BH - Biglari Holdings

[giofranchi]

BH has enlisted the services of an IR firm and is meeting with institutional investors.

 

Thanks for your response.

 

I'm incredibly disappointed that Sardar feels the need to do this.

 

Best,

Ragu

 

Same here. This action is directly contradictory to what he constantly says in the annual meeting and shareholder letters about not talking to any investors outside of the annual meeting, not giving any special information outside of the shareholder letter, and treating all investors equally.

 

Once again, what would I do if I were in his stead? Once again, I would do the same!

With the words of Neil Young:

I won’t attack you, but I won’t back you.

If I had felt threatened, I would have defended myself too. And if talking to large, institutional shareholders might be helpful, so be it!

Imo it is only a pity that Biglari’s time should be wasted that way!

 

Gio

 

[rayfinkle]

You're right of course. Dilution with compensation through rights offerings is constructively very different from simply issuing new shares, and it's unfair to simply say as I did "dilution" with all that implies.

 

+1...cheap way to raise capital. Consider IPO with 6% gross spread as one extreme and these rights offerings on the other...

[Jurgis]

+1...cheap way to raise capital.

 

by selling shares under the intrinsic value... sure.

[rayfinkle]

+1...cheap way to raise capital.

 

by selling shares under the intrinsic value... sure.

 

Relative to other types of fundraising at the same price relative to IV, this is preferable. Dilutes shareholders less. Need to separate "what is the mkt clearing price (at a given target $$ raised) relative to IV" vs. deal structure. Of course it's better from the company perspective to raise money at a higher price in either structure--this is like saying I want to be able to sell my stock for a high per-share price.  I'm saying at least the offering keeps me from being diluted and costs the company less $$ in deal fee (leakage).

 

But yes, BH is selling cheap stock not buying cheap stock. Either implies really really good investment opportunities or poor capital allocation (driven by greed). Or both.

[RichardGibbons]

"Selling shares under the intrinsic value" to shareholders benefits the shareholders who purchased the shares.  So while there are other aspects of the company that are more objectionable, I think the Rights Offering was pro-shareholder.  (And for those shareholders who sold their subscription rights, they got both (A) a large one-time cash dividend and (B) though they were diluted, they then own a cash-richer company.)  Who would not want to be sold something at a price "under its intrinsic value"?

 

Rights offerings hurts shareholders because they're being sold something that you already own. 

 

Suppose you own half a pizza cut into 8 slices and each slice is selling for $1.  You don't gain from a quarter of each of your slices being cut off, and the quarter slices sold back to you for 80 cents.  You own the same amount of pizza, but you've given up some cash to get back what you already owned.  (And in fact, you lose because the person doing the slicing is charging some fee to do so.)

[Parsad]

You own the same amount of pizza, but you've given up some cash to get back what you already owned.

 

Hi Richard, your thesis is correct, but just one little correction:

 

"You own more pizza, but you've given up some cash to retain the same percentage ownership."

 

Instead of one pizza, there may be one and a half pizzas now...you just own the same percentage.  Effectively, if you participate, no harm, no foul.  If you don't participate, then you do hurt the shareholders who cannot afford to participate. 

 

NBL0303's comment that it is pro-shareholder isn't exactly correct either...it is only pro-shareholder for those that participate.  The remaining shareholders get diluted and some of their pizza is redistributed to others.  Those shareholders are effectively being told that if they don't have the money, some of their pizza has to be given to those that do.

 

Issuing stock below book is done for only 2 reasons:  You want to raise money quick and you want it to be fully subscribed.  Otherwise, it never makes sense to raise money below book if you truly are pro-shareholder!  The easiest way to end this debate is to simply ask yourself...how many times has Buffett issued stock below book or intrinsic value?! 

 

Cheers!

[Parsad]

The comment that some shareholders get diluted ignores the fact that those shareholders received two very valuable things for the dilution.  Those non-participating shareholders received: (1) a one-time large cash dividend and (2) a cash-richer company.

 

1) is only true if the warrant is tradeable, and the shareholder sells the warrant in the open market...that is very different than a cash dividend.  Some 80-year old pensioner, who doesn't pay attention regularly to shareholder mailings would not benefit from this.

