BH - Biglari Holdings

[giofranchi]

NBL,

Just a curiosity: first you say you own far more BH shares than Groveland, than you say BH is a small position of yours… You have a pretty large investment portfolio, haven’t you?! ;D

 

;)

 

Cheers,

 

Gio

 

[vinod1]

 

As a value investor, I couldn't agree with you more that just taking a pass through market valuation is not the most useful way to do it.  As a shareholder of BH, I value CBRL every quarter also.  In fact, I feel like I've spent far more of my life then I would have liked learning everything there is to know about Cracker Barrel over the last year.  With that said, as shorthand I do cite the market valuation of Biglari Holdings' Cracker Barrel stake because it is a lot simpler than a long long valuation and because for most of the last year the CBRL market price was in the range of my intrinsic value estimate, though that is no longer true.  With CBRL's steep rise over the last four or five months, it is greater than even my outer bound of valuation - so my own intrinsic  value calculation is what I use in my own valuation - though it is not far enough off the market price to write a 23 page post here valuing Cracker Barrel - so I probably won't go into it on that depth.

 

 

Thanks! Makes a lot of sense. Since Cracker Barrel is such a large component of the value of BH, I would think it makes sense to spend as much time as you did on Cracker Barrel.

 

I see options only 6 months out. If I want to protect with say $130 strike price, the cost is about $8 for roughly six months, so we are looking at around $30 for two years of protection since that would be the minimum holding period. To me that is pretty expensive at about an annual cost of about 11%.

 

The hedge part is interesting but why do you think BH would be able to buy out CBRL since, buying out just another 30%stake would cost nearly a $1 billion.

 

 

Good points.  To the first one - a hedge against a significant price drop of CBRL, to me, doesn't mean hedging at $130 - it would be protecting against a price significantly lower than that.  And that is when it gets cheap to do this.  There are other ways to do this too, but it is too long a discussion to go into here.  Instruments can be designed for this sort of thing.  There are a number of ways to do it.  The point is not that BH shareholders could hedge dollar-for-dollar losses of CBRL share price.  The point is that they could cheaply protect against a very large drop in CBRL's share price but again I really think it is better to not go this route except in a small way.

 

On the other question, it wouldn't be $1 billion for another 30% it would be something substantially less than that because we are talking about a scenario in which shareholders of CBRL experienced a significant price drop.  So maybe it would be more like $600 million or $700 million to buy a controlling interest in CBRL.  There are a myriad of options for BH to accomplish that.  I'm not going to go into all of that here.  But this scenario is also two or three years down the road and would necessarily involve a significant price drop of CBRL.

 

Makes sense. Thanks for the detailed responses. It is very helpful.

 

Vinod

[randomep]

 

hi forgive me if this has been asked before:

 

is the tax consequence the same if Biglari sells CBRL shares directly held in BH, and if he sells CBRL shares through the lion fund?

 

I assume BH owns CBRL directly and Lion fund also owns CBRL (too lazy to check right now)....

 

thanks in advance

 

 

[gfp]

I believe all the CBRL was put into the Lion Fund (primarily Lion Fund 2).  Tax treatment is the same.  Management fees are higher in the Lion Fund, as they are not capped.

 

 

hi forgive me if this has been asked before:

 

is the tax consequence the same if Biglari sells CBRL shares directly held in BH, and if he sells CBRL shares through the lion fund?

 

I assume BH owns CBRL directly and Lion fund also owns CBRL (too lazy to check right now)....

 

thanks in advance

[gfp]

Market certainly likes the report from CBRL today

 

http://investor.crackerbarrel.com/releasedetail.cfm?ReleaseID=897910

 

http://www.sec.gov/Archives/edgar/data/1067294/000114036115008597/form10q.htm

[OracleofCarolina]

20 year franchisee closing his store

http://quincyjournal.com/above-the-fold/2015/03/02/quincy-steak-and-shake-closes/

 

[BTShine]

20 year franchisee closing his store

http://quincyjournal.com/above-the-fold/2015/03/02/quincy-steak-and-shake-closes/

 

Interesting to read the comments on there.  Thanks for posting.

[giofranchi]

20 year franchisee closing his store

http://quincyjournal.com/above-the-fold/2015/03/02/quincy-steak-and-shake-closes/

 

Yeah…! Surely there are always strong emotions attached to this kind of business decisions… Yet, numbers don’t care about emotions and usually don’t lie.

 

Journalists, on the contrary, mostly write about emotions and don’t care about numbers… Imo a disservice!

 

Gio

 

[mateo999]

Is there a record date for the 4/9 shareholder meeting?  I bought one share on 2/13 and hope I didn't miss the boat.

[frugalchief]

Is there a record date for the 4/9 shareholder meeting?  I bought one share on 2/13 and hope I didn't miss the boat.

 

 

Prior year was March 3, I'd assume it's close to the same date this year. 

