BH - Biglari Holdings

[innerscorecard]

I think this AIRT stuff is ridiculous

 

Sorry, sometimes I am really very slow to understand… but can someone please explain to me in plain English, in a very easy way to grasp the concept, why do you all think that what Biglari has done with AIRT is so condemnable?

 

Thank you very much in advance! ;)

 

Gio

 

I think the view (I'm not saying it's a correct or incorrect view) is that Biglari is frittering away shareholder money (which he collected from rights offerings) on purchases which are meant for protection his personal position, rather than enhancing the value of the enterprise. According to the view, this is proven by the fact that his purchases seemed to be indiscriminate and badly traded (causing unusual volume and a spike in price).

[giofranchi]

I think the view (I'm not saying it's a correct or incorrect view) is that Biglari is frittering away shareholder money (which he collected from rights offerings) on purchases which are meant for protection his personal position, rather than enhancing the value of the enterprise. According to the view, this is proven by the fact that his purchases seemed to be indiscriminate and badly traded (causing unusual volume and a spike in price).

 

Ah! Ok... Thank you very much! ;)

 

Gio

[abitofvalue]

I think this AIRT stuff is ridiculous

 

Sorry, sometimes I am really very slow to understand… but can someone please explain to me in plain English, in a very easy way to grasp the concept, why do you all think that what Biglari has done with AIRT is so condemnable?

 

Thank you very much in advance! ;)

 

Gio

 

 

Let's say I run a small public company and a hedge fund.  One day I decide, you know this large conglormorate is wasting a ton of shareholder money on silly investments like BYD and IBM. I think I am going to get on the board and make chages.  So I go buy 100 shares of BRK and write a letter saying hey stop wasting money and vote for me.  "Get rid of Charlie this old fool who is infatuated with BYD and wasting our money." Do you think Warren & Charlie ignore me or do you think they immediately retaliate by using BRK funds to buy up 10% of my company to get me out of there.

 

Yes you will say Warren has control - but I picked Charlie who doesn't have control.  However you can replace BRK with any other public company (say CBRL). Let's say CBRL management decides meh screw Biglari - our stock is up big, lets issue more and buy up a ton of BH for CBRL's account and get rid of Sardar.  You would be screaming bloody murder at the waste of shareholder funds and the use of the company by management for personal vendetta's.

 

[giofranchi]

Let's say I run a small public company and a hedge fund.  One day I decide, you know this large conglormorate is wasting a ton of shareholder money on silly investments like BYD and IBM. I think I am going to get on the board and make chages.  So I go buy 100 shares of BRK and write a letter saying hey stop wasting money and vote for me.  "Get rid of Charlie this old fool who is infatuated with BYD and wasting our money." Do you think Warren & Charlie ignore me or do you think they immediately retaliate by using BRK funds to buy up 10% of my company to get me out of there.

 

Yes you will say Warren has control - but I picked Charlie who doesn't have control.  However you can replace BRK with any other public company (say CBRL). Let's say CBRL management decides meh screw Biglari - our stock is up big, lets issue more and buy up a ton of BH for CBRL's account and get rid of Sardar.  You would be screaming bloody murder at the waste of shareholder funds and the use of the company by management for personal vendetta's.

 

This is the way you see it.

 

The way I see it is simply the cost of doing business, when you don’t have control. If you think Biglari has sown the seeds for great financial rewards in future years, seeds that have been real costs for the past two years!, you surely don’t want someone you have never heard before shaking the business and claiming he knows how to run it better than Biglari…

 

At least, I am sure I don’t want it! ;)

 

Gio

 

[merkhet]

Let's say I run a small public company and a hedge fund.  One day I decide, you know this large conglormorate is wasting a ton of shareholder money on silly investments like BYD and IBM. I think I am going to get on the board and make chages.  So I go buy 100 shares of BRK and write a letter saying hey stop wasting money and vote for me.  "Get rid of Charlie this old fool who is infatuated with BYD and wasting our money." Do you think Warren & Charlie ignore me or do you think they immediately retaliate by using BRK funds to buy up 10% of my company to get me out of there.

 

Yes you will say Warren has control - but I picked Charlie who doesn't have control.  However you can replace BRK with any other public company (say CBRL). Let's say CBRL management decides meh screw Biglari - our stock is up big, lets issue more and buy up a ton of BH for CBRL's account and get rid of Sardar.  You would be screaming bloody murder at the waste of shareholder funds and the use of the company by management for personal vendetta's.

