BH - Biglari Holdings

[skanjete]

I read the letter to shareholders and annual report.

 

He starts his letter by writing that he wants to provide information to his shareholders that he would want as a shareholder.  Well, as a shareholder I would want information on following points :

 

- I'm lacking an overall metric by which Biglari evaluates his achievements. He talks about "intrinsic value", but doesn't specify what metric he considers best to evaluate intrinsic value. Buffett uses book value as a (understated) proxy for intrinsic value. I suppose book value would also be best to use in Biglari's case, but of course, results wouldn't be as impressive as suggested in his annual report : book value grew 33% this year, but only compounded at 11,6% over the last 5 years.

- He fails to explain why the investment business was sold. This would have been the place to do it. What regulatory or accounting reasons could there have been?

- He doesn't explain the rights offering and his intentions with the money

- Since his pay package is out of the ordinary for corporations, I would have appreciated some elaboration  (with numbers!) on how he thinks his value creation over the last 5 years justifies his pay package.

- What's the rationale for international expansion for S&S? They have about 500 stores now. That's about 10 per state in the US. Is the US really that fully supplied that an incremental dollar of investment has a higher return internationally than in the US, where the whole back office infrastructure is already in place?

 

Other remarks :

- Did he create an opening to sell the investment in C.B.? He suggests that non controlled invested are a possible sale.

- In his letter he tries to copy Buffett, and although at a first read, you get a Buffett-letter feeling, it's content is a far cry from Buffett's letter content. Biglari's letter wasn't coherent in my view and comes over as sloganesque. You can read any letter from Buffett and it will as pertinent and relevant today as the day it was written. I suspect this won't be the case with Biglari's letters.

- Of course, as a shareholder, you can't expect to know everything that's going on in a business. For these unknowns, you just have to trust management. After the BH shenanigans of the last few years, I seem to have trouble "just trusting BH".

- It's clear that a lot of my questions haven't been answered by the BH letter. But hey, it could be me of course, because "BH is no stock for dummies".

 

If ever someone asks me the apex of arrogance, I'll know what to answer.

[giofranchi]

- I'm lacking an overall metric by which Biglari evaluates his achievements. He talks about "intrinsic value", but doesn't specify what metric he considers best to evaluate intrinsic value. Buffett uses book value as a (understated) proxy for intrinsic value. I suppose book value would also be best to use in Biglari's case, but of course, results wouldn't be as impressive as suggested in his annual report : book value grew 33% this year, but only compounded at 11,6% over the last 5 years.

 

I don’t think this is the right way to look at it… Let me explain:

When you purchase a whole business and most of your capital is used for such an investment, and you have to reorganize it, you simply cannot take the growth in BV of that business after the reorganization as a metric to evaluate the quality of that investment. Simply because most of your capital is locked into a business the growth potential of which is not 20% per year! Therefore, what you want to compare is always your initial investment in that business with its BV, and you want to make sure the CAGR of your initial investment is satisfactory.

In BH’s case, only after “other investments”, which instead have the potential to grow 20% per year, have become large enough to have a true impact on BV, BVPS growth could be used as the right metric to evaluate performance. Imo that moment came at year end 2012.

 

Gio

 

[skanjete]

Gio,

 

Of course you're completely right that value creation was higher than book value growth.

 

But I think it is healthy to have an objective metric to evaluate the progress in the company. If necessary, management can point out why intrinsic value growth was higher or lower than the objective metric. Investors can then make their own interpretation.

 

In the early days of Berkshire, Markel and Fairfax, and especially Leucadia there was also something to be said as to why book value wasn't a good proxy. But nonetheless, they created their metric/benchmark and evaluated their performance against their metric.

 

The notion "intrinsic value" is too subjective to be used as an objective metric.

[giofranchi]

But I think it is healthy to have an objective metric to evaluate the progress in the company. If necessary, management can point out why intrinsic value growth was higher or lower than the objective metric. Investors can then make their own interpretation.

