BH - Biglari Holdings

[InelegantInvestor]

Swenson claims to have made $500 million shorting subprime in the presentation.

[giofranchi]

Groveland letter:

 

http://www.sec.gov/Archives/edgar/data/93859/000089706915000229/cg548.htm

 

The thing I find truly shameful is that a fantastic businessman and investor like Biglari should have to waste his time protecting BH from a bunch of opportunistic guys, who would do anything to make a name for themselves quickly… But, as I have already said, I am sure the great majority of BH’s shareholders are rational investors! ;)

 

Cheers,

 

Gio

 

[gfp]

Whitebox made $500 million shorting subprime and Swenson worked there at the time.  Redleaf is the main guy at Whitebox if I remember correctly.

 

Swenson claims to have made $500 million shorting subprime in the presentation.

[jschembs]

Groveland letter:

 

http://www.sec.gov/Archives/edgar/data/93859/000089706915000229/cg548.htm

 

The thing I find truly shameful is that a fantastic businessman and investor like Biglari should have to waste his time protecting BH from a bunch of opportunistic guys, who would do anything to make a name for themselves quickly… But, as I have already said, I am sure the great majority of BH’s shareholders are rational investors! ;)

 

Cheers,

 

Gio

 

What aspect of their recent investments or their proposal would you characterize as opportunistic?

[giofranchi]

What aspect of their recent investments or their proposal would you characterize as opportunistic?

 

Well, of course the market is misunderstanding or underestimating:

1) S n S operating performance

2) BH’s investments in building the new franchise infrastructure

3) BH’s investment in MAXIM

4) BH’s stock market investments

5) Also BH’s investment in First Guard is imo not fully appreciated

6) During the last few years BH stock price has not increased much…

 

Easy to attack Biglari. And just see what happens. Nothing to lose, right? And possibly a lot to gain, if BH’s shareholders happen to be of the gullible kind!

 

Those investors, who instead understand how business is done, know better. And would prefer not to be bothered by opportunistic guys without a shred of a plan for the company!

 

I hope this kind of investors will ultimately prevail. Or else I am gone!

 

Cheers,

 

Gio

 

[mcmaaaaath]

Gio here's a question for ya-- I get that you like Biglari, but you must also know that BH trades at a large discount to the SotP.

 

If Groveland won the proxy, and immediately presented a strategy of liquidating the CBRL stake and distributing it as a special dividend, you wouldn't sell at $417 would you?

 

 

[giofranchi]

If Groveland won the proxy, and immediately presented a strategy of liquidating the CBRL stake and distributing it as a special dividend, you wouldn't sell at $417 would you?

 

I would probably wait to collect the special dividend and then sell all my shares… This doesn’t mean I would be interested in BH as a business anymore, while waiting for the special dividend… Because I would not. Mine would be just a short term trade.

By the way, whenever I try to make short term trade, I usually lose money! ;)

 

Gio

 

[cheerlee]

FYI

http://nrn.com/corporate-news/biglari-s-hedge-fund-receives-344m-bonus

Is that true? Not cap at $10M?

"Biglari Holdings Inc. paid a $34.4 million incentive fee last year to Biglari Capital Corp., the hedge fund controlled by the company’s chairman and CEO, Sardar Biglari, according to Biglari Holdings’ latest earnings report.The fee was based on $166.2 million that Biglari Holdings recorded in investment gains made through the hedge fund in 2014."

[redskin]

There is so much wrong with Biglari's compensation.  The most egregious is that he double dips by receiving the 25% incentive fee from Lion Fund which is funded mostly by BH capital.  He sold the Lion fund to BH in 2010 for $4.2 million and then repurchased in 2013 for $1.7 million?  Are you kidding me?  How did this happen?

[gfp]

The $4.2 million included interests in the partnerships - The management company was valued at $1.  The $1.7 million was after BCC had distributed substantially all of BCC's partnership interests to Biglari Holdings, leaving just the GP.