 

This is the way you see it.

 

The way I see it is simply the cost of doing business, when you don’t have control. If you think Biglari has sown the seeds for great financial rewards in future years, seeds that have been real costs for the past two years!, you surely don’t want someone you have never heard before shaking the business and claiming he knows how to run it better than Biglari…

 

At least, I am sure I don’t want it! ;)

 

Gio

 

Has everyone here forgotten that Gio is Italian, and he might just see "going to the mattresses" as a part of doing business? #DonGio ;)

[premfan]

Let's say I run a small public company and a hedge fund.  One day I decide, you know this large conglormorate is wasting a ton of shareholder money on silly investments like BYD and IBM. I think I am going to get on the board and make chages.  So I go buy 100 shares of BRK and write a letter saying hey stop wasting money and vote for me.  "Get rid of Charlie this old fool who is infatuated with BYD and wasting our money." Do you think Warren & Charlie ignore me or do you think they immediately retaliate by using BRK funds to buy up 10% of my company to get me out of there.

 

Yes you will say Warren has control - but I picked Charlie who doesn't have control.  However you can replace BRK with any other public company (say CBRL). Let's say CBRL management decides meh screw Biglari - our stock is up big, lets issue more and buy up a ton of BH for CBRL's account and get rid of Sardar.  You would be screaming bloody murder at the waste of shareholder funds and the use of the company by management for personal vendetta's.

 

This is the way you see it.

 

The way I see it is simply the cost of doing business, when you don’t have control. If you think Biglari has sown the seeds for great financial rewards in future years, seeds that have been real costs for the past two years!, you surely don’t want someone you have never heard before shaking the business and claiming he knows how to run it better than Biglari…

 

At least, I am sure I don’t want it! ;)

 

Gio

 

I wish you luck my friend.  Beware of the wolf in sheep's  clothing.  Sheep's clothing= marketing like berkshire to capture niche investors that only path to riches is to catch the next brk early.  Wolf=  Cognitive dissonance with words vs actions and true intentions slowly revealing itself hiding behind the veil of IV and buffett quotes.  Most of us the early investors in SNS would still be in if it wasnt for the cognitive dissonance of Mr. Big. 

 

For me to tolerate cognitive dissonance of biglari is equivalent to me tolerating a cheating spouse. Raise your hands who would tolerate that? Is self worth that low?  Is the  berkshire business model that beautiful trophy wife that can get away with anything because shes a beauty and having her increases your self-worth. Merry Xmas

 

[merkhet]

Let's say I run a small public company and a hedge fund.  One day I decide, you know this large conglormorate is wasting a ton of shareholder money on silly investments like BYD and IBM. I think I am going to get on the board and make chages.  So I go buy 100 shares of BRK and write a letter saying hey stop wasting money and vote for me.  "Get rid of Charlie this old fool who is infatuated with BYD and wasting our money." Do you think Warren & Charlie ignore me or do you think they immediately retaliate by using BRK funds to buy up 10% of my company to get me out of there.

 

Yes you will say Warren has control - but I picked Charlie who doesn't have control.  However you can replace BRK with any other public company (say CBRL). Let's say CBRL management decides meh screw Biglari - our stock is up big, lets issue more and buy up a ton of BH for CBRL's account and get rid of Sardar.  You would be screaming bloody murder at the waste of shareholder funds and the use of the company by management for personal vendetta's.

 

This is the way you see it.

 

The way I see it is simply the cost of doing business, when you don’t have control. If you think Biglari has sown the seeds for great financial rewards in future years, seeds that have been real costs for the past two years!, you surely don’t want someone you have never heard before shaking the business and claiming he knows how to run it better than Biglari…

 

At least, I am sure I don’t want it! ;)

 

Gio

 

Has everyone here forgotten that Gio is Italian, and he might just see "going to the mattresses" as a part of doing business? #DonGio ;)

 

Seriously, ethnic humor?

 

It was more of a Godfather crack than ethnic humor. Jesus, people are so goddamned touchy these last few weeks...