 

Yes, with this I agree. IV could have been explained in a somewhat clearer way…

 

Gio

 

[giofranchi]

While cumulative investment gains in capital allocation outbid the cumulative cash production from operating businesses, without the latter, there would be no possibility for the former.

--Mr. Sardar Biglari

 

This is EXACTLY how I feel about my own company (albeit on a much smaller scale…). And that’s why I invest in BH.

 

Gio

 

[Morgan]

Sardar is building a company that will prbably do very well over the next 10, 20, 30 years, barring some extemely damaging event. He's not prioritizing on shareholders religiously or promoting the company to death. I like how he lays out his thoughts in his letters and it makes sense what he seems to want to do big picture wise, but his arrogance in those communications may cause problems in the future. People just may not like him. Why create bad feelings or feelings of arrogance or suporioity when you can appear folksy and nice al la Buffett.

 

He has good business sense and a strong drive. Hopefully he'll relax some in the coming years.

[onyx1]

He has good business sense and a strong drive. Hopefully he'll relax some in the coming years.

 

Yes.  When you stop wanting things in a hurry, life will begin to offer them up to you!

[ragu]

Yes.  When you stop wanting things in a hurry, life will begin to offer them up to you!

 

onyx1,

 

You are quite easily the classiest of the "detractors" on this board, so I'll ask you this, especially since you've made this "in a hurry" statement now more than once.

 

How much of a hurry is Sardar in given:

 

a. The investments in SNS that hurt short-term profits (two years and running now) in order to set the stage for growth through franchising

b. The lack of an acquisition in 5 years of running the company (WEST notwithstanding)

 

It's not been perfect by any stretch of the imagination (Sardar himself admits as much), but I don't really see the "hurry".

 

Best,

Ragu

[Parsad]

Yes.  When you stop wanting things in a hurry, life will begin to offer them up to you!

 

onyx1,

 

You are quite easily the classiest of the "detractors" on this board, so I'll ask you this, especially since you've made this "in a hurry" statement now more than once.

 

How much of a hurry is Sardar in given:

 

a. The investments in SNS that hurt short-term profits (two years and running now) in order to set the stage for growth through franchising

b. The lack of an acquisition in 5 years of running the company (WEST notwithstanding)

 

It's not been perfect by any stretch of the imagination (Sardar himself admits as much), but I don't really see the "hurry".

 

Best,

Ragu

 

You guys like to act like we have no clue about Sardar, or we simply hate the guy which were the words a couple of people put in my mouth a few weeks ago. 

 

Onyx and myself, among many others, have dealt with Sardar from back when he took over Western Sizzlin.  Onyx was a huge shareholder and backer.  He's been screwed over like a number of other people who no longer have anything to do with him, including people who were key in the turnarounds at Western Sizzlin and Steak'n Shake. 

 

We were all big-time supporters of Biglari...for years...so obviously something significant must have happened to make us disillusioned, sell our stakes, and avoid the guy like the plague!  Other shareholders can come to their own conclusion, be it positive or negative, but it doesn't take away the stain that is left with the ones who had a negative experience.  You guys will have to get over that, just like we'll have to get over the glowing reviews some of you guys give him.  Cheers! 

[giofranchi]

We were all big-time supporters of Biglari...for years...so obviously something significant must have happened to make us disillusioned, sell our stakes, and avoid the guy like the plague!  Other shareholders can come to their own conclusion, be it positive or negative, but it doesn't take away the stain that is left with the ones who had a negative experience.  You guys will have to get over that, just like we'll have to get over the glowing reviews some of you guys give him.  Cheers!

 

Sanjeev,

I understand your point of view and Onyx’s very well! And it keeps reminding me that I have to constantly scrutinize every new move by Mr. Biglari! And, depending on what I see, my judgment might very well change over time.

