BH - Biglari Holdings

[Packer16]

Packer, I hope your investors don't compare your new funds performance against the S&P 500 with math like that.  You state the S&P 500 is up 20% per year since the beginning of 2013.  What the what?  Does that even sound right to you?

 

The posters on this board keep congratulating your excellent analysis because the numbers you are pulling out of god-knows-where are confirming the opinions they already had.  Yours included.

 

So, to recap...  22.5% annualized returns after fees for the investment partnerships over 9 years is not good enough because he got rich from his cut.  The fees are 0% of assets and 25% of profits over a 6% hurdle, with a high water mark.

 

And we need to further discount intrinsic value from book value (who values restaurants on book value?  What is SnS real estate actually worth vs. BV values) because we are underperforming an index that was A,) cherry picked out of a recent uninterrupted bull market and B,) totally mis-stated to be 20% per year when in reality it was 13.5 - 13.8% per year depending on whether we use 12/31/2016 data or today's data. (14.2% if we use end of Q2)

 

C'mon man.  You've gone from stating that BV/share didn't grow, to acknowledging that it grew at a world class rate.  You've gone from stating that he lost hundreds of millions of dollars of those gains on the operations side to acknowledging that he hasn't lost money on the operations side.

 

And now you have firmly made your point that we are destined to underperform the index by stating that the index returns 20% per year, which it hasn't and certainly won't going forward either.  And yet his track record in the partnerships after all his fees is still above that made-up number of 20% per annum.

 

It's not much of a stretch to just say, hey - this company is actually worth more than $400m but I will never buy it because of a million good reasons.  That's fine.

 

It is not a contrarian point of view to think that Biglari Holdings is a crappy investment.  It is the consensus.  At 320/share or wherever its kind of a hard sell.

 

 

 

I agree with you in the abstract & if this was an obscure micorcap & I would also agree but BH is a $600m company, large enough to generate real interest if there were something really good here.  Although I agree stock price is not a good short term measure over the long term it is.  As a matter of fact, one of Buffet's long term measure is for every dollar retained has a $1 of stock market value been created.  For BH, this last test has not been met.  Also you need to compare BH to the S&P 500, Buffet does.  So even for this test, the S&P 500 is up 20% per year since the beginning of 2013 while BH's BV has compounded at only 18% (with this performance being impaired by his large comp package - BV growth would have been 25% per year before Biglari's comp).  So what you have is higher than market returns overall but Biglari is taking all the excess return plus 2% for himself.  How is this a good deal for minority shareholders?

 

Packer

 

I rechecked the numbers and you are correct the compound rate is closer to 14.4% per year, the Vanguard 500 fund is up 71% per Morningstar over 4 years (Jan 1 2013 to Jan 1 2017).  So he has provided investors 3% excess returns and kept 7% for himself.  However, the stock decline I think has something to do with this ring-fenced incentive structure beginning in 2013.  I have no problem with the incentive structure (it is the same as Buffett's), it is just that he has ring-fenced his returns which I have never seen anyone do before.  If you value the restaurant & the other businesses on cash flows then the cash flows after corp expense have been cut by $8m over the same period so he has lost the capitalized decline of these cash flows if you value the cash flows at 15x AT earnings, it is about $120m.  The issue is that this is not clawbacked against the investment gains.  Now he is removing the cap on operations bonus & starting to get gains on operations.  If he looses money from unrealized gains do you think he will clawback any? 

 

The discounts I have referenced are for situations in private companies where management pays themselves alot before minority shareholders similar to the situation here & the current discount of 27% is light, typically the discounts there are 40%+.  BTW another similarity with private companies is to have relatives on the payroll,  BH has this also as two members of Biglari's family are on the BH payroll.  So the situation could get worse from here based upon other private company situations.  I am not saying this may not work out but there are alot of things that have to go right one being Biglari is willing to share more of the gains with you than he has in the past for the discount to close.  Also if afloridian figures are correct (making the adjustment for BH held by funds) the BV gains from 9/2010 to 6/2017 are closer to 12% per year, $202/share @ 9/2010 to $437.1/share @ 6/2017 vs. and S&P gain of 14.2% per year over the same period per Morningstar.  IMO the internal returns that Biglari quotes are marketing blather to an investor in BH because the investor cannot get these returns without also investing in the businesses where the cash flows have declined & in the end you have to account for declines with the gains.  IMO opinion it is hard enough to beat the market but with a manager that will take most of the gains (even going to the extreme of not counting losses against gains) it is even more difficult. 