[jschembs]

Let's say I run a small public company and a hedge fund.  One day I decide, you know this large conglormorate is wasting a ton of shareholder money on silly investments like BYD and IBM. I think I am going to get on the board and make chages.  So I go buy 100 shares of BRK and write a letter saying hey stop wasting money and vote for me.  "Get rid of Charlie this old fool who is infatuated with BYD and wasting our money." Do you think Warren & Charlie ignore me or do you think they immediately retaliate by using BRK funds to buy up 10% of my company to get me out of there.

 

Yes you will say Warren has control - but I picked Charlie who doesn't have control.  However you can replace BRK with any other public company (say CBRL). Let's say CBRL management decides meh screw Biglari - our stock is up big, lets issue more and buy up a ton of BH for CBRL's account and get rid of Sardar.  You would be screaming bloody murder at the waste of shareholder funds and the use of the company by management for personal vendetta's.

 

This is the way you see it.

 

The way I see it is simply the cost of doing business, when you don’t have control. If you think Biglari has sown the seeds for great financial rewards in future years, seeds that have been real costs for the past two years!, you surely don’t want someone you have never heard before shaking the business and claiming he knows how to run it better than Biglari…

 

At least, I am sure I don’t want it! ;)

 

Gio

 

Has everyone here forgotten that Gio is Italian, and he might just see "going to the mattresses" as a part of doing business? #DonGio ;)

 

Seriously, ethnic humor?

 

It was more of a Godfather crack than ethnic humor. Jesus, people are so goddamned touchy these last few weeks...

 

+1

 

A lot of divisiveness and I told you so's on the board these days...BH/AIRT/ISIG, OCN/ASPS, SD/PWE/AWLCF, and lest we forget the good old SHLD.

[BTShine]

Let's say I run a small public company and a hedge fund.  One day I decide, you know this large conglormorate is wasting a ton of shareholder money on silly investments like BYD and IBM. I think I am going to get on the board and make chages.  So I go buy 100 shares of BRK and write a letter saying hey stop wasting money and vote for me.  "Get rid of Charlie this old fool who is infatuated with BYD and wasting our money." Do you think Warren & Charlie ignore me or do you think they immediately retaliate by using BRK funds to buy up 10% of my company to get me out of there.

 

Yes you will say Warren has control - but I picked Charlie who doesn't have control.  However you can replace BRK with any other public company (say CBRL). Let's say CBRL management decides meh screw Biglari - our stock is up big, lets issue more and buy up a ton of BH for CBRL's account and get rid of Sardar.  You would be screaming bloody murder at the waste of shareholder funds and the use of the company by management for personal vendetta's.

 

This is the way you see it.

 

The way I see it is simply the cost of doing business, when you don’t have control. If you think Biglari has sown the seeds for great financial rewards in future years, seeds that have been real costs for the past two years!, you surely don’t want someone you have never heard before shaking the business and claiming he knows how to run it better than Biglari…

 

At least, I am sure I don’t want it! ;)

 

Gio

 

Has everyone here forgotten that Gio is Italian, and he might just see "going to the mattresses" as a part of doing business? #DonGio ;)

 

Seriously, ethnic humor?

 

It was more of a Godfather crack than ethnic humor. Jesus, people are so goddamned touchy these last few weeks...

 

+1

 

A lot of divisiveness and I told you so's on the board these days...BH/AIRT/ISIG, OCN/ASPS, SD/PWE/AWLCF, and lest we forget the good old SHLD.

 

Would you guys say that we are now in the part of the market cycle when it's not fun to be a value investor?  Stocks are much closer to fully valued than cheap, etc., etc...?

[Picasso]

Let's say I run a small public company and a hedge fund.  One day I decide, you know this large conglormorate is wasting a ton of shareholder money on silly investments like BYD and IBM. I think I am going to get on the board and make chages.  So I go buy 100 shares of BRK and write a letter saying hey stop wasting money and vote for me.  "Get rid of Charlie this old fool who is infatuated with BYD and wasting our money." Do you think Warren & Charlie ignore me or do you think they immediately retaliate by using BRK funds to buy up 10% of my company to get me out of there.

 

Yes you will say Warren has control - but I picked Charlie who doesn't have control.  However you can replace BRK with any other public company (say CBRL). Let's say CBRL management decides meh screw Biglari - our stock is up big, lets issue more and buy up a ton of BH for CBRL's account and get rid of Sardar.  You would be screaming bloody murder at the waste of shareholder funds and the use of the company by management for personal vendetta's.

