BH - Biglari Holdings

[gg]

 

This is subjective.  Is optimal capital structure to pull cash out of the SNS subsidiary, so as to allocate it into a one-shot all or nothing bet on CBRL, while same store sales stagnate at SNS?  CBRL management did many things wrong, but they were far from negligent.  Also, BH's horizon isn't anywhere as long as you think...that's a veiled threat to intimidate incumbent management.  BH's horizon only extends to their next action to release capital or take control.  Cheers!

 

One way to look at this information set is to say, how could Biglari invest a few hundred million dollars into a different restaurant brand and demand better operational execution from their management, when his own restaurant chain isn't growing to quickly? How could he take so much risk with an "all or nothing bet". (although I'm not sure where the "nothing" comes to play, it's not like Cracker Barrel is highly levered or likely to cease to exist any time soon).

 

The second way to look at it is to say, if Biglari sees that his store base and sales at Steak n Shake are not growing as fast as they were during his turn-around, maybe it would be smart if he reinvested excess cash in other businesses which he understood extremely well (restaurant industry), where he knew the business was undervalued due to bad capital allocation and poor business execution, and had significant real estate assets that accounted for a significant part of the market's valuation at the time. Maybe that type of investment would have a higher return on capital than making marginal improvements to the SNS menu...

[APG12]

This is subjective.  Is optimal capital structure to pull cash out of the SNS subsidiary, so as to allocate it into a one-shot all or nothing bet on CBRL, while same store sales stagnate at SNS?  CBRL management did many things wrong, but they were far from negligent.  Also, BH's horizon isn't anywhere as long as you think...that's a veiled threat to intimidate incumbent management.  BH's horizon only extends to their next action to release capital or take control.  Cheers!

 

Yeah, I guess you're right about it being subjective in some sense.

 

I'm just trying to take a step back here and look at the big picture objectively. There are some things that this guy has done that are indefensible and designed to increase his power over BH (such as the name licensing fiasco). However, there are a LOT of people on here that see him as the devil incarnate and that colors their opinion on everything he does. Using your SNS sub example, should we look at his actions and conclude that he was wrong to remove capital from the SNS sub as it has lead to stagnant SSS? Or should we look at what he did with the capital, which was to invest it in CBRL, and conclude that it was smart to allocate the capital as he did because it has gotten much higher returns than it would have in the SNS sub?

 

Let me preface this by saying that I've agreed with nearly everything I've ever seen you post on here, Parsad. I just think that when you've gotten to the point of "go fu*k yourself Biglari" your emotions may be affecting your opinion more than you think. I try to remain introspective and monitor my own emotions and I have to admit that in the case of BH I find my immediate response is generally to side with Biglari. I don't know if this is because I'm naturally combative or what. All in all, I just don't think Biglari's plan is the insanity that it's made out to be.

[ragu]

If you think that his proposed debt level is too high, that's one thing. However, I've yet to see anyone make that criticism. I'd be interested in an intelligent discussion on the matter.

 

agaglio,

 

From Sardar's letter to management dated September 16th:

 

Net debt would be around $800 million for a real estate, restaurant, and retail company with over $1 billion worth of real estate.

Moreover, the cash flow coverage, in our view, would be more in line with that of its peer group.

(emphasis supplied)

 

The latest presentation from Sardar to CBRL shareholders has the cash flow coverage data for CBRL and peers(Slide 7).

 

Best,

Ragu

 

 

[giofranchi]

The latest presentation from Sardar to CBRL shareholders has the cash flow coverage data for CBRL and peers(Slide 7).

 

Best,

Ragu

 

Thank you ragu, for posting the presentation. :)

Yesterday I sold some investments of mine, which had appreciated in price, and increased my firm’s investment in BH by 10%.

 

giofranchi

 

[ragu]

Yesterday I sold some investments of mine, which had appreciated in price, and increased my firm’s investment in BH by 10%.