[mateo999]

I'm curious if they'll do a Q&A this year at the Annual Meeting.  I know they always have previously and that the annual letter says that is their practice, but when there is a proxy contest many companies change their annual meeting/their previously planned discussions with analysts/etc. until the vote of the proxy contest is clear.  It would be peculiar in a way for their to be a Q&A with current management while everyone is waiting for the results of the vote as to whether current management is current management.  (I think the results of the vote will likely not be announced until a few days later.)  And I know that other companies planned annual meetings change when there is a proxy contest.  So its possible that the Q&A would not occur this year or would be postponed.

 

Hope you're wrong... I paid 416 dollars!  I demand fireworks!

[wescobrk]

As long as Sardar is still CEO, you can bet he'll have the 5 hour Q&A.

[giofranchi]

As long as Sardar is still CEO, you can bet he'll have the 5 hour Q&A.

 

I guess the point is that he will not know for sure if he is CEO when the Q&A is supposed to occur and if there were any chance he wouldn't be, they may change the format.

 

Listen, what I truly believe is that we can talk about Buffett and Watsa as long as we want, and yet we will never get the ability to reproduce their results ourselves... Idem for Biglari during the last 15 years!... All this talk about him not being CEO anymore simply doesn't make any sense to me... I am sure BH has very savvy shareholders, who recognize a rare and precious thing when they see one... And won't vote against Biglari.

 

Gio

[giofranchi]

I thought you were talking about the probability of having or not having a Q&A session with Biglari at the next AM... Wescobrk said we will always have a Q&A session as long as Biglari is CEO... You have commented there is the chance Biglari won't be CEO anymore...

 

To your comment I have simply answered I think that chance is very small indeed, and therefore the probability of not having a Q&A session is very small... That's all!

 

Ah! Of course I also added why I believe Biglari will go on being CEO, and therefore will answer shareholders' questions.

 

Cheers,

 

Gio

[mateo999]

who recognize a rare and precious thing when they see one...

 

I just threw up a bit in my mouth

[cheerlee]

FYI

Biglari Holdings Inc (NYSE:BH) Update based on the information released on Monday, Feb 23rd, Gabelli lowers stake in Biglari to 9.54% from 9.69%.Gabelli sent a letter to the CEO of Biglari stating that it would support Biglaris incumbents at the upcoming annual meeting of shareholders if the Lion Fund shares abstained from voting. If the Lion Fund shares did not abstain and are directed to vote for the incumbents, Gabelli will look more favorably upon the slate of directors intended to be nominated by The Groveland Group..

[frugalchief]

Hope you're wrong... I paid 416 dollars!  I demand fireworks!

 

The biggest fireworks would be some Maxim girls there selling some burgers and shakes and trucking insurance.  ::)

 

Aside from feisty tree huggers demanding SNS use ethically raised/killed meat and eggs.

[giofranchi]

who recognize a rare and precious thing when they see one...

 

I just threw up a bit in my mouth

 

Ah!… But mateo999, you understand that the chances anyone on this board will achieve in business during his/her whole life what Biglari has achieved at 38 are not many, do you?… Biglari is an outlier, a top performer… And imo there is no way of knowing exactly why. All we can do is just to recognize a great entrepreneur, when we see one, and to invest alongside him/her.

 

Then, of course, you might not like many things about Biglari, as the members of this board always remind us with great solicitude, but you should know by now how I approach the matter: as long as Biglari’s character peculiarities don’t make him irrational in his business dealings, I will accept them.

 

Gio

 

[giofranchi]

FYI

Biglari Holdings Inc (NYSE:BH) Update based on the information released on Monday, Feb 23rd, Gabelli lowers stake in Biglari to 9.54% from 9.69%.Gabelli sent a letter to the CEO of Biglari stating that it would support Biglaris incumbents at the upcoming annual meeting of shareholders if the Lion Fund shares abstained from voting. If the Lion Fund shares did not abstain and are directed to vote for the incumbents, Gabelli will look more favorably upon the slate of directors intended to be nominated by The Groveland Group..

 

This is a very reasonable request from Gabelli imo! After all the Lion Fund holds BH shares on behalf of all the shareholders, therefore each shareholder should be free to express his/her vote through the percentage that belongs to him/her… This being practically impossible to do, I also think the fairest way would be the Lion Fund shares (those belonging to BH) abstained from voting.

Gabelli seems to be an intelligent man. :)

 

Gio

 

[giofranchi]

As we wanted the fees to be very fair for the long term investors in Fairfax India, we structured them after negotiations

with Fidelity, the largest cornerstone investor. The fees are as follows: (i) an administration and advisory fee of 1⁄2% of

undeployed capital and 1 1⁄2% of capital invested in India. Fairfax will bear the full compensation costs of Fairfax

India’s senior employees; and (ii) a performance fee, calculated over three-year periods, equal to 20% of any return,

calculated from inception, above a 5% annual hurdle, payable in shares of Fairfax India (if the shares are trading at

more than two times their net asset value, Fairfax has the option of taking the fee in cash).