 

This is the way you see it.

 

The way I see it is simply the cost of doing business, when you don’t have control. If you think Biglari has sown the seeds for great financial rewards in future years, seeds that have been real costs for the past two years!, you surely don’t want someone you have never heard before shaking the business and claiming he knows how to run it better than Biglari…

 

At least, I am sure I don’t want it! ;)

 

Gio

 

Has everyone here forgotten that Gio is Italian, and he might just see "going to the mattresses" as a part of doing business? #DonGio ;)

 

Seriously, ethnic humor?

 

It was more of a Godfather crack than ethnic humor. Jesus, people are so goddamned touchy these last few weeks...

 

+1

 

A lot of divisiveness and I told you so's on the board these days...BH/AIRT/ISIG, OCN/ASPS, SD/PWE/AWLCF, and lest we forget the good old SHLD.

 

Would you guys say that we are now in the part of the market cycle when it's not fun to be a value investor?  Stocks are much closer to fully valued than cheap, etc., etc...?

 

I am sure I will get slapped for bringing this up, but....

 

It says a lot about the valuation on the market when you have to look at BH robbing shareholders, OCN essentially out of business, SD levered to the wrong commodity, and SHLD a busted up retailer to find value in this market.

[LC]

Consider this illustration: Imagine there are two shareholders in a company and each shareholder has one share and we think the intrinsic value of the company is 2000 and the market cap of the company is currently 1000.  That makes each share of the company worth 1000 and those shares are currently trading at 500.  The company then executes a Rights Offering and each shareholders buys a discounted Rights share at 250.  The company is then worth 2500 (the original 2000 plus the 500 from the Rights Offering), and now the company would have four shares and if the same 50% value discount was applied those four shares would be have a market cap of 1250 or a per share trading price of 312.50.  If one shareholder then decided to get the company to use the 500 proceeds from the Rights Offering and a little cash the company previously had to buy the other shareholder out, and the other shareholder agreed to sell (which of course is what the shareholders who are selling their shares the BH is currently buying are doing) - the selling shareholder would get the 312.50 * 2 so 725 for their shares.  The company would now be worth 2500 - 725 (cost of the buyback) = 1775.  This 1775 in value would be owned by one shareholder (holding two shares) and this whole interaction would have left that shareholder significantly better off.  That shareholder would have spent a total of 750 for 1775 in intrinsic value.  (The 750 is derived from 500 which represents their original purchase price - which I'm assuming they purchased right before the Rights Offering in this example - for the sake of simplicity - so the 500 original purchase price plus the 250 contributed for the Rights Offering - is a 750 total investment).  Thus their original investing calculation was getting 1000 for 500 - after the Rights Offering and share buyback - they actually got 1775 for 750.  Again, the remaining shareholder is much better off.

So you went from 2 shareholders who owned a piece of something worth $2000 to 1 shareholder who owned something worth $1775.

 

Isn't this kind of like getting rich off your shareholder's back? And you had to destroy $225 of company value to do so?

[BTShine]

Picasso, I totally agree with you. 

 

 

 

Personally, I do think there's value in both BH and SHLD, but it's much, much less attractive than the bottom of this cycle when I was buying Chipotle at $55-$70 a share and Ruth's Chris at $4 a share (among other bargains). 

[BTShine]

Do you guys think there's a potential for a buyout offer, or some activist buying a 15%-20%+ stake in BH and shaking up the board?

 

You have Gabelli, Och Ziff and some other rational investors with stakes that could be voted against Biglari in the event of a an activist looking for shareholder support.  Gio and others, I understand you might think Sardar is superior to others in running this company.  I'm not looking to debate that (and I'm not taking sides). 

 

But, isn't it possible for CBRL, Ackman, Starboard Value or someone else to spend $200 million on buying a 20%+ stake in BH?  Even if it costs $100 million for Sardar's golden parachute, it might be an attractive target.  Or no?

 

 

[cooger72]

Okay, since it was specifically asked, I'll try to give a brief explanation of the Rights Offering/Buyback logic/math.  For those that see this differently or do not understand this, I'm not sure an explanation will do much good.  Some people seem to misunderstand the nature of Rights Offerings and think that they cause dilution/etc.  I do not think its worth re-litigating here as the different sides of this discussion have been well fleshed out.  But I'll try to give a brief explain it.