 

giofranchi,

 

Welcome. As I started reading that line of yours, I thought you'd sold some BH!

 

From the proxy for the dual class structure issued on July 6th 2011:

 

Furthermore, the Board and the management do not believe the Company’s stock is overvalued.

 

Based on the latest quarterly numbers prior to this proxy, the stock's closing price on July 5th 2011, the subsequent (conservative) increase in business value since then, it is clear that BH is undervalued today.

 

My numbers suggest a price/share that is somewhere between $487 and $531.5 to achieve a similar level of "not overvalued" (based on last quarter's numbers + impact of rights offering and ignoring changes to book from the increase in CBRL's market price and potential addition to retained earnings from the restaurant businesses).

 

 

Best,

Ragu

[APG12]

 

The latest presentation from Sardar to CBRL shareholders has the cash flow coverage data for CBRL and peers(Slide 7).

 

 

Ah, thanks for posting! This is the only thing that matters in my opinion and his case is pretty convincing.

[gfp]

http://www.businesswire.com/news/home/20131101005925/en/ISS-Glass-Lewis-Egan-Jones-Endorse-Cracker-Barrel

[wescobrk]

Anyone know why iss and glass Lewis has so much prestige?

I don't know anything about these organizations.

I can understand giving so much respect to Buffett and other great investors but why is the above accorded so much weight?

[Hielko]

A lot of large passive investors follow their advice as part of their corporate governance strategy.

[fareastwarriors]

Some managers give complete control of their proxy duties to ISS/Glass Lewis. These firms then can vote according to their own policies without any input from the investment manager.

[wescobrk]

Thanks, how did the market choose them? Are they private organizations or some type of federal connection?

If the former, I'm presuming they must have done some quality work outside of marketing to have such a giant market share. It appears to be a oligopoly for corp governance.

Thanks.

[wescobrk]

I'm guessing biglari will lose the special dividend vote now since everyone follows iss like sheep.

I guess it's similar to Moody's and S&P for people that don't want to think for themselves.

[bargainman]

You try to talk and calmly reason with management once, twice, even three times. Then, when you finally realize you are talking to a concrete wall, you simply go to Caterpillar and hire a Bulldozer! ;D

 

giofranchi

 

Well I think this is exactly what Prasad tried to do with Biglari back in the day before it was called BH and before the incentive agreement and before all of the ego maniac actions that he took. I think Prasad tried talking to him a number of times about this and was rudely ignored. The biggest problem that I have with big Larry is that he is incredibly egotistical and particularly hypocritical. The egotistical part doesn't bother me quite as much as the hypocritical part. Primarily because the hypocritical part is the non-introspective part which will prevent him from seeing his own mistakes and could lead to a black swan type downfall.

 

I do have a question for you and for Raju as well. What is your criteria for no longer trusting Biglari?

 

At least a couple of members of this board including the moderator have gone from being huge fans and even investors with him, even believing that he was the next coming of Warren Buffett, to almost viscerally distrusting the man. I'm truly curious given both your large investments with him what it would take given all of his egotistical actions to make you turn away? I'm really not criticizing, I do want to understand however.

 

As a full disclosure I do own a reasonable size position which I bought back when steak and Shake was about three or four dollars if I remember correctly.

[giofranchi]

I do have a question for you and for Raju as well. What is your criteria for no longer trusting Biglari?

 

I am terrible at judging character traits in people… Or better, I am terrible at judging those traits and inferring from them investment decisions.

Therefore, I will part ways with Mr. Biglari when he starts making business decisions, strategic decisions, capital allocation decisions, that make no sense to me. That’s exactly when I will part ways with any of the owner/manager I now trust and respect.

 

giofranchi

 

[ragu]

What is your criteria for no longer trusting Biglari?

 

As things stand, the only thing that I expect will cause me to reconsider is any sale of BH shares by Sardar.

 

I also believe that the odds on such a possibility are somewhere between zero and none.

 

Best,

Ragu

[giofranchi]

What is your criteria for no longer trusting Biglari?