For now, what I see is an extremely well designed platform for doing business. If Mr. Biglari’s flaws of character truly are important, they will gradually mar the effectiveness of that platform. And business will suffer. I am not saying it won’t happen. All I am saying is I will take the evidence as it comes. Today the evidence that I see is this one: despite all his flaws of character, Mr. Biglari has devised a platform for doing business which, with the only exception of Fairfax and Lancashire, has no equal.

If someone can show me one that is better, I will gladly shift capital from BH to that other platform I ignore the existence of.

 

Gio

 

[onyx1]

Yes.  When you stop wanting things in a hurry, life will begin to offer them up to you!

 

onyx1,

 

You are quite easily the classiest of the "detractors" on this board, so I'll ask you this, especially since you've made this "in a hurry" statement now more than once.

 

How much of a hurry is Sardar in given:

 

a. The investments in SNS that hurt short-term profits (two years and running now) in order to set the stage for growth through franchising

b. The lack of an acquisition in 5 years of running the company (WEST notwithstanding)

 

It's not been perfect by any stretch of the imagination (Sardar himself admits as much), but I don't really see the "hurry".

 

Best,

Ragu

 

Ragu,

 

My comment wasn't directed at capital allocation decisions where he has complete control.  Rather, I was observing that in matters where he needs the cooperation of others, Sardar should slow down and relax!  He is in a hurry.  He wants others to respond according to his script.  How many times has he been shot down at CBRL?  Three, four, I've lost count!  He's had two compensation structure battles, are there more to come?    Acting needy and impatient puts people on the defensive.  When people are on the defensive, trust evaporates and they look for ways to avoid cooperation. 

 

It makes a world of difference when people around you are receptive and look for common ground.  Deals become easy and you don't need to fight. If Sardar wants to be an acquirer, he should take a page from Prem, or even better call and seek a meeting for advice.  Prem has a reputation for fairness and enriching those around him.  He has droves of loyal supporters to show for it, and he uses his social proof to avoid hostility.  It's no surprise that he has completed scores of acquisitions.   

 

Sardar is smart, has good business sense, and I'm confident he will enrich his shareholders.  But it will come a lot easier, faster, and the rewards will be greater if he slows down a bit and works to get others on his side.

 

[giofranchi]

Ragu,

 

My comment wasn't directed at capital allocation decisions where he has complete control.  Rather, I was observing that in matters where he needs the cooperation of others, Sardar should slow down and relax!  He is in a hurry.  He wants others to respond according to his script.  How many times has he been shot down at CBRL?  Three, four, I've lost count!  He's had two compensation structure battles, are there more to come?    Acting needy and impatient puts people on the defensive.  When people are on the defensive, trust evaporates and they look for ways to avoid cooperation. 

 

It makes a world of difference when people around you are receptive and look for common ground.  Deals become easy and you don't need to fight. If Sardar wants to be an acquirer, he should take a page from Prem, or even better call and seek a meeting for advice.  Prem has a reputation for fairness and enriching those around him.  He has droves of loyal supporters to show for it, and he uses his social proof to avoid hostility.  It's no surprise that he has completed scores of acquisitions.   

 

Sardar is a smart, has good business sense, and I'm confident he will enrich his shareholders.  But it will come a lot easier, faster, and the rewards will be greater if he slows down a bit and works to get others on his side.

 

This is simply perfect!

I have just read that Mr. Rockefeller slowed down and relaxed in his mid-sixties… As good as Mr. Biglari is, he most probably is no Rockefeller… The sooner he learns this lesson, the better! ;)

 

Gio

 

[wescobrk]

http://www.sec.gov/Archives/edgar/data/93859/000080724913000358/bh_06.htm

 

Only a few hundred thousand worth of selling but gabellis first ever selling of Bh since he bought a big chunk at the end of 09.

[ragu]

Only a few hundred thousand worth of selling but gabellis first ever selling of Bh since he bought a big chunk at the end of 09.