 

http://www.sec.gov/Archives/edgar/data/93859/000152153613000580/form8k07428_07012013.htm

 

http://www.sec.gov/Archives/edgar/data/93859/000092189510000667/form8k07428_04302010.htm

 

 

There is so much wrong with Biglari's compensation.  The most egregious is that he double dips by receiving the 25% incentive fee from Lion Fund which is funded mostly by BH capital.  He sold the Lion fund to BH in 2010 for $4.2 million and then repurchased in 2013 for $1.7 million?  Are you kidding me?  How did this happen?

[cheerlee]

revisited proxy, $10M cap is only for his operating compensation. no cap on performance fee charged by Biglari Capital. no sure when he can become a real Buffet?

[hillfronter83]

What aspect of their recent investments or their proposal would you characterize as opportunistic?

 

Well, of course the market is misunderstanding or underestimating:

1) S n S operating performance

2) BH’s investments in building the new franchise infrastructure

3) BH’s investment in MAXIM

4) BH’s stock market investments

5) Also BH’s investment in First Guard is imo not fully appreciated

6) During the last few years BH stock price has not increased much…

 

Easy to attack Biglari. And just see what happens. Nothing to lose, right? And possibly a lot to gain, if BH’s shareholders happen to be of the gullible kind!

 

Those investors, who instead understand how business is done, know better. And would prefer not to be bothered by opportunistic guys without a shred of a plan for the company!

 

I hope this kind of investors will ultimately prevail. Or else I am gone!

 

Cheers,

 

Gio

 

I agree with Gio. Groveland's presentation has so many errors. So either they are incompetent, or being dishonest. While I understand the Biglari discount, the Groveland discount will probably be bigger!

[mcmaaaaath]

What aspect of their recent investments or their proposal would you characterize as opportunistic?

 

Well, of course the market is misunderstanding or underestimating:

1) S n S operating performance

2) BH’s investments in building the new franchise infrastructure

3) BH’s investment in MAXIM

4) BH’s stock market investments

5) Also BH’s investment in First Guard is imo not fully appreciated

6) During the last few years BH stock price has not increased much…

 

Easy to attack Biglari. And just see what happens. Nothing to lose, right? And possibly a lot to gain, if BH’s shareholders happen to be of the gullible kind!

 

Those investors, who instead understand how business is done, know better. And would prefer not to be bothered by opportunistic guys without a shred of a plan for the company!

 

I hope this kind of investors will ultimately prevail. Or else I am gone!

 

Cheers,

 

Gio

 

I agree with Gio. Groveland's presentation has so many errors. So either they are incompetent, or being dishonest. While I understand the Biglari discount, the Groveland discount will probably be bigger!

 

I'm somewhat reluctant to post this because I don't want to bag on the Groveland group that much, because it is certainly their right to do what they are doing.  But, in their presentation there is a schedule of what they would do during their first 120 days if they won.  If that schedule is to be taken seriously, it would be very time intensive - lots of board meetings, reviewing Maxim, First Guard, picking permanent CEOs for the business units, etc.  I just can't help but ask again, what does N. Swen. have to gain from that?  That much time and attention devoted to Biglari Holdings surely couldn't be good for Air T - which I think he was elected Chairman and CEO of not that long ago and, presumably, he has much more money invested in it.  Why is he willing to spend so much time away from Air T for such a small investment?  I mean this earnestly, not as a criticism but more as a question - I really just don't understand what game is being played here.

 

Perhaps one of Gabelli/Janus/Dimensional are actually behind this move, and just don't want their names behind it directly?

 

Just thinking out loud here, since clearly something weird is happening.

 

Or perhaps Groveland views it as a $200k marketing gimmick? And anyways, where did the $200k figure come from again?

[cheerlee]

What aspect of their recent investments or their proposal would you characterize as opportunistic?