 

Consider this illustration: Imagine there are two shareholders in a company and each shareholder has one share and we think the intrinsic value of the company is 2000 and the market cap of the company is currently 1000.  That makes each share of the company worth 1000 and those shares are currently trading at 500.  The company then executes a Rights Offering and each shareholders buys a discounted Rights share at 250.  The company is then worth 2500 (the original 2000 plus the 500 from the Rights Offering), and now the company would have four shares and if the same 50% value discount was applied those four shares would be have a market cap of 1250 or a per share trading price of 312.50.  If one shareholder then decided to get the company to use the 500 proceeds from the Rights Offering and a little cash the company previously had to buy the other shareholder out, and the other shareholder agreed to sell (which of course is what the shareholders who are selling their shares the BH is currently buying are doing) - the selling shareholder would get the 312.50 * 2 so 725 for their shares.  The company would now be worth 2500 - 725 (cost of the buyback) = 1775.  This 1775 in value would be owned by one shareholder (holding two shares) and this whole interaction would have left that shareholder significantly better off.  That shareholder would have spent a total of 750 for 1775 in intrinsic value.  (The 750 is derived from 500 which represents their original purchase price - which I'm assuming they purchased right before the Rights Offering in this example - for the sake of simplicity - so the 500 original purchase price plus the 250 contributed for the Rights Offering - is a 750 total investment).  Thus their original investing calculation was getting 1000 for 500 - after the Rights Offering and share buyback - they actually got 1775 for 750.  Again, the remaining shareholder is much better off.

 

Again, this is all premised on the shares of the company being undervalued and the share price one day wending towards the intrinsic value of the company.  If the shares are undervalued, as long-term oriented purchasers of the stock within the last year surely think they are, then the Rights Offering / Buyback is a great value building mechanism for BH shareholders.

 

One thing people could push back on is to suggest that the 500 contributed to the company would not get a 50% discount that the original intrinsic value of the company was being discounted at and that is certainly a possibility if the share price after the rights offering went up.  But in the case of BH, that is not what happened.  The share price stayed down essentially and something like the original discount was applied.  Actually because CBRL went up significantly in value after the Rights Offering but BH's share price stayed somewhat lower, the discount actually expanded.

 

I'm sure this explanation was not necessary for many people reading this, but this basic logic exercise does seem to be lost on some people. 

 

Because of the above explanation, it all comes down to the value of the company - which is what I've been trying to focus on in my thinking.

 

You do not have to describe again why you think that the company is not undervalued - we get that.  This analysis is again for long-term shareholders of the company who believe the company is undervalued (which is why they're shareholders).  You sold your shares and are moving on to other investments.  But for those of us that do think the company is undervalued - we believe this will be a good thing.

 

If I read this correctly, you believe that going from an intrinsic value of $1000/share to $888/share, is somehow a good thing?  This may be why others fail to see the logic.

[Hielko]

If I read this correctly, you believe that going from an intrinsic value of $1000/share to $888/share, is somehow a good thing?  This may be why others fail to see the logic.

That's not the whole picture since you would also have bought a share at a discount in the rights offering.

 

One thing people could push back on is to suggest that the 500 contributed to the company would not get a 50% discount that the original intrinsic value of the company was being discounted at and that is certainly a possibility if the share price after the rights offering went up.  But in the case of BH, that is not what happened.  The share price stayed down essentially and something like the original discount was applied.  Actually because CBRL went up significantly in value after the Rights Offering but BH's share price stayed somewhat lower, the discount actually expanded.

I think you are wrong to expect that the share price after the rights offering should go up, even if the new cash is valued at 100%, since there are more shares outstanding after the rights offering as well. Since the shares are sold at a discount compared to the previous market price the new intrinsic value per share will always be lower than the previous intrinsic value per share.

 

I also think that you should actually expect that the P/B ratio drops after a rights offering if the stock is trading at a ratio above 1x. If the new cash is valued at exactly book value and the existing assets are valued above book the new blended P/B ratio should always be lower than the ratio pre rights offering. Saying that BH is now more attractive because it is trading at a lower PB ratio than before the rights offering is in my opinion because of that point also incorrect. Every share now owns a smaller piece of Shake 'n Stake, Cracker Barrel etc.