 

Packer       

       

[Txvestor]

To NBLs comments about alligned with shareholder interests. I would note.

Yes, but he is in absolute control of the company (and arguably his BOD) and he can easily change the compensation structure to suit a different end, once it becomes clear to him that he cannot easily cross this hurdle he has hitherto set.

[valueinvestor82]

My point is not that Bigalri is a bad investor.  He clearly is (he has been able to compound at 25%) but as an investor in this vehicle you are getting much less even to the point where his fees reduce your return to less than an index fund.  Why would this change going forward?  If I can find investment that net fees I think will do better than an index fund, why invest in one where it has been shown in the past you will lag the index in large part due to Biglari's compensation?  This is why BTW that BH sells at discount to BV although it has been growing at 18% per year.  I think the market has it right here as the discount to BV of 25 to 30% accounts for the fact that you are going to get below index returns.  Now if somehow the compensation is less the discount will tighten or go away.  So the bet you are making here is the compensation will go down so you can get better than market returns.  However, removing a compensation cap IMO is not a good sign this will happen anytime soon.

 

Packer

 

Comparing a value investor to an index with the market being at an all-time high doesn't have much meaning, in my view. That approach is probably what has pushed more people into indexing to begin with. Let's perform that comparison after a correction..it's avoiding catastrophic losses that makes the difference, not sticking around for the incremental last few points of a bull market. Just a sidenote!

[Packer16]

You are correct over the short-term but Buffett compares himself to the S&P 500 so why shouldn't Biglari.  However, a big part of the outperformance is a few stocks like CBRL & BH.  Do you think in the next recession CBRL will do better than the S&P 500?  If not, then the BV here will decline by more than the S&P 500.

 

Another way to look at this is to divide the operations into ops & investments.  Since 9/2011, the ops value has declined from $435m (15x AT profit) to $120m (15x AT profit) while the investments have increased from $252m to $1080m (excluding DTL of $152m). So if you add these together & subtracted debt of $100m you have an equity of $586m @ 9/11 going to an equity of $919m pre DTL @12/16 (after subtracting debt of $281 m).  So the equity value has increased 8.9% per year over the past 5.25 years, so this is almost 5% per year lower than the S&P 500.  There is less then 1% change in net shares owned from 9/11 based upon analysis below so share count will have a small effect.

 

There is also an unusual recursive aspect here as the value of BH falls the BV/share goes down as well as the partnerships own 841k shares of BH.  At this point equity has declined by $130m due to the decline in BH shares. 

 

So based upon the above there is almost a 50% uggh discount between the value after the DTL of $800m and market cap of $400m.  If we value ops at 10x versus 15x the value declines by only $40m so you still have a large uggh discount.  This makes sense if BH will have a performance 1/3rd less than the market as it has done over the past 5 years (9% growth vs. 14% growth) which will account for 33% and/or if you capitalize Biglari's $20m/yr bonus at 10% ($200) you get a 25% discount. 

 

Packer

[shalab]

Packer - the market value is higher as BH shares are held in a partnership that is voted in favor of Biglari. There are ~2 million+ shares. So the discount is not as dramatic as it sounds.

 

In all the previous threads - people have used different values for the # of stock outstanding. Also, people use different ways to look at Biglari compensation and the equity value.

 

In addition, there is the uncertainty of the pay-cap, non voting shares. So far BH hasn't breached the 10mm cap so there hasn't been a need to change it. It is a given that the pay cap will go eventually.