 

wescobrk,

 

You'll find that there is a net addition of 80 shares owned amongst all of the related entities here. The decrease in the % of shares owned is a result of the rights offering.

 

FWIW, I wish Gabelli didn't own so much of BH.

 

Best,

Ragu

[wescobrk]

Thanks Ragu, I missed that little minus sign.

I should have said he owns a smaller percentage of the company now. The first time since 09 -even though he picked up another 80 shares.

[dcollon]

Cracker Barrel holder Biglari Capital requests company to explore sale process - amended 13D

Wednesday, December 18, 2013 01:08:30 PM (GMT)

 

 

Biglari does not believe the company’s board and management are able to maximize the intrinsic business value of the company.

Accordingly, the holder believes that the board should undertake a value maximization process by reviewing all potential extraordinary transactions, including the sale of the company, to create an immediate realization of value for the benefit of all stockholders.

Because of the Biglari’s substantial investment in the company and because it does not hold representation on the board, Biglaris is willing to participate in a process in any capacity that the holder may deem advisable.

In the event that the board does not promptly announce definitive action to engage in a sale process, the holder intends to call a special meeting of the company's shareholders to vote upon a non-binding resolution recommending that the board pursue an extraordinary transaction, e.g., the sale of the company.

Biglari disclosed a 19.9% stake in the company

[redskin]

Does Sardar receive a management/incentive fee from BH's investment in the Lion Fund in addition to his compensation package tied to BH book value?

[APG12]

He receives a fee but it is separate from, not in addition to, the fee on book value. He's not being paid twice for the same performance if that's what you're asking.

[OracleofCarolina]

So Saudi Arabia appears to be opening up to more Western brands. I saw last week Cheesecake Factory was opening there, the World Wrestling was putting on 3 shows, and now Steak-n-Shake.

 

8:04 am Biglari Holdings subsidiary, Steak 'n Shake to open 50 restaurants throughout Saudi Arabia during the coming years (BH) : Steak 'n Shake announces a major international development agreement in the Middle East, which will bring this notable "better burger" chain to Saudi Arabia. Steak 'n Shake has signed an exclusive agreement with AB Holdings to open 50 restaurants throughout Saudi Arabia during the coming years. This agreement represents the ongoing extension of Steak 'n Shake by Biglari outside of the US. Steak 'n Shake expects to open its first location in Riyadh during 1H14.

[redskin]

He receives a fee but it is separate from, not in addition to, the fee on book value. He's not being paid twice for the same performance if that's what you're asking.

 

So any gains from the $400mm+ investment in the Lion Fund will not be included in the book value calculation for his compensation?

[wescobrk]

Cracker Barrel holder Biglari Capital requests company to explore sale process - amended 13D

Wednesday, December 18, 2013 01:08:30 PM (GMT)

 

 

Biglari does not believe the company’s board and management are able to maximize the intrinsic business value of the company.

Accordingly, the holder believes that the board should undertake a value maximization process by reviewing all potential extraordinary transactions, including the sale of the company, to create an immediate realization of value for the benefit of all stockholders.

Because of the Biglari’s substantial investment in the company and because it does not hold representation on the board, Biglaris is willing to participate in a process in any capacity that the holder may deem advisable.

In the event that the board does not promptly announce definitive action to engage in a sale process, the holder intends to call a special meeting of the company's shareholders to vote upon a non-binding resolution recommending that the board pursue an extraordinary transaction, e.g., the sale of the company.

Biglari disclosed a 19.9% stake in the company

 

I'm personally highly entertained watching him constantly needling the board.

His rope a dope strategy might work at some point.

They have beat him every proxy but he keeps coming back.

Maybe the board will tire at some point.

[APG12]

So any gains from the $400mm+ investment in the Lion Fund will not be included in the book value calculation for his compensation?