 

2) is also only worthwhile as you said, if the company can generate reasonable returns on the additional cash...and those returns would have to compensate for the decreased equity by issuing stock below book.  But would a company like Coca-cola or Costco really benefit from increased cash?  Their return on equity would probably drop with a large influx of cash.

 

Obviously share repurchases are a different animal then what we're discussing here but my point is that the fact that Buffett did not engage in Rights Offerings does not end the debate.  Warren Buffett is my investing hero and while his playbook does not contain bad investing/business decisions, but his playbook does not contain the entire universe of good business decisions.

 

You're correct.  But it should make you stop and think, especially as Buffett is your investing hero...that the reason Buffett didn't do that, was because as he's always said, he didn't want to take advantage of his shareholders...including that 80-year old pensioner who doesn't always read his/her mailings. 

 

For Buffett, ethics trumps returns...which has turned out to be the greatest business decision for him...since it is what has garnered his loyal shareholder base and why business owners want to sell their life's work to Berkshire.  Cheers!

[giofranchi]

The easiest way to end this debate is to simply ask yourself...how many times has Buffett issued stock below book or intrinsic value?! 

 

Truth be told, Malone instead has made these rights offerings many times during his long career with spectacular results for all the shareholders who followed him. And he is still doing them right now with Liberty Broadband… And I am following him! ;)

 

Buffett has made spectacularly rational choices given the circumstances he found himself in. This is key in business: circumstances always change, therefore the most rational choices are always different.

 

Buffett has never gone activist… That doesn’t mean Icahn is not a rational investor.

 

I would put rationality even above ethics… Because at the end of the day the most rational choice is also the one that makes the greatest good.

 

Gio

 

[rayfinkle]

The comment that some shareholders get diluted ignores the fact that those shareholders received two very valuable things for the dilution.  Those non-participating shareholders received: (1) a one-time large cash dividend and (2) a cash-richer company.

 

1) is only true if the warrant is tradeable, and the shareholder sells the warrant in the open market...that is very different than a cash dividend.  Some 80-year old pensioner, who doesn't pay attention regularly to shareholder mailings would not benefit from this.

 

 

Parsad- the counter to this is that companies (for better or worse) do not pander to the entire universe of shareholders. When a company like CVX for example dedicates itself to growing a dividend--and the CEO messages to employees that one of their objective functions is to raise the dividend over time--this creates a culture in the company around activities that benefit shareholders that care most about income. So, the 80 year old pensioner that doesn't read his mail can reasonably expect that he won't be harmed by not reading his mail. This would be consistent with decades of company performance and aligned with company messaging.

 

Conversely BH has never claimed to target themselves at this shareholder base--and Biglari is seemingly doing everything possible to wash these types of folks out of ownership. While we don't always agree with it--nothing he does is inconsistent with his statements that this is a jockey stock. Short of a press release he has been clear that your pensioner shouldn't own this company.

 

The difference shareholder demographics--particularly the point at which companies transition from one demo to another--is one area of real opportunity for value investors. This is one of the ways that stocks re-rate in the public market.

 

Anyway, I just don't think that any management has a responsibility to act in a way that accounts for shareholders not paying attention. And I certainly don't think it's unethical to behave consistently with things that you've messaged (explicitly and through actions) consistently.

[muscleman]

The comment that some shareholders get diluted ignores the fact that those shareholders received two very valuable things for the dilution.  Those non-participating shareholders received: (1) a one-time large cash dividend and (2) a cash-richer company.

 

1) is only true if the warrant is tradeable, and the shareholder sells the warrant in the open market...that is very different than a cash dividend.  Some 80-year old pensioner, who doesn't pay attention regularly to shareholder mailings would not benefit from this.

 

2) is also only worthwhile as you said, if the company can generate reasonable returns on the additional cash...and those returns would have to compensate for the decreased equity by issuing stock below book.  But would a company like Coca-cola or Costco really benefit from increased cash?  Their return on equity would probably drop with a large influx of cash.

 

Obviously share repurchases are a different animal then what we're discussing here but my point is that the fact that Buffett did not engage in Rights Offerings does not end the debate.  Warren Buffett is my investing hero and while his playbook does not contain bad investing/business decisions, but his playbook does not contain the entire universe of good business decisions.