 

Well, of course the market is misunderstanding or underestimating:

1) S n S operating performance

2) BH’s investments in building the new franchise infrastructure

3) BH’s investment in MAXIM

4) BH’s stock market investments

5) Also BH’s investment in First Guard is imo not fully appreciated

6) During the last few years BH stock price has not increased much…

 

Easy to attack Biglari. And just see what happens. Nothing to lose, right? And possibly a lot to gain, if BH’s shareholders happen to be of the gullible kind!

 

Those investors, who instead understand how business is done, know better. And would prefer not to be bothered by opportunistic guys without a shred of a plan for the company!

 

I hope this kind of investors will ultimately prevail. Or else I am gone!

 

Cheers,

 

Gio

 

I agree with Gio. Groveland's presentation has so many errors. So either they are incompetent, or being dishonest. While I understand the Biglari discount, the Groveland discount will probably be bigger!

 

I'm somewhat reluctant to post this because I don't want to bag on the Groveland group that much, because it is certainly their right to do what they are doing.  But, in their presentation there is a schedule of what they would do during their first 120 days if they won.  If that schedule is to be taken seriously, it would be very time intensive - lots of board meetings, reviewing Maxim, First Guard, picking permanent CEOs for the business units, etc.  I just can't help but ask again, what does N. Swen. have to gain from that?  That much time and attention devoted to Biglari Holdings surely couldn't be good for Air T - which I think he was elected Chairman and CEO of not that long ago and, presumably, he has much more money invested in it.  Why is he willing to spend so much time away from Air T for such a small investment?  I mean this earnestly, not as a criticism but more as a question - I really just don't understand what game is being played here.

 

Obviously, Groveland wants to control more than $700M cash and investment and all the future cash flow from operating businesses, then charge management fee or/and performance fee like Biglari Capital. Vote for Biglari at least he has better performance record than Groveland.

[mcmaaaaath]

Mcmaaaaath - I don't think it would be a Dimensional/Gabelli thing, that would arguably be a violation of securities laws and I do not think that they would roll like that.  And it would just be such a complicated work around for a small investment for all of them, but something like that is possible.  I was thinking maybe someone in Groveland's group was involved in the Friendly's situation or one of Biglari's other proxy battles and has a sort of bone to pick with him.  One of the Groveland's nominees worked for Perkins, and that is actually who both Biglari and Preston Blakely (forget his exact name, but the founder of Friendly's who Biglari was on the same side as in that battle) were fighting - it was Perkins who was their opponent b/c Perkins was controlling Friendly's.  Could be something there, I really don't know though.

 

It could also be a marketing ploy sort of thing - that was my best guess throughout this as to what was going on.

 

As for Groveland's $200k proxy expenses, they will bear those unless they win and then they will ask the company, BH, to reimburse them.  Fair enough on that point - that is their right.  But, again, why?  It is not like Groveland/etc. doesn't have a lot of other things going on.

 

I was just wondering where the $200k number came from-- did Groveland disclose it? Or is it just sort of known that's what a proxy contest costs? Could the number actually be lower for some reason?

 

Groveland posted some responses today:

 

http://www.sec.gov/Archives/edgar/data/93859/000089706915000236/cg550a.pdf

 

One thing they point out is the shear volume of expenses allocated to the franchising operation relative to the size of the operation. And it does seem VERY high to me. They are spending about $1m per franchisee they added in 2014. How can it possibly cost that much?

 

 

[frugalchief]

If Groveland won the proxy, and immediately presented a strategy of liquidating the CBRL stake and distributing it as a special dividend, you wouldn't sell at $417 would you?

 

IF....Groveland was able to win, doesn't The Lion Fund partnership agreements prevent it from liquidating (immediately to somewhat in the short-term)?  There is a 5 year lock-up and up to 2 years to pay out on all cash/securities invested in The Lion Fund.

 

Or would Groveland go ahead and sue to try and debase the agreement?