[cooger72]

Good question.  In this scenario, your original investment calculus (for the remaining shareholder) would have gone from $1000 value costing you $500 to, after the rights offering & buyback, $1775 in value costing you $750.  So yes technically your per share value would have gone down because it is split over two shares, but you would technically have gotten another share for close to free.  So your total piece of pie as a shareholder has gone up from $1000 costing $500 to $1775 costing $750.  Since there would only be one shareholder remaining, you could actually just cancel one of your two shares or reverse split your two shares into one and call it $1775 in value per share.  So for the remaining shareholder, their per share intrinsic value has gone up.  Does that logic make sense?

 

The place where you lose me is the place where you ignore that shareholders overall are worse off.  Sure the remaining shareholder (Sardar) is happy that he now has traded 225 in intrinsic value for half of his company, but that came at the expense of the departing shareholder, and more.  If you don't get the guy to leave, and the market continues to value the company at 50% of intrinsic, your $750 stake is meanwhile cut to $612, but that is less important than the fact that 1/9th of shareholder value was squandered in your hypothetical transaction.  Sure, if all shareholders equally subscribe to the offering and the buyback, each has simply removed some of his investment from the company to cash and profits for the investment bank.  Here I still struggle to see how anyone wins.  If the company is overcapitalized, why not skip a step and return capital without the rights offering?  If the share price is too low, wouldn't it clearly be better to buy $225 worth of equity at $500?  1.55 remaining shares would then be worth $1145 each in terms of intrinsic value. 

 

In any case, the objection that it's merely a shell game where the assets of some shareholders are transferred to the others is valid.  This is not the behavior of a management I'd want running a company I own.

[cooger72]

 

Good question.  In this scenario, your original investment calculus (for the remaining shareholder) would have gone from $1000 value costing you $500 to, after the rights offering & buyback, $1775 in value costing you $750.  So yes technically your per share value would have gone down because it is split over two shares, but you would technically have gotten another share for close to free.  So your total piece of pie as a shareholder has gone up from $1000 costing $500 to $1775 costing $750.  Since there would only be one shareholder remaining, you could actually just cancel one of your two shares or reverse split your two shares into one and call it $1775 in value per share.  So for the remaining shareholder, their per share intrinsic value has gone up.  Does that logic make sense?

 

Also worth noting, is that your example pays $725 to the departing investor for something he purchased at $750 (under your assumptions), although I'm not sure how you got from $312 per share to 362, but that's neither here nor there to the question of whether the departing investor is unquestionably worse off than if you'd just repurchased $225 worth of shares at $500/per share without the rights offering occuring.

[LC]

You're telling shareholders: Pony up some more cash or I'll screw you. And then AFTER they pony up the cash, you better hope some are willing to sell. If they're not, your entire plan to buyback shares under IV with shareholder money (vs corporate earnings, or personal money, or debt, etc.) goes to waste.

 

 

 

[cooger72]

Alright man.  I'm happy that this works for you. 

 

My problem with your logic for the rights offering/buy back you used in your illustration is that it is in all ways inferior to simply buying back shares (even at $500/share).  It's not the buyback itself, but the combination.  Obviously any time you can buy shares for less than intrinsic, a shrewd capital allocator should consider it.

 

In any case, after the activity, you can either have 2 shares worth 1,775, or 1.55 shares worth $1,775.  If management desires to maximize per share intrinsic value (and perhaps focus on running the business instead of buying and selling its own shares), the choice is easy.  If management does not desire to maximize intrinsic value per share, I see no reason to employ said management.

 

The objection to the shell game aspect is that some investors are not going to, or simply will be unable to pony up additional capital for the rights offering, and I imagine the market for such rights is less than efficient.  If instead you use a company with three shares and three shareholders, the shareholder who fails to participate (or sell) is in all situations worse off, so a rights offering with no better use for the cash than to repurchase shares is doubly harmful to passive investors.

 

I included Sardar in the remaining shareholders, because you can be assured that for good or for ill, his percentage of ownership of SNS will be higher at the end of the day than it would have been under the straightforward buyback scenario, even if it means a diminution of intrinsic per share.

 

Purely a red herring, but you said 312.5 x 2 is 725.  I'm afraid you aren't going to be able to help me figure that one out unless math has changed since I graduated.