 

You're correct.  But it should make you stop and think, especially as Buffett is your investing hero...that the reason Buffett didn't do that, was because as he's always said, he didn't want to take advantage of his shareholders...including that 80-year old pensioner who doesn't always read his/her mailings. 

 

For Buffett, ethics trumps returns...which has turned out to be the greatest business decision for him...since it is what has garnered his loyal shareholder base and why business owners want to sell their life's work to Berkshire.  Cheers!

 

Parsad, do you know how much Pabrai charges in his new reinsurance structure? I hope his is not charging 6% hurdle on 25% earnings of the assets under management in his reinsurance.

[ragu]

Might it be in preparation for a proxy fight, etc? 

 

This'd be the only thing that'd make it palatable as far as I am concerned.

 

link,

 

I don't expect it is any of the reasons you posit. If it was about valuation, I expect he'd have made a fairly direct comment in the annual letter.

 

innerscorecard,

 

As I said, he feels the need to do this. I don't think it's a change of philosophy, merely a practical response to current circumstances.

 

I suspect there is trouble brewing over at BH. Groveland are not out to simply get some attention with their director nominations and I expect they have Gabelli's backing.

 

Best,

Ragu

[RichardGibbons]

Yeah, you're right, Sanjeev.  I think the way to evaluate these situations is to say, "if I had a choice between buying more shares in the market (with no rights offering) or getting shares through a rights offering, what would be better for me?" The answer is for most undervalued companies is almost always the former. Rights offerings being good for you is almost always an edge case (e.g. the company needs capital in order to operate efficiently, remain solvent, or to take advantage of an opportunity that would not be available with smaller amounts of capital).  But for most public companies, this is not true, particularly when you consider the rule of thumb that it's typically harder to grow large sums of capital than small sums.

 

I guess for large public companies like BH, the main situation where you as an existing shareholder does well from a rights offering is if the offering is above fair market value and you don't exercise your rights, and other people do.

 

Of course, if, hypothetically speaking, a CEO gets part of the book value increase as part of their compensation, it's rational for them to constantly issue rights offerings. It would screw over existing shareholders, but would increase book value and thereby increase their own compensation.  It would be much better for them, every year, to skim off pieces of a bigger pie than skim off pieces of a smaller pie.

[TheValueDude]

Swenson files proxy, Biglari accumulates AirT (Swenson is Chairman/CEO), Swenson adopts shareholder rights plan???

 

http://www.marketwatch.com/story/air-t-inc-adopts-stockholder-rights-plan-with-stockholder-protections-2014-12-15?reflink=MW_news_stmp

 

If true (and who the hell knows), I hope it doesn't turn into a pissing contest.

[petey2720]

Since you guys opened this can of worms, let me add to the debate:

 

I took another hard look at BH after NBL's thoughtful post a couple of weeks ago and agreed with his assessment.

 

However, as I was diving in, I just could not bring myself to continue because of the fact that Sardar took BH's cash invested in the Lion Fund and bought CBRL.  The way I see it Sardar will get paid twice on the appreciation of CBRL.

 

I don't think Sanjeev, Mohnish, or Gio would ever do the same thing.

 

I know I would not.

[gfp]

"Sardar will get paid twice on the appreciation of CBRL"

 

I don't think you are correct.  This has been hashed out in this thread in detail.  If, instead, your point is that BH shareholders are already compensating Sardar for allocating BH's capital and shouldn't be investing in his hedge fund at all - then yes, I agree. 

 

Since you guys opened this can of worms, let me add to the debate:

 

I took another hard look at BH after NBL's thoughtful post a couple of weeks ago and agreed with his assessment.

 

However, as I was diving in, I just could not bring myself to continue because of the fact that Sardar took BH's cash invested in the Lion Fund and bought CBRL.  The way I see it Sardar will get paid twice on the appreciation of CBRL.

 

I don't think Sanjeev, Mohnish, or Gio would ever do the same thing.

 

I know I would not.

[BTShine]

Swenson files proxy, Biglari accumulates AirT (Swenson is Chairman/CEO), Swenson adopts shareholder rights plan???