-- Prem Watsa 2014 AL

 

Am I wrong if I say The Lion Fund might be even cheaper for BH shareholders? Because BH shareholders don't pay the 1 1/2% fixed fee?

 

Gio

 

[gfp]

For most plausible return numbers [like 35% and below], the fee paid is less under BH's terms with the lion fund.  The difference is that Fairfax shareholders own the manager and get the fees for their portion of the assets under management back (in addition to the fees on outside capital that was VOLUNTARILY invested in the vehicle).  Biglari sold himself the management company in a negotiation that he was on both sides of the table in - and now owns Biglari Capital personally.  So the fees on BH shareholders' capital invested in the Lion fund aren't paid to Biglari Holdings, they are paid to Sardar Biglari.

 

As we wanted the fees to be very fair for the long term investors in Fairfax India, we structured them after negotiations

with Fidelity, the largest cornerstone investor. The fees are as follows: (i) an administration and advisory fee of 1⁄2% of

undeployed capital and 1 1⁄2% of capital invested in India. Fairfax will bear the full compensation costs of Fairfax

India’s senior employees; and (ii) a performance fee, calculated over three-year periods, equal to 20% of any return,

calculated from inception, above a 5% annual hurdle, payable in shares of Fairfax India (if the shares are trading at

more than two times their net asset value, Fairfax has the option of taking the fee in cash).

-- Prem Watsa 2014 AL

 

Am I wrong if I say The Lion Fund might be even cheaper for BH shareholders? Because BH shareholders don't pay the 1 1/2% fixed fee?

 

Gio

[giofranchi]

The difference is that Fairfax shareholders own the manager and get the fees for their portion of the assets under management back (in addition to the fees on outside capital that was VOLUNTARILY invested in the vehicle).

 

Mmm… I think Watsa is talking about the long term investors in Fairfax India, not Fairfax Financial, when he says the fees are very fair… Don’t you agree? ;)

 

Gio

 

[gfp]

I'm not debating the fairness of hedge fund fees.  Some of us here charge similar fees (not me. I charge 1%, but I am happy to pay hedge fund fees at PSH and elsewhere.).  The analogue to BH only applies to the FFH capital invested in the new vehicle.  The outside investors invested THEIR capital VOLUNTARILY in the vehicle with the fees plainly disclosed in the offering documents.  I tried to capitalize the important word in my previous note so you wouldn't miss my point, as I suspected you would.

 

If you can't see anything unethical in the way SHAREHOLDER funds were invested in the CEO's private hedge fund after he was already being paid a generous CAPPED fee to manage the capital; the price and negotiation for the repurchase of Biglari Capital from BH shareholders; and the licensing agreement who's sole purpose is management entrenchment - then you are never going to see it and there is nothing anyone can do to convince you.

 

I think most people, whether they choose to own the stock when it is cheap or not, can at least admit that several of these decisions are unethical at best.

 

Several posts ago you were applauding the "rationality" of Sardar using shareholders' capital to cement his voting control.  Then a few posts above you applaud Gabelli for being very smart and reasonable for demanding that those shares not be voted.  I get that you don't care about ethics if you can understand the business rationale behind a self-interested decision - but that doesn't preclude admitting that someone is serially unethical.

[giofranchi]

I tried to capitalize the important word in my previous note so you wouldn't miss my point, as I suspected you would.

 

Surely you did… This doesn’t mean that your answer wasn’t out of context with what I was trying to point out!

 

If you can't see anything unethical in the way SHAREHOLDER funds were invested in the CEO's private hedge fund after he was already being paid a generous CAPPED fee to manage the capital; the price and negotiation for the repurchase of Biglari Capital from BH shareholders; and the licensing agreement who's sole purpose is management entrenchment - then you are never going to see it and there is nothing anyone can do to convince you.

 

What can I say… You are a more ethical person than I am! ;)

 

Several posts ago you were applauding the "rationality" of Sardar using shareholders' capital to cement his voting control.  Then a few posts above you applaud Gabelli for being very smart and reasonable for demanding that those shares not be voted.

 

I think both things are smart! If you don’t put me in a corner, I won’t use all the weapons at my disposal (ethical or not) to do what I think is in the best interest of BH for the long term. But, if you put me in a corner instead, I won’t depend on your kindness.

 

I knew someone would have pointed out an inconsistency here, but imo there is none.

 

Gio

 

[Txvestor]

Gio,

 

You certainly are willing to overlook a lot wrt Mr Bigs. Whether bias or insight, time will tell.

All I know is the bigger BH gets, the more Mr Bigs needs goodwill and consent of takeover targets

to grow the empire. CBRL is a case in point. The way he treats his minority partners presages the way he will dispense with his takeover targets.

What is especialy bothersome to me is that the BH board appears little more than a rubber stamping mechanism for Mr Big.

The performance hurdle rate for minirity shareholders to make money discounting for all of this 'unethhical' behaviour is very high and will get higher the bigger BH gets.