 

The whole structure is so convoluted (and self-serving) that it is impossible for reasonable people to figure out the economics of the company easily.

 

My bet is that Biglari will eventually end up owning all of BH in whole - it may take 15 or 30 years.

 

 

You are correct over the short-term but Buffett compares himself to the S&P 500 so why shouldn't Biglari.  However, a big part of the outperformance is a few stocks like CBRL & BH.  Do you think in the next recession CBRL will do better than the S&P 500?  If not, then the BV here will decline by more than the S&P 500.

 

Another way to look at this is to divide the operations into ops & investments.  Since 9/2011, the ops value has declined from $435m (15x AT profit) to $120m (15x AT profit) while the investments have increased from $252m to $1080m (excluding DTL of $152m). So if you add these together & subtracted debt of $100m you have an equity of $586m @ 9/11 going to an equity of $919m pre DTL @12/16 (after subtracting debt of $281 m).  So the equity value has increased 8.9% per year over the past 5.25 years, so this is almost 5% per year lower than the S&P 500.  There is less then 1% change in net shares owned from 9/11 based upon analysis below so share count will have a small effect.

 

There is also an unusual recursive aspect here as the value of BH falls the BV/share goes down as well as the partnerships own 841k shares of BH.  At this point equity has declined by $130m due to the decline in BH shares. 

 

So based upon the above there is almost a 50% uggh discount between the value after the DTL of $800m and market cap of $400m.  If we value ops at 10x versus 15x the value declines by only $40m so you still have a large uggh discount.  This makes sense if BH will have a performance 1/3rd less than the market as it has done over the past 5 years (9% growth vs. 14% growth) which will account for 33% and/or if you capitalize Biglari's $20m/yr bonus at 10% ($200) you get a 25% discount. 

 

Packer

[Packer16]

Good point.  I remember looking at Russian oil company that had a similar situation (where treasury stock was looked at as either the shareholders capital or managements).  If it was managements, the valuation changed quite abit.  Having a distribution there provided some value for the shareholders.

 

It is an interesting point that here it looks like there is a management vs. shareholder situation and thus what is the appropriate discount.  I keep coming back to the 40 to 50% being not unreasonable given the circumstances.  Others disagree but that is what makes a market.

 

Packer

[afloridian]

I began to carry out your calculation on my own, Packer.

 

I found the numbers you used for investments on page 1 of the 2016 annual report.  I wondered whether these numbers included the BH stock that BH holds thru the lion fund.  I found, on page 54, that they do.  I then continued to calculate the investments per share in two ways: one, including this BH stock both in the numerator and denominator; and excluding it in the other.

 

date                        2016-12-31 2015-12-31 2014-09-24 2013-09-25 2012-09-26 2011-09-28

                                                                                             

investments:                                                                                 

  cash & cash-equivalents          75.8      56.5      124.3      94.6      60.4      99.0

  marketable securities            26.8      23.8      21.5      85.5      269.9      115.3

  funds:                                                                                     

    including BH stock            972.7      734.7      620.8      455.3      48.3      38.5

    BH stock                      395.1      263.0      63.6      57.6      35.9      29.6

    excluding BH stock            577.6      471.7      557.2      397.7      12.4        8.9

total investments:                                                                           

  including BH stock            1,075.3      815.0      766.6      635.4      378.6      252.8

  excluding BH stock              680.2      552.0      703.0      577.8      342.7      223.2

                                                                                             

shares outstanding:                                                                         

  including BH stock          2,067,193  2,066,691  2,065,566  1,720,782  1,433,671  1,433,019

  excluding BH stock          1,232,304  1,259,622  1,878,457  1,588,376  1,227,928  1,227,276

                                                                                             

total investments per share:                                                                 

  including BH stock              520.2      394.4      371.1      369.3      264.1      176.4

  excluding BH stock              552.0      438.2      374.3      363.8      279.1      181.9

                                                                                             

todo:                                                                                       

deferred tax liability                                   

debt                                                                                         

contributions                                                                               

pre-2013 shares held by funds (convert to proportional?)                                                 

fees

 

I'm not sure if I'm going to get to my to do list.  I already know that I'm not going to invest in this company.