 

http://www.marketwatch.com/story/air-t-inc-adopts-stockholder-rights-plan-with-stockholder-protections-2014-12-15?reflink=MW_news_stmp

 

If true (and who the hell knows), I hope it doesn't turn into a pissing contest.

 

On the whole, do people think some pressure or activism towards Biglari would actually increase the market price of BH in the near term (6-12 months)?  If some of the major holders teamed up to get on the BOD to make changes on his compensation, etc.  or found a buyer for SNS, CBRL, etc. wouldn't the price of BH go up pretty quickly?  I'm not a short term trader, but these thoughts ran through my head and it seems like some spotlight on BH wouldn't be all bad for passive shareholders in BH.  Unless you're looking to acquire more shares in the upcoming months or are set on holding BH for many years.

[muscleman]

I have a question for anyone who has done a deep dive on Biglari Holdings - Mateo/Muscleman/anyone else - has anyone reviewed a recent Franchise Disclosure Document?  I have a few of Steak n Shake's FDDs but the most recent I have is mid-2013, but I'd love to know a few things from a 2014 (preferably mid-2014 or later SNS FDD).  If anyone has access to one of these, I would love to know the sales numbers in Item 19 (starting around page 70, 71 - something like that); basically, sales for new franchised stores for the last year and the projected openings for the next year.  If anyone has access to that, I would be greatly appreciative if you posted it or PM'd me with those figures.

 

Well, I am embarrassed to say that I didn't go as deep as you did.  :-[

Where did you get those FDD for mid-2013?

[giofranchi]

If, instead, your point is that BH shareholders are already compensating Sardar for allocating BH's capital and shouldn't be investing in his hedge fund at all - then yes, I agree. 

 

I don’t agree with that either… BH’s shareholders are compensating Biglari as CEO of the company only for its operating results… I agree that capital allocation is the duty of any CEO… But choosing stock market investments is completely another matter!… Look at it this way: as CEO of my company I may decide the most reasonable thing to do with the free cash my company generates is to put it in the hands of Packer or Eric and let them invest it in the stock market… Certainly I should pay them for their services, shouldn’t I?

 

As we are again on the compensation topic, I will quote the Western Sizzlin 2006 AL to say once and for all what I think about it:

 

My decision to become more involved and accept the position of CEO hinged on my desire to assume responsibility for the overall operations. I do not expect large cash compensation or stock options. Because I am Western's largest stockholder through The Lion Fund, of which I am chairman and CEO, I will earn my equitable portion by making money with shareholders, not off them.

 

TO WRITE, SAY, OR BELIEVE SUCH A THING SIMPLY WAS A BIG MISTAKE!

 

Why?... Simply because it was false! Biglari has never been Western’s largest stockholder… Instead, his investors in the Lion Fund were! He behaved like a Buffett, a Malone, a Watsa, or a Marks, without really owning nor controlling his company… With the benefit on hindsight it was an obvious mistake! To really get to own a large portion and therefore to achieve control over BH, Biglari needed to be paid for his services and still needs to.

 

This is what I believe. Then, we could start arguing if he is getting paid what’s fair or too much… But that’s another story!

 

Gio

 

[TheValueDude]

To anyone who was at the meeting yesterday, some of us would greatly enjoy notes from it whenever someone has time to post them.  I realize those that were there are very busy people and may be traveling, but whenever someone has a chance - we would be very appreciative.

 

Seconded.

[dcollon]

The meeting that we had scheduled with BH was cancelled by management.

 

Sorry

[muscleman]

The meeting that we had scheduled with BH was cancelled by management.

 

Sorry

 

Any reason? That's weird.....

[APG12]

The meeting that we had scheduled with BH was cancelled by management.

 

Sorry

 

Mine too...

[dcollon]

No reason given. 

[Jurgis]

They read this board and said "screw it, we're not talking to these curmudgeons".  ;D

[Liberty]

They read this board and said "screw it, we're not talking to these curmudgeons".  ;D

 

Seriously, I would be surprised if Bilgari didn't read this thread from time to time. Someone with enough ego to put his signature on public marketing materials (for a business that he didn't start and build from nothing with his bare hands -- founders who went through hell to get something going can get a pass on that one) certainly has the ego to Google his own name and read what people are saying about him.

 

So I guess... 'Hi Sardar'  ???