, he said:

"Our most significant noncontrolled holding is Cracker Barrel Old Country Store, Inc. We own 4,737,794 shares, or 19.9% equity interest. BH holds Cracker Barrel shares through two entities:775,190 shares directly through Steak n Shake Operations, Inc. and 3,962,604 shares indirectly through The Lion Fund II, L.P. "

 

Therefore the increase in the 13-HR of 775,190 is just a different way of classification. I think he moved the marketable securities of BH all into the Lion funds.

 

What did he do with last year's rights offering then? I don't see anything purchased.

[gfp]

"What did he do with last year's rights offering then? I don't see anything purchased."

 

Signs with his name on them don't come cheap

[muscleman]

"What did he do with last year's rights offering then? I don't see anything purchased."

 

Signs with his name on them don't come cheap

 

I am confused. Can you elaborate? Do you mean he doesn't think anything is cheap right now so he didn't invest in anything using last year's proceeds?

[gfp]

"What did he do with last year's rights offering then? I don't see anything purchased."

 

Signs with his name on them don't come cheap

 

I am confused. Can you elaborate? Do you mean he doesn't think anything is cheap right now so he didn't invest in anything using last year's proceeds?

 

It was a joke.  I meant that he spends a lot of money buying signs with his name on them...  Seriously though - he bought a couple small businesses and is probably waiting on something interesting to come across his desk.  Who knows...

 

http://www.ibj.com/ext/resources/blog/propertylines/B/Biglari_Ober_Building_900px.jpg

http://www.ibj.com/ext/resources/blog/propertylines/S/SteaknShake.jpg

http://www.restfinance.com/images/cache/cache_2/cache_1/cache_0/biglari-6be80012.jpeg?ver=1415477324&aspectratio=1.3354231974922

 

[BTShine]

It's interesting that people find it weird that Biglari puts his name on the buildings and puts his photo in the restaurants, but no one complains that Dave Thomas has his photo most Wendy's.  Some people put their name on the business they run (Buffett Partnership I, etc., etc.) and it can be for many different reasons.  Personally, as the CEO I would do it to remind myself that the company lives and dies by my doing. 

 

Also, if someone runs a company into the ground and it's called "XYZ Corp." or even better "XYZ Hedge Fund" that person can more easily start over in comparison to the person that has their name on the company's letterhead.  If Talon Partners goes BK not everyone knows who is to blame.  But if ESL Partners, Buffett Partners, Biglari Holdings, etc. etc. etc. goes bankrupt that person's reputation will be damaged by the event.

 

I personally don't think it's as crazy as other do and am less offended by it than most.

[muscleman]

"What did he do with last year's rights offering then? I don't see anything purchased."

 

Signs with his name on them don't come cheap

 

I am confused. Can you elaborate? Do you mean he doesn't think anything is cheap right now so he didn't invest in anything using last year's proceeds?

 

It was a joke.  I meant that he spends a lot of money buying signs with his name on them...  Seriously though - he bought a couple small businesses and is probably waiting on something interesting to come across his desk.  Who knows...

 

http://www.ibj.com/ext/resources/blog/propertylines/B/Biglari_Ober_Building_900px.jpg

http://www.ibj.com/ext/resources/blog/propertylines/S/SteaknShake.jpg

http://www.restfinance.com/images/cache/cache_2/cache_1/cache_0/biglari-6be80012.jpeg?ver=1415477324&aspectratio=1.3354231974922

 

Got it! Thanks!

I just wonder if he is going to keep doing the rights offerings.

[wescobrk]

The shareholder letter comes out saturday.

Should be interesting!

He'll clearly write about franchising, maxim, first guard and the current cash position.

[OracleofCarolina]

The Cracker Barrel annual meeting results come out and ......of course pretty much all shareholders voted for the current board members....excluding Biglari Capital......I think the poison pill expires in a couple of months so Bigs could buy more next year, right?

[giofranchi]

It's interesting that people find it weird that Biglari puts his name on the buildings and puts his photo in the restaurants, but no one complains that Dave Thomas has his photo most Wendy's. 

 

I have also read, I think in a book by Cialdini, that putting the face of the owner on the wall has a powerful psychological effect on employees that makes them behave more diligently… In alternative also a mirror might do the job, what matters is that the employee sees someone is watching over his/her work (even if the one watching is no other person but him or herself!)…

 

Of course, cannot say how much effective such a strategy might turn out to actually be… But, if there is a place where it might work, I guess it is precisely the fast food industry, in which tons of very low skilled workers are still employed.  ;)

 

Gio

 

[muscleman]

The Cracker Barrel annual meeting results come out and ......of course pretty much all shareholders voted for the current board members....excluding Biglari Capital......I think the poison pill expires in a couple of months so Bigs could buy more next year, right?

 

Can't CRBL board implement a new poison pill after the current one expires?

It doesn't seem to make sense to buy more at current lofty P/E multiples. If I were Biglari, my game plan would be:

If CRBL management continues to reject Biglari on the board but keeps stealing his idea of restructuring and cost cutting, then the stock price will keep going up, which means it is probably time to sell. If CRBL management does something stupid and stock price plunge, then I would call for another proxy vote and it would be much easier to get on board when the stock price plunge, and it is ok to buy when the stock price plunges. :)

 

BTW, I noticed that all restaurant stocks trade at lofty P/E. Cheese Cake Factory, Red Robbins, Burger King etc. Does anyone look into them as comparison studies?