 

As things stand, the only thing that I expect will cause me to reconsider is any sale of BH shares by Sardar.

 

I also believe that the odds on such a possibility are somewhere between zero and none.

 

Best,

Ragu

 

As I have said before, no one can say ragu lacks conviction in his ideas!! ;D ;D ;D

 

giofranchi

[dcollon]

Cracker Barrel announces preliminary results indicate all nominees elected to board; special dividend rejected

Wednesday, November 13, 2013 05:16:45 PM (GMT)

 

 

The preliminary results indicate shareholders:

elected by an overwhelming margin all of the company's nominees to the board, once again rejecting both Sardar Biglari and Phil Cooley as directors (see linked comments below).

rejected by an overwhelming margin the non-binding, advisory proposal on a $20 per share special dividend, which was publicly proposed by affiliates of Biglari Holdings (see linked comments below).

Final results will be announced when they are certified.

[wescobrk]

No surprise there once iss said this is how you should vote.

I originally thought they would lose the board seats but had a shot at the dividend but post iss decision it seems a forgone conclusion since most managers let iss make their decisions.

Hopefully biglari will announce acquisition soon (insurance)

5 years at the helm and only one acquisition so far.

[wescobrk]

For Bh shareholders on the board:

Do you guys think he can obtain the same type of returns in the future with his activist campaigns?

I know he made a ton on cbrl but if iss et all will continue to recommend to vote against him because of corporate governance, unless he can buy 35-40 percent of a company, it looks very difficult he will be able to get on a board in the future (caw doesn't count, too small in my opinion).

[APG12]

That's an interesting point and could definitely be a negative. On the other hand, he didn't need to get on the board of CBRL to light a fire under management. Furthermore, I don't think you can place the blame for his loss totally at the feet of ISS. The stock's performance surely didn't help his cause.

[ragu]

For Bh shareholders on the board:

Do you guys think he can obtain the same type of returns in the future with his activist campaigns?

 

Sardar has said that, with control (read as  influence in capital allocation at least), a CAGR of 32% is possible (probable?) in activist situations. I suspect that number will go down considerably if he can't get on the board. It is a significant negative, IMO.

 

Re. the CBRL proxy, to channel WEB: Nothing sedates rationality like a rising stock price.

 

Best,

Ragu

 

[gg]

Just a reminder about Biglari's investment in CBRL since so many of you seem to be talking about it as if it's a failure....

 

Biglari was buying shares starting in April 2011, and was amassing an enormous stake in the $45-$55 range. He believed the company was undervalued based on its current value (i.e. 50 cent dollar). He also believed that with better decision making at the top, operations and results could be significantly improved (i.e. 1 dollar's value growing into 2).

Original 13D - http://www.sec.gov/Archives/edgar/data/93859/000092189511001292/sc13d07428cra_06032011.htm

 

CBRL has been a tremendously successful investment by any measure. This was all done WITHOUT Biglari being on the board. Part of the returns have come form the valuation discount narrowing (probably in part due to the press from his activism), and part has come from the fact that Biglari was able to cause some changes to operations and management without having a board seat, and from holding a flame under management.

 

It is silly to extrapolate what future returns will be if BH can't get board seats on future targets. Even more silly to use CBRL as an example of why BH won't be successful in the future when this has been such a great outcome for BH investors already without a seat on CBRL's board .

 

[giofranchi]

Re. the CBRL proxy, to channel WEB: Nothing sedates rationality like a rising stock price.

 

Best,

Ragu

 

I agree 100%. And great quote! :)

 

Gio

[APG12]

No surprise there once iss said this is how you should vote.

 

One more thought on this. Voting based upon the recommendation of ISS is completely asinine (my new favorite word). How many times do investors need to be taught how important it is to be independent?? Do your own research and come to your own conclusions. This is the exact same principle that was violated when people thought they could rely on the rating agencies' opinions. We know how that ended and we know how this is going to end- with more idiotic capital allocation. Principles are important, follow em!