[OracleofCarolina]

I looked over the 13Ds filed on AIRT and ISIG...these little nuggets crack me up...

 

From the AIRT 13D

The Reporting Persons believe that the Issuer’s Board of Directors and management should concentrate on improving the profitability of its operations rather than diversify its limited capital through minority interests in other public companies. The Reporting Persons believe that the Issuer’s profitability and cash flow generation are too low, but opportunities do exist to scale operations and thereby achieve efficiencies able to augment profits. Thus, the Board of Directors should focus attention on exploring opportunities to become an effective consolidator in its industry, or alternatively to sell its units for maximum value.

 

From the ISIG 13D

The Reporting Persons believe that the Issuer’s surplus cash should be distributed to its shareholders through a one-time special dividend. In addition, the Reporting Persons conclude that the Issuer is too small to remain as a public company and therefore it is in the interest of all shareholders for the Issuer’s Board of Directors to pursue a sale of the company

[frugalchief]

Some of the rights offering going to work or partly because of Groveland filing?  Up to 62,000 shares to be bought by TLF.

 

http://www.sec.gov/Archives/edgar/data/93859/000092189514002705/ex991to13da2307428036_121714.htm

[merkhet]

I'm not sure I can keep explaining this if it is not sinking in.

 

I can't keep helping you with the math on this, but just figure it out on your own - you'll see the math behind it.

 

It is often a good idea to use condescension to make your point. People respect that and are very open to being told that they are stupid by other folks on the internet. Are you Harry Long* in disguise? If so, welcome back after a long hiatus.

 

In any case, I think the point that people haven't made in a while is that while you are correct that your scenario means that all remaining shareholders make money, the question remains as to whether an individual investor feels comfortable investing their money with someone who has shown a clear disregard for the financial well-being of other shareholders in certain of his actions. Parsad provided a long list somewhere earlier in this thread.

 

For some people, the answer is yes. For some people, the answer is no. There is no moral superiority to be had for choosing either answer. It's just an individual choice.

 

I fully expect this post to solve this long persisting issue, as this is the internet, and that's how things work on the internet. ;)

 

*Unless you were here circa 2010, you might not get the inside joke on this one.

[merkhet]

I actually got the joke reference. (See? Maybe our taste in jokes isn't so far apart after all.)

 

I agree with you on the mechanics of the rights offerings.

 

The problem people have mostly pointed out is that there is a whiff of coercion when it comes to rights offerings -- and possibly your stance on the degree of coercion will relate back to what you think about Biglari as a person. (Few people will complain about a rights offering from Malone and/or to some extent ESL.)

[link01]

Alright man.  I'm happy that this works for you. 

 

 

The objection to the shell game aspect is that some investors are not going to, or simply will be unable to pony up additional capital for the rights offering, and I imagine the market for such rights is less than efficient.  If instead you use a company with three shares and three shareholders, the shareholder who fails to participate (or sell) is in all situations worse off, so a rights offering with no better use for the cash than to repurchase shares is doubly harmful to passive investors.

 

I included Sardar in the remaining shareholders, because you can be assured that for good or for ill, his percentage of ownership of SNS will be higher at the end of the day than it would have been under the straightforward buyback scenario, even if it means a diminution of intrinsic per share.

 

 

Alright man.  I'm happy that this works for you. 

 

 

The objection to the shell game aspect is that some investors are not going to, or simply will be unable to pony up additional capital for the rights offering, and I imagine the market for such rights is less than efficient.  If instead you use a company with three shares and three shareholders, the shareholder who fails to participate (or sell) is in all situations worse off, so a rights offering with no better use for the cash than to repurchase shares is doubly harmful to passive investors.

 

I included Sardar in the remaining shareholders, because you can be assured that for good or for ill, his percentage of ownership of SNS will be higher at the end of the day than it would have been under the straightforward buyback scenario, even if it means a diminution of intrinsic per share.

 

 

I think part of the misunderstanding regarding rights offerings has to do with the understanding or misunderstanding of the concept of 'dilution'. shares issued under book val per share, for instance, will always result in a reduction of book val per share. that's obvious & indisputable. is a reduction in a co's book val per share a form of dilution? yes. but are the co's shareholders diluted? no. not if they (a) sold their rights (similar to taking opting to take a dividend rather than the shares), (b) not if they sold some of their existing shares equal to the amount of shares they were eligible to buy with their rights, or an amount of shares with a value equal to the cost of those future exercised rights, or © rec'd & exercised their rights in the purch of the newly issued shares. only if a shareholder did absolutely nothing would they experience a 'dilution' of their shareholding value in the stock. those are arguably the kind of shareholders who are better off investing in mutual funds if they don't have the time to read filings.