[Cevian]

What do people think about the likelihood that he takes this private?

 

 

[Txvestor]

What about bankruptcy if cracker barrell cracks?

[awindenberger]

What about bankruptcy if cracker barrell cracks?

 

You're actually worried about BK?  ;D

[Txvestor]

Are you implying that I am committing blasphemy with that thought?

[Kuhndan]

I'm doing an update series on Sardar Biglari investments on Seeking Alpha. The first one is on the Maxim purchase (Ouch!) https://seekingalpha.com/article/4106123-biglari-holdings-continue-bet-jockey-part-1

[treasurehunt]

Dana,

 

Thanks for the great analysis of Biglari's purchase of Maxim. I learnt quite a bit from your article and look forward to the rest of the series.

[awindenberger]

I'm doing an update series on Sardar Biglari investments on Seeking Alpha. The first one is on the Maxim purchase (Ouch!) https://seekingalpha.com/article/4106123-biglari-holdings-continue-bet-jockey-part-1

 

Dana,

 

I haven't read the article yet, but I really enjoyed your first set a few years ago, so looking forward to more.

[OracleofCarolina]

https://www.sec.gov/Archives/edgar/data/93859/000134100417000594/form8k.htm

 

Not sure of what to make of negotiations on the insurance deal.

As far as the service agreement, great deal for the GP of the Lion Funds. Also,shareholders  would be better off if the trading plan was done under the Biglari Holdings side instead of the Lion Fund side.

[jimjam]

Purchase plan to buy 80,000 shares:

https://www.sec.gov/Archives/edgar/data/93859/000134100417000607/ex99_1.htm

[jimjam]

My apologies. OracleofCarolina had already linked to this two weeks ago.

-j

 

[OracleofCarolina]

plan goes into effect next week on the 2nd. Looks like folks are front-running it today :)

[dcollon]

On December 21, 2017, Biglari Holdings Inc. (the “Company”) entered into an Agreement and Plan of Merger (the “Reorganization Agreement”) to reorganize itself as a holding company with a dual class structure. The Reorganization Agreement is among the Company, NBHSA Inc., an Indiana corporation and a direct, wholly owned subsidiary of the Company (“New BH”), and BH Merger Company, an Indiana corporation and a direct, wholly owned subsidiary of New BH (“Merger Sub”). Pursuant to the Reorganization Agreement, Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of New BH. Upon completion of the merger, New BH will be named “Biglari Holdings Inc.” and replace the Company as the publicly held corporation through which our collection of businesses is conducted. The foregoing transaction is referred to as the “reorganization.”

As a result of the reorganization, the current shareholders of the Company will become shareholders of New BH and will receive, for every ten (10) shares of common stock of the Company they own immediately prior to the effective time of the reorganization, (i) ten (10) shares of Class B common stock of New BH and (ii) one (1) share of Class A common stock of New BH. In other words, shareholders will receive for a share of common stock of the Company (i) one (1) share of Class B common stock of New BH and (ii) 1/10th of one share of Class A common stock of New BH. In lieu of fractional shares of Class A common stock, shareholders will receive an additional share of Class B common stock for every 1/5th of one share of Class A common stock they otherwise would have received, and cash in lieu of any remaining fractional shares of Class A common stock. New BH has two classes of common stock designated Class A common stock and Class B common stock. A share of Class B common stock has economic rights equivalent to 1/5th of a share of Class A common stock, however, Class B common stock has no voting rights.

Consummation of the reorganization is subject to specified conditions in the Reorganization Agreement, including approval by the Company’s shareholders. The Company intends to hold a special meeting of shareholders (the “Special Meeting”) in the first half of 2018 to vote on the Reorganization Agreement. The date, time and place of the Special Meeting will be announced by the Company at a later time.