[gg]

Interesting article on proxy advisor firms:

http://blogs.wsj.com/riskandcompliance/2013/10/31/msci-puts-iss-on-block-amid-proxy-firm-headwinds/

 

MSCI Inc. announced in its third quarter earnings release that it was exploring strategic alternatives for its influential proxy advisor and governance-services provider Institutional Shareholder Services Inc.

 

The announcement comes as the proxy advisory business is facing regulatory scrutiny, market headwinds, and questions about the validity of its analytical models.

 

The announcement quoted Henry A Fernandez, chairman and chief executive of MSCI, saying of ISS that, “Over the past three years, MSCI has worked hard to return that business to a growth track.” Mr. Fernandez further said, “the Governance business reported organic revenue growth of 7% and Adjusted [earnings before interest, tax, depreciation and amortization] growth of 12%. We believe the time is right to explore our strategic alternatives.”

 

A spokesman for ISS declined to comment beyond the release.

 

MSCI acquired ISS in June 2010 as part of its $1.8 billion acquisition of RiskMetrics Group, which had paid $553 million to buy ISS in 2006. MSCI reported only about $59 million in governance revenue for 2010, but it had only owned the business for half the year. That’s consistent with $120 million in 2011, and $123 million in 2012. Revenue reported in the MSCI release for the first nine months of 2013 was about $91.5 million, down slightly from $92 million at the same point last year. The numbers confirm that governance hasn’t been a big growth business for MSCI.

 

Not only is the growth record moderate, but regulatory scrutiny is intensifying. Congressional hearings in June aired criticism by business groups and others who want to see proxy advisors reined in, and in July, in a speech before the Society of Corporate Secretaries and Governance Professionals, Commissioner Daniel M. Gallagher of the Securities and Exchange Commission  said, “I believe that the Commission should fundamentally review the role and regulation of proxy advisory firms and explore possible reforms…”

Regulation isn’t the only possible headwind for ISS. There is some evidence to suggest that its influence over institutional votes, while still substantial, may be declining. Combine the facts that the institutions are foregoing income from lending shares in order to vote those shares with the fact that they are voting independently of ISS, and it seems they are not merely outsourcing their votes to the proxy advisor.

 

Professor Reena Aggarwal of Georgetown University’s McDonough School of Business said in an interview her research shows that institutional investors value their votes enough to give up lending revenue in order to recall the shares, especially in situations where governance is weak, or there are important issues such as mergers and acquisitions on the ballot. “They obviously consider it important to vote and are putting in the effort to do this,” she said.

 

Yet in other research, she and coauthors found that institutional investors have become more independent of both management and proxy advisors, writing that “from 2004 to 2010, the percentage of votes following management’s recommendation has declined as has the percentage of votes following ISS’s recommendation.”

 

Meanwhile, there is some evidence that bad things may happen to companies that follow the recommendations of proxy advisors. Professor David Larcker of the graduate school of business at Stanford drew attention to the influence of ISS over executive compensation in a note released earlier this week. He and his fellow researchers claim that not only do proxy advisors influence the design of executive compensation programs, but that the recommendations destroy shareholder value.  In research published earlier this year, the researchers showed how the stock market turned thumbs down on companies that adopted proxy advisor recommendations on executive pay. “I think it’s worth stating that you do want these people out there, firms like that, to be experts and highlight the bad guys. The question is, are these guys able to do that given their model,” said Prof. Larcker in an interview.

 

ISS could be the second proxy advisory firm to change hands in recent months. In August, Canada’s Alberta Investment Management Corp. acquired a 20% stake in ISS’s smaller competitor, Glass Lewis & Co., for undisclosed terms. The seller was Ontario Teachers’ Pension Plan, which had bought Glass Lewis in 2007 for $46 million from China’s Xinhua Finance Ltd., which had purchased the company in 2006 for an implied equity value of $56 million, according to S&P Capital IQ.