BH - Biglari Holdings

[NBL0303]

Just sold my entire 7000 shares stake. The risk-reward is no longer as appealing as it was a few weeks ago at $350. I don't feel comfortable with Biglari taking in new shareholder capital through rights offerings, only to further his grip on the company by doing a tender offer at quite a substantial premium.

 

Just curious, this means you tendered them at $420?  Of you sold them on the open market for less than $420?  If so, just curious why you didn't tender them?

[awindenberger]

Just sold my entire 7000 shares stake. The risk-reward is no longer as appealing as it was a few weeks ago at $350. I don't feel comfortable with Biglari taking in new shareholder capital through rights offerings, only to further his grip on the company by doing a tender offer at quite a substantial premium.

 

Thats a nice quick return for you.

[awindenberger]

 

My guess is that he either sent more money up from the operating Co's, or more likely doesn't expect to actually have all 575k tendered.

 

I'm somewhat surprised this has to be explained to this smart group, but the Lion Fund II had nearly $200 million cash as of 3/31/2015.  Page 10 of the 10Q filed May 8 shows that the Lion Fund II had $911 million in assets.  And through Biglari Capital's 13-F and other filings you can infer that the Lion Fund II only held about $740 million worth of stock (basically it only has Cracker Barrel, Air T, Insignia and cash - so the cash has to equal at least $175 million).

 

You mis-attributed that statement to BTShine when it was my mistake. I forgot about that note in the 10Q and got my info from the quarterly fund filing: http://www.secinfo.com/$/SEC/Manager.asp?CIK=1334429

[peridotcapital]

While I would love for all 575K shares to be tendered, I do not think very many will be. I'd be surprised if he got 50% of the maximum and could easily see it being far less than that. Who would tender? Short-term arb traders, sure, as well as people who bought recently in the 350's or 360's and are happy to lock in a quick gain. But I would guess that many people are in this as an investment and have a cost basis above $400. Why would they tender at $420? It's not close to intrinsic value. For those who were at the end of their rope with Sardar, they would have probably already sold. I hope I'm completely wrong, but I would not at all be shocked to see 5% or less of the total shares outstanding be tendered in this offer.

[valueyoda]

There is an opportunity cost of having through the tender offer process, when the potential reinvestment return of other investments exceed the difference between the tender and sale price.

[NBL0303]

There is an opportunity cost of having through the tender offer process, when the potential reinvestment return of other investments exceed the difference between the tender and sale price.

 

Thanks - just curious.

[peridotcapital]

While I would love for all 575K shares to be tendered, I do not think very many will be. I'd be surprised if he got 50% of the maximum and could easily see it being far less than that. Who would tender? Short-term arb traders, sure, as well as people who bought recently in the 350's or 360's and are happy to lock in a quick gain. But I would guess that many people are in this as an investment and have a cost basis above $400. Why would they tender at $420? It's not close to intrinsic value. For those who were at the end of their rope with Sardar, they would have probably already sold. I hope I'm completely wrong, but I would not at all be shocked to see 5% or less of the total shares outstanding be tendered in this offer.

 

Chad - on one level - I agree with you.  But the arb funds will likely get something like 100k shares in the next month right?  Plus, Gabelli would equal about 50% of the tender.  You don't think Gabelli will tender?  I don't know if he will, so I was curious on your perspective Chad.

 

I have no idea how many shares the arbs will gobble up this month. 100K is probably on the high side, but certainly reasonable. I think you get some retail investors to tender, but that is such a small number of shares.

 

I do not think Gabelli will tender (or any other larger institutional holders for that matter), as they are primarily valuation-based investors. If Biglari's actions were a big enough issue that they would exit the position because of them, I do not think they would have held on to the stock this long. There have been plenty of issues to quibble with, and plenty of opportunities to sell (including when Sardar was buying above $400 recently through the LPs). I don't think $420 is a high enough price for them to exit.

[Picasso]

So once the tender is over this stock will most likely drop right?  Especially since the shares trading so much under the tender sort of indicates that the value add by buying up the shares at a discount to intrinsic value is not fully appreciated.  More than likely it won't be appreciated after either.  Once the tender is over you really are back in the same situation and I can't help but wonder why Biglari does not have better uses for that cash if he is that good of a capital allocator?

 

Seems good for a pop but can anyone explain why this is a positive long-term aside from owning 25% more than would otherwise be the case?

[peridotcapital]

So once the tender is over this stock will most likely drop right?  Especially since the shares trading so much under the tender sort of indicates that the value add by buying up the shares at a discount to intrinsic value is not fully appreciated.  More than likely it won't be appreciated after either.  Once the tender is over you really are back in the same situation and I can't help but wonder why Biglari does not have better uses for that cash if he is that good of a capital allocator?

 

Seems good for a pop but can anyone explain why this is a positive long-term aside from owning 25% more than would otherwise be the case?