[innerscorecard]

This has been a great thread over the past few days, especially after NBL0303's thoughtful writeup. I like that the discussion has transitioned from endlessly rehashing the same old character issues (which, while significant, are already fully analyzed) to something more substantive.

 

I'm reading Groveland's latest response, and while they make some valid points, I think it actually hurts their case to keep bringing up operating income as a metric based on which Biglari's compensation, for example, is outrageous, when one of Biglari's main points in his presentation was that Biglari Holdings is an investment holding company, not a restaurant company. It seems unfair to compare Biglari's total compensation (not just his compensation as CEO, rather than as investor) to operating income, which obviously excludes the value that Biglari added as investor in addition to operating CEO.

 

Edit: I think it especially does not help Groveland's latest response because I felt that was one of Biglari's strongest points in the investor presentation.

[giofranchi]

Gio here's a question for ya-- I get that you like Biglari, but you must also know that BH trades at a large discount to the SotP.

 

Moreover, I would say that I never use a SotP analysis to value the businesses I own. It is simply too flawed and you’ll never get to an idea of FV.

 

FV is what we as shareholders will own 30 years from now, that is to say BVPS 30 years from now, discounted to the present. Period.

 

Imo BVPS 30 years from now will be orders of magnitude higher if Biglari stays as CEO. Therefore, if on the other hand Groveland wins, my margin of safety holding BH would shrink substantially.

 

Gio

 

[peridotcapital]

 

Groveland posted some responses today:

 

http://www.sec.gov/Archives/edgar/data/93859/000089706915000236/cg550a.pdf

 

One thing they point out is the shear volume of expenses allocated to the franchising operation relative to the size of the operation. And it does seem VERY high to me. They are spending about $1m per franchisee they added in 2014. How can it possibly cost that much?

 

This is actually something I find very troubling. Biglari told us that franchising expenses were $19M in 2013. They were undisclosed in 2014, so I think we can assume they are well above $20M per year now.

 

I wanted to get a sense of whether this seemed reasonable (it does not upon first glance), so I looked at the 2014 10-K for DineEquity (DIN), which has more than 3,600 franchised IHOP and Applebee's locations that generate $365 million of annual fee and royalty revenue. Guess what their franchise segment expenses were in 2014? Merely $31.5 million.

 

I'm not saying BH's cost structure should be the same as DIN by any means given how early they are in the initiative, but the disconnect between the two is striking.

 

Edit: I also just looked at Sonic (SONC), which has 3,100 franchised units and $138 million in annual franchise fee and royalty revenue. Their SG&A for the entire company in 2014 (which includes 400 company owned units --- they don't break it down further) was $69 million.

[mcmaaaaath]

Chad -- I've thought about that issue many times and the examples you used are helpful and there are many additional public companies you can use to get an idea of what a franchising platform should cost.  My impression is the same as yours in that Steak n Shake doesn't seem to be particularly lean in their franchising expenses, but I think you have to account for some of the expenses as "start-up" costs and not recurring.  Much of the costs one year were design costs - to design, field test, and perfect new unit models that could easily be franchised.  These costs are clearly somewhere on a continuum between recurring and one-time, but many more costs of this nature are likely necessary the first few years then will be going forward.  The other thing I think about a lot is, kind of relates to your Sonic example of $69 million in costs for 3,100 stores.  The whole point of Steak n Shake franchising is that is a highly scalable business.  So a whole predicted part of the equation would be that Steak n Shake's platform can go from servicing 300 franchises or whatever at $20 million or so to 3,000 franchises with only small incremental costs.  Since this is such a new endeavor - and so far from a steady state - I don't think their costs per current franchised store is as relevant as most of the comparable examples.  What is more important for Steak n Shake is the strength and scalability of their new franchising platform and the ability to scale from 300 to 3,000 without incurring large incremental costs.  The really frustrating thing with all of this, of course, is that it will take years to know if their platform is highly scalable without large additional spending, or whether they are spending far too much on franchising costs.