 

but, ironically, maybe the clearest explanation about 'rights' offerings came from the man himself back in the day when before he was infamous & his words were taken at face value:

 

from 2006 western sizzlin annual letter:

 

Rights Offering

A rights offering involves the issuance of new common stock to company

shareholders on a pro rata basis — that is, in proportion to the magnitude of their

ownership. Unlike a typical equity offering, in which the new stock purchaser dilutes the

ownership of current shareholders, a rights offering permits current shareholders to enjoy

the opportunity to maintain their proportional interest in the company. Therefore,

stockholders retain their same percentage ownership in the issuer but, of course, have

invested more money.

In 2006, we raised $4.2 million from existing shareholders. Before the rights

offering we had 1,191,850 shares outstanding. We issued one right for every share,

meaning that as many rights were issued as there were shares. For every two rights, a

shareholder was entitled to subscribe to one additional share at $7, a discount to the

market price. By granting a discount, we imparted a value to the rights that enabled them

to be traded over-the-counter. In essence, Western issued 595,925 shares at $7, raising

$4.2 million.

A prevalent misperception floating around is that in rights offerings an investor

receives something for nothing because of the discount. However, that view is fallacious

because everyone enjoys the same reduction. A shareholder's wealth does not vary so

long as he or she either exercises the rights to purchase more stock or sells the rights to

other investors. A rights offering does not change shareholder wealth.

Like stock splits, rights offerings alter the price per share in a way that a

comparison between stock prices prior to the offering and the price post-offering is akin

to comparing apples to elephants. If you're up for it, I'll do my best by displaying what

takes place:

2006 Rights Offering

                        Shares Outstanding x Stock Price = Market Value

B e f o r e                1 , 1 9 1 , 8 5 0      $ 1 0      $ 1 1 , 9 1 8 , 5 0 0

O f f e r i n g            5 9 5 . 9 2 5            $ 7          $ 4 . 1 7 1 . 4 7 5

A f t e r                  1 . 7 8 7 . 7 7 5      $ 9          $ 1 6 . 0 8 9 . 9 7 5

As the above table depicts, total shareholder wealth remains the same even when

the stock declines from $10 to $9 because additional shares were issued at $7. The rights

offering at $7 per share enabled the market value to rise, yet shareholders' wealth stayed

at status quo. The basic idea of the table above is to apprise shareholders who wish to

know the accurate change in stock price and market value with the effects of the rights

offerings. (Of course, should a stockholder fail to exercise his or her rights or sell them,

that investor would lose value through inaction and will effect a transfer of wealth. When

Western performed the rights offering, very few stockholders failed to exercise their

options.)

A company incurs flotation costs when issuing new securities. These costs

typically are twofold: underwriting spread, or the difference between market value of the

issuance and the proceeds paid by investment bankers to the company, and issuing

expenses, e.g., legal, printing, accounting, and numerous smaller associated outlays.

Western did not hire an investment banker to assist with the rights offering.

Consequently, our flotation costs were only 3% of the issuance, resulting in net proceeds

of $4.05 million. Not only are flotation costs much lower in rights offerings than they are

in most other forms of equity offerings, but we believe they are a quite equitable method

and can provide all shareholders equal terms.

We were so pleased with the results of the rights offering that we are going to

present another in 2007 for the cogent reason that we want financing in place to make

acquisitions. This time, we seek to raise over $7 million. Flotation costs should be

substantially less on the second rights offering.

(Robyn Mabe, Western's CFO, did a marvelous job last year in facilitating

various initiatives including the stock split and rights offering in a timely manner.)

[Jurgis]

 

I am sure I will get slapped for bringing this up, but....

 

It says a lot about the valuation on the market when you have to look at BH robbing shareholders, OCN essentially out of business, SD levered to the wrong commodity, and SHLD a busted up retailer to find value in this market.

 

Off topic: +1 Mr. Picasso.

 

The market currently offers few bargains. And the ones it offers usually come with a Big (pardon the reference) set of warts.