 

You're right, it doesn't change anything with respect to how the market views BH. But I think it tells us that Sardar thinks the stock is dirt cheap (which most of us already know) and (more importantly) likely won't stay that way for long. While some might not like that he is using the LPs to acquire BH shares for control purposes, it's not like that is the only reason he is doing it. If he thought the market would ignore the underlying value of BH for a long time, he would not link his pay to that outcome (this move links his future pay more and more with the price of the stock). In that sense, it is even more clear that he will actually care about the share price personally, as opposed to just collecting his incentive fee regardless. Since his pay is linked to book value and the returns of public investments, as BH shares becomes a larger part of the LPs and BH's assets more generally, it makes it even more clear that we are all on the same team and will benefit long-term together.

 

The big question I have is whether Sardar will ever actually purchase and retire BH stock. That is what I would like to see eventually, if the price stays where it is.

[Picasso]

On the surface it appears attractive since of course if you think the shares are cheap then it's great to use up $241 million of cash to buy up more shares that you believe are cheap.  But aren't they cheap because of the ability of Biglari to find attractive future investment opportunities?  I think Warren Buffett was better off buying National Indemnity or See's Candy versus using that cash to reduce the share count. 

 

You can keep buying up shares to try and get closer to intrinsic value, but if the returns on equity are subpar (as they are with BH) then the long-term returns will be weak. 

 

I don't think I have to go back further than 10 pages to find people salivating over what Biglari might do with the cash he raised from the rights offer and CBRL sales.  It included looking at his investment track record.  Instead he used the cash to entrench himself even further and get a shareholder base that is less likely to argue against his actions.  Sure shareholders are at least getting something for that (maybe assets at 50 cents on the dollar), but why would new investors then want to buy up shares of BH? And those dollars you are getting for 50 cents aren't exactly growing dollars as far as I can tell.

 

I have a negative view of BH which may skew my thinking, but the one thing I was looking for to change my mind was new proof that he could use the cash to grow either cash flows or book value.  In this case I see neither, aside from a marginal improvement in book value that is offset by worsening governance issues.

[wescobrk]

On the surface it appears attractive since of course if you think the shares are cheap then it's great to use up $241 million of cash to buy up more shares that you believe are cheap.  But aren't they cheap because of the ability of Biglari to find attractive future investment opportunities?  I think Warren Buffett was better off buying National Indemnity or See's Candy versus using that cash to reduce the share count. 

 

You can keep buying up shares to try and get closer to intrinsic value, but if the returns on equity are subpar (as they are with BH) then the long-term returns will be weak. 

 

I don't think I have to go back further than 10 pages to find people salivating over what Biglari might do with the cash he raised from the rights offer and CBRL sales.  It included looking at his investment track record.  Instead he used the cash to entrench himself even further and get a shareholder base that is less likely to argue against his actions.  Sure shareholders are at least getting something for that (maybe assets at 50 cents on the dollar), but why would new investors then want to buy up shares of BH? And those dollars you are getting for 50 cents aren't exactly growing dollars as far as I can tell.

 

I have a negative view of BH which may skew my thinking, but the one thing I was looking for to change my mind was new proof that he could use the cash to grow either cash flows or book value.  In this case I see neither, aside from a marginal improvement in book value that is offset by worsening governance issues.

 

Another reason is he doesn't want to deal with a jackass (in his view) like Swenson that owns .2% of the stock and tries to takeover the company. I'm sure Biglari wasn't happy about spending $5 million to defend against someone like Swenson.

If he can get even half the tender, he shouldn't have to worry about wasting more money in the future on someone like Swenson.

[treasurehunt]

So, here it is:

https://finance.yahoo.com/news/lion-fund-ii-l-p-100000190.html

 

"The Lion Fund II, L.P. ("The Lion Fund II") today commenced a tender offer to purchase for cash up to 575,000 shares of the common stock of Biglari Holdings Inc. (BH) at a purchase price of $420.00 per share."

 

This is a big chunk of the float if fully subscribed, using BH's own money. If this gets any material volume, Biglari is entrenched completely.

 

Wow, I didn't see this coming! Pretty funny I said a couple of days ago mr. market probably won't care about cbrl much now it's up over 10%.

I thought the Lion Fund 2 only had about $150 million in cash. Where is he getting the money to pay for this?

 

My guess is that he either sent more money up from the operating Co's, or more likely doesn't expect to actually have all 575k tendered.

 

The last sentence on page 23 of the tender offer statement filed today: <i>On June 4, 2015 the Company invested $63.0 million in exchange for limited partner interests in the Offeror.</i>

 

This plus the cash already in the Lion Fund II should be enough for 575K shares.

[Txvestor]

This is basically about Sardar gaining voting control of the entity and forever thwarting a proxy context. Those that stay are effectively 100% surrendering control of their capital to him forever, and he will be the decider of everything including his own compenstion. If the board was felt to be useless before, they would be even more toothless now. He has effectively issued shares to move the money into the lion fund and buy himself control of the entity.

[Txvestor]

You mean 5million spent on proxy contest other than the Insignia and AirT purchases right?

[Picasso]

Does it not make sense for everyone to simply tender and repurchase after the tender is over?  Especially since the shares are still trading well below the offer price which indicates it will not trade at or above $420 immediately after the tender?