 

I totally agree with you that the important thing is the scalability. But here is another data point that is probably more comparable:

 

In 2004 Red Robin added 15 franchise locations, going from 103 to 118. In 2005, they added 18 units, going from 118 to 136.  They spent a mere mere $4.1m on franchise development in 2004, and $4.7m in 2005. Their franchise locations have since declined, so maybe you could argue they didn't spend enough on it. I'm not sure. But it gives one pause the SNS is spending 4x that amount to add a similar number of franchises.

 

Its true that will take years to determine if it was money, but we must value the stock on the weighted probability now. And it is a lot tougher for the $50 or $60m he  has spent so far (and which appears to be recurring?) on the franchising initiative to be money well spent than if he had only spent say, $15m or $20m.

 

And if its true that a lot of the costs were 'design costs' then we should expect to see a decline this year, right?

 

[vinod1]

NBL0303,

 

I finally gone through your detailed analysis today. Very impressed with the pragmatic approach you have taken.

 

I have a couple of questions, even though these have been explicitly addressed in your analysis

 

1. For debt, you mentioned that the interest expenses have already been run through the Steak n Shake segment and hence you are not deducting it from the overall value. I understand that. But, on the annual report when they break out the segment information, it says "Interest expense, not allocated to segments" and lists $10.3 million for 2014 and similar amounts for last two years. Do you know what this expense is if not for the $220 million in debt?

 

2. BH also has corporate expenses of about $8 million in 2014 and similar amounts for last two years. These I believe are not allocated to segments as well. Should we not incorporate this into value, say by capitalizing it?

 

Thanks

 

Vinod

[rayfinkle]

Chad -- I've thought about that issue many times and the examples you used are helpful and there are many additional public companies you can use to get an idea of what a franchising platform should cost.  My impression is the same as yours in that Steak n Shake doesn't seem to be particularly lean in their franchising expenses, but I think you have to account for some of the expenses as "start-up" costs and not recurring.  Much of the costs one year were design costs - to design, field test, and perfect new unit models that could easily be franchised.  These costs are clearly somewhere on a continuum between recurring and one-time, but many more costs of this nature are likely necessary the first few years then will be going forward.  The other thing I think about a lot is, kind of relates to your Sonic example of $69 million in costs for 3,100 stores.  The whole point of Steak n Shake franchising is that is a highly scalable business.  So a whole predicted part of the equation would be that Steak n Shake's platform can go from servicing 300 franchises or whatever at $20 million or so to 3,000 franchises with only small incremental costs.  Since this is such a new endeavor - and so far from a steady state - I don't think their costs per current franchised store is as relevant as most of the comparable examples.  What is more important for Steak n Shake is the strength and scalability of their new franchising platform and the ability to scale from 300 to 3,000 without incurring large incremental costs.  The really frustrating thing with all of this, of course, is that it will take years to know if their platform is highly scalable without large additional spending, or whether they are spending far too much on franchising costs.

 

I suspect these costs are related to building infrastructure, and not related to deploying the "next franchise unit." The "next unit" costs are almost certainly marginal, whereas the costs to develop the platform (supply chain & sourcing, other franchise support tools) are likely significant and front-loaded. Also hard to tell how leverageable to franchising the existing tools that support company owned stores are--my gut says there's leverage but hard to be sure. Growth into new businesses is always more expensive than it seems! Anywho, it would be pretty hard to get a pure comparison with a scale franchisor, for whom the bulk of these expenses were recognized years or decades back, and have since been replenished on a lower annual rate. Perhaps a company like BWLD, that built out stores recently with both company-owned and franchise components, might hold some clues.

 

I suspect a good comparable would need to be a company that had established

[krazeenyc]

Don't know if this was posted already:

 

The purchase of stock in Biglari Holdings with capital that belongs to Biglari Holdings has not been lost on Mario Gabelli’s GAMCO Asset Management.