The Company expects the shares of New BH Class A common stock will trade on the New York Stock Exchange (“NYSE”) under the ticker symbol “BHA,” whereas the New BH Class B common stock is expected to trade on the NYSE under the ticker symbol “BH,” which is the current ticker symbol for the Company common stock.

[kh812000]

Is the idea for Sardar to use this A/B voting split to either have BH finally able tender BHb shares it holds in TLF for retirement and/or enable him to sell/free up capital in TLF for investment and still maintain voting control by holding A shares? 

 

I guess its not clear to me what the value creation here is for BH holders. Its clear Sardar stands to benefit by maintaining control w/only 1/3 prior economic interest via holding majority of A.   

 

Somehow Sardar sees BH to benefit as TLF II is buying up stock in the open mkt ahead of the A/B reorg.  He doesnt need more BH in TLF to maintain control so there must be an economic reason... I could see BH following with a tender of B for retirement aka a real buyback.

 

Good news at least is that the Trump Tax plan will enable him to sell CBRL at the cheaper 20%ish tax rate.... 

 

 

 

 

 

 

 

 

[gaddis]

After the reorganization, Company shares held by the Company via partnership stakes in the Lion Funds can be retired such that it benefits Sardar economically without impairing his control.  Company shares held by the Company are valuable only to the extent they're used to exert control; this is how they've been used over the last few years.  They have no economic value per se.  The market appears to have been assuming # voting interests = # economic interests (as it does with most companies with a single share class), despite the fact their are far fewer economic interests because of the tender and 10b5-1s.  This is the point of BH of disclosing both o/s shares and "net outstanding shares for financial reporting purposes."  Sardar hasn't seen the economic benefit of past repurchases to the extent one would have expected.

 

If anything the rate of repurchases should accelerate through the special meeting--the last repurchase agreement has been modified twice in two months.  I wouldn't be surprised to see a negotiated repurchase with a large passive holder (if such a thing is possible), an increase in the $420/110k share repurchase level or some other similar transaction.  At this point, Sardar could use the securities portfolio plus b/s cash to repurchase all shares not currently under his control at a 20% premium AND be left with the operating company for free.  I don't think he'll do that, but I do think he'll increase repurchases through the reorganization date when the accounting for s/o vs. voting interests vs. economic interests becomes more transparent and easier to understand.

[kh812000]

Lawsuit looking to block BH/nonvoting split..... Now the fun begins.

 

https://finance.yahoo.com/news/biglari-holdings-inc-bh-reorganization-164200889.html

 

 

[OracleofCarolina]

http://biglariholdings.com/letters/2017/2017.pdf#zoom=100

 

The fit really hit the shan with Steak N Shake in 2017. Lower sales and higher costs = barely break even for the year. Some say it still is a decent trade with downside minimized by Lion Fund stakes in CBRL, cash on hand, and the debt being carried by SNS, and Bigs being incentivized to increase share price in order to get a incentive fee from Lion Fund I & II.

 

 

 

 

 

 

[EricSchleien]

http://biglariholdings.com/letters/2017/2017.pdf#zoom=100

 

The fit really hit the shan with Steak N Shake in 2017. Lower sales and higher costs = barely break even for the year. Some say it still is a decent trade with downside minimized by Lion Fund stakes in CBRL, cash on hand, and the debt being carried by SNS, and Bigs being incentivized to increase share price in order to get a incentive fee from Lion Fund I & II.

 

But look - he turned 1.6 million into a billion ;)

[Spekulatius]

http://biglariholdings.com/letters/2017/2017.pdf#zoom=100

 

The fit really hit the shan with Steak N Shake in 2017. Lower sales and higher costs = barely break even for the year. Some say it still is a decent trade with downside minimized by Lion Fund stakes in CBRL, cash on hand, and the debt being carried by SNS, and Bigs being incentivized to increase share price in order to get a incentive fee from Lion Fund I & II.

BH is now producing operating losses. Also, Corporate and other expenses are up around 50% YoY. I guess Mr. Big is having fun. The commoners not so much.