[innerscorecard]

 

Gabelli immediately tweeted about the tender offer in his usual off the cuff style. I asked him what his thoughts about it were, as he sometimes does respond to comments, but he probably wisely ignored my question.

[ScottHall]

This is pretty sketchy.

[giofranchi]

Once the tender is over you really are back in the same situation and I can't help but wonder why Biglari does not have better uses for that cash if he is that good of a capital allocator?

 

I don’t understand… Back in the same situation? Why? With a BVPS that could be 25% higher? ???

 

Gio

 

 

 

[giofranchi]

The big question I have is whether Sardar will ever actually purchase and retire BH stock. That is what I would like to see eventually, if the price stays where it is.

 

I do not see why this should matter… Biglari is buying all those share with BH’s shareholders’ capital; therefore, those who remain BH’s shareholders after the tender has expired, provided Biglari is successful in repurchasing all the shares he wants to, will have their slice of the pie increased by 25%.

 

Of course, if he were to retire those shares, he would lose voting power… Why should he do that?

 

Gio

 

 

 

[giofranchi]

 

Gabelli immediately tweeted about the tender offer in his usual off the cuff style. I asked him what his thoughts about it were, as he sometimes does respond to comments, but he probably wisely ignored my question.

 

I don’t understand what he means…

 

What I understand, instead, is Gabelli should stop tweeting complains about BH or should tender his shares instead: to go on both tweeting complains about BH and holding his BH shares simply is inconsistent behavior, or, as Gabelli himself would say, “mindless investing”! ;)

 

Cheers,

 

Gio

 

[giofranchi]

You can keep buying up shares to try and get closer to intrinsic value, but if the returns on equity are subpar (as they are with BH) then the long-term returns will be weak. 

 

Imo you are completely wrong. Probably you and I read business results in very different ways! That’s the only possible explanation…

 

Cheers,

 

Gio

 

[giofranchi]

Those that stay are effectively 100% surrendering control of their capital to him forever

 

You can always sell your shares... As is the case for BRK, FFH, LMCA, BAM, MKL, TDG and many other successful companies led by an entrepreneur and founder and investor and businessman, not by a "manager"!

 

You don't like what he/she (the entrepreneur and founder and investor and businessman) is doing? Very well, just sell your shares! Period.

 

Cheers,

 

Gio

[Hielko]

Those that stay are effectively 100% surrendering control of their capital to him forever

You don't like what he/she (the entrepreneur and founder and investor and businessman) is doing? Very well, just sell your shares! Period.

 

Cheers,

 

Gio

That's an argument that you could also use when a CEO is literally stealing from the company, and I doubt that you would think that that would be okay and investors should simply sell if they wouldn't like that.

[giofranchi]

That's an argument that you could also use when a CEO is literally stealing from the company, and I doubt that you would think that that would be okay and investors should simply sell if they wouldn't like that.

 

What I might think is right does not matter much. What matters, instead, is what I can and cannot do.

You cannot argue with Buffett, Watsa, Malone, Flatt, Gayner, nor with Howley. While you can part ways with them, if you don’t like what they are doing.

The same is true for Biglari.

 

Cheers,

 

Gio

 

[Txvestor]

Gio,

I think everyone on this board is capable of making their own investment decisions. Not sure why every comment is met with a "sell and get out" response. It is quite irritating actually.

That said, I think it is quite rational to have the opinion that the shares are undervalued and also not wishing Sardar based on his past actions have such utter and complete control of the company, right? The market is saying precisely that by applying the biglari discount right?

I will acknowledge that this or some other variation of the theme was always the likely outcome once the results of the proxy contest ended up the way they did. In fact, I think NBL or one of the other posters predicted this precise action to thwart the possibility of a proxy contest in the future.

My larger point was that if the business results later do prove to be worse than expected the market "discount" to any tangible measure of value will be even more steep than it already is, as other more constructive exit options such as a shareholder instigated change of operational control will be out. The market will know this and price shares appropriately.

As for my individual situation, I think I already mentioned that I exited the majority of my position before the proxy contest, it was at a price slightly above the current tender offer. I retain a much smaller position mainly to monitor the situation in case I am wrong and Mr Bigs actions become more shareholder friendly than Mr Bigs friendly, and business results improve dramatically. The way I see it, if he is the second coming of WEB, it will be apparent in due course by his business and investment actions and results, and the runway is sufficiently long that there is more than enough time to buy back in. It is like the difference between buying Berkshire in 1965 and 1970. '65 was better but hey '70 is not that shabby either. Thus far I haven't judged his management performance worthy of the 25% above 6% hurdle price.

I guess I'm approaching it from the opposite viewpoint to you. Thus far the one point made here that I've found quite valid is that with such a high percentage of the LionFund now tied up in BH stock, he has much more incentive to see the BH stock price close the gap with the much higher value perceived by many on this board. Ie he may have incentive to render his actions worthy of reducing the Biglari discount. So far that hasn't been enough to sway me back.

Ciao.