As Biglari Holdings’ second-largest shareholder, GAMCO recently asked Biglari the CEO how he planned to vote the company stock financed by the company but overseen by his investment company.

“If those shares abstain, GAMCO, on behalf of its clients, intends to support the incumbents,” the Gabelli fund wrote in a letter viewed by The Post.

“[but] if those shares do not abstain and are directed to vote for the incumbents, GAMCO will look more favorably upon the slate of directors intended to be nominated by the Groveland group.”

 

This was from a NY Post Article.

[vinod1]

NBL0303,

 

I finally gone through your detailed analysis today. Very impressed with the pragmatic approach you have taken.

 

I have a couple of questions, even though these have been explicitly addressed in your analysis

 

1. For debt, you mentioned that the interest expenses have already been run through the Steak n Shake segment and hence you are not deducting it from the overall value. I understand that. But, on the annual report when they break out the segment information, it says "Interest expense, not allocated to segments" and lists $10.3 million for 2014 and similar amounts for last two years. Do you know what this expense is if not for the $220 million in debt?

 

2. BH also has corporate expenses of about $8 million in 2014 and similar amounts for last two years. These I believe are not allocated to segments as well. Should we not incorporate this into value, say by capitalizing it?

 

Thanks

 

Vinod

 

Thanks Vinod.  This is probably dangerous to answer because I'm not looking anything up, this is off the top of my head, but I'll try to briefly address your two points.  #1 - the company did have some debt - the last few years - they went from like $120 to $220 a year ago, so it wasn't zero to $220 or anything - that doesn't directly address your point though.  I think the number you may be referencing is related to the "interest" they are supposed to apply for the Capital Leases.  Technically the company has another $100 million in debt, though anyone who has wrestled with this issue in other contexts is aware how odd capital lease accounting can be.  That $100 million relates to future lease obligations, if a lease obligation satisfies certain GAAP criteria it is considered a "capital lease" and is carried as debt.  This literally has no debt like effect on the company though because the capital lease obligations just become "rent" and flow through the income and earnings like an ordinary expense - so this particular GAAP device (capital leases) doesn't add clarity.  Anyway, I think there is some sort of "interest" that runs through the capital lease obligations - I'm not sure if that is the number you are referring to or not.

 

The bottom line is though that they have $220 million in debt - at a 2.7% or so after-tax interest rate, so that is going to equal after-tax interest expense of a little under $10 million.  I'm factoring that into my cash flow considerations for Steak n Shake, and anyone else's valuation should too.  I'm not sure if that is the specific number you are referring to, or that is a capital lease obligation number, but however it is shuffled it is $10 million or so.

 

#2.  The corporate expenses I'm already running through the cash flows in my own valuations - clearly there is going to be certain expenses, probably at about that same level, at the parent company level - and those run through the operating cash flows generated already - though in certain places in the financials they are broken out.

 

1. I did notice the ~100 million in leases. The lease cost ("Interest on obligations under leases") is already taken out in the calculation of pre-tax earnings (page #16 of Annual Report) for the Restaurant segment. It would have been strange if lease costs were not allocated to the segment that is benefiting from them. So I am guessing the interest expenses that are not allocated to segments is probably from the $220 million debt.

 

You mentioned that you expect FCF to be about $50 million. I assumed it is free cash flow to the firm or unlevered cash flow. From what you are saying, the $50 million is really free cash flow to equity as it already incorporates $10 million in interest costs. So you are estimating the FCF to firm to be $60 million (~$150k per unit, which looks reasonable).

 

2. For corporate expenses, the vast majority should go to Steak n Shake I assume, since there is no other segment big enough to go. Am I missing something?

 

Vinod

[gfp]

Lead independent director buys a token amount of stock -

 

http://www.sec.gov/Archives/edgar/data/93859/000092189515000669/xslF345X03/form407428007_03192015.xml