 

"The modification of the Incentive Bonus Agreement between BH and Mr. Biglari to give effect to the transactions, inter alia, by providing that Mr. Biglari’s incentive compensation will thereafter be calculated without reference to any investments by BH and its subsidiaries in investment partnerships (including the Lion Fund and the Lion Fund II), of which Biglari Capital or Mr. Biglari is the general partner."

[rayfinkle]

UNAM up 10% this morning--no news that I can find.

[dcollon]

BIGLARI CAPITAL CORP.

17802 IH 10 WEST, SUITE 400

SAN ANTONIO, TEXAS 78257

TELEPHONE (210) 344-3400

FAX (210) 344-3411

 

 

 

SARDAR BIGLARI, CHAIRMAN

 

December 24, 2013

 

 

 

Mr. James W. Bradford

Chairman of the Board

Cracker Barrel Old Country Store, Inc.

305 Hartmann Drive

Lebanon, Tennessee 37087

 

 

Dear Jim:

 

 

We have called upon the Board of Directors of Cracker Barrel Old Country Store, Inc. to undertake a value maximization process by reviewing all potential extraordinary transactions, including the sale of the Company. The Board’s primary aim should be to sell to the highest bidder in order to create a realization of Cracker Barrel’s value. As the Company’s lead investor, owning nearly 20% of the outstanding shares, we are willing to lead the process by submitting a bid. But, as you are well aware, Tennessee law currently restricts our ability to engage in such a transaction. Thus, we request that the Board support our efforts to seek an amendment to the state law that would give all shareholders the ability to decide the future of their Company.

 

 

The value of the business, or any business, depends on who is in control of the assets. We believe Cracker Barrel’s assets would be far more productive under our leadership than in the hands of present leadership. Thus, we are willing to purchase the business because we perceive a significant upside under our management. But other sophisticated buyers also should have the opportunity to bid for the Company.

 

 

We think Cracker Barrel’s earning power is far too low in your hands. Current management appears relatively successful because of the dismal performance under the former CEO. We firmly believe that neither you nor your management has a deep understanding of how substantial value can be created. It takes an entrepreneurial mind. To illustrate, we had to drive the Board and management to license products to third parties. Now that you see the benefits to the business, management claims the idea was part of its plan. But we have no interest in gaining credit; our interest lies in making money. Yet it is obvious you will have difficulty growing earnings through operating performance henceforth.  We are convinced you are leaving a ton of value on the table. In contrast, the sale of the Company will create immediate value for all.

 

 

If you are confident in your ability, then, alternatively, you should take on leverage and do a share repurchase. We would consider selling our entire position because we would not want to leave our money in your care. The handling of the Duck Dynasty controversy is another example of poor judgment.

 

Naturally, if our bid is the highest offer, then the Board’s fiduciary duty should dictate a sale to us. We have been working closely with an investment banking firm to arrange the financing required for us to complete the transaction. Consequently, we are prepared to collaborate with the Board in order to amend Tennessee law, thereby placing us in a position to provide the Board with a proposal that would maximize value for all shareholders. All options are on the table.

 

 

Should the Board refuse to take meaningful steps to engage in an extraordinary transaction, including the public announcement of its commencement of such a process, we then intend to exercise any and all rights and remedies at our disposal, including a call for a special meeting of shareholders.

 

 

We remain resolute in our quest for value maximization.

 

 

 

 

Sincerely,

 

/s/ Sardar Biglari

 

Sardar Biglari

[giofranchi]

Thank you, David! :)

 

Well, I guess this answers pretty well what Mr. Biglari is going to do with the CBRL investment: either he gets to buy the whole company, or he is out. Nothing to say about it: I would be doing exactly the same thing.

 

The value of the business, or any business, depends on who is in control of the assets. We believe Cracker Barrel’s assets would be far more productive under our leadership than in the hands of present leadership.

 

+1

 

If you are confident in your ability, then, alternatively, you should take on leverage and do a share repurchase. We would consider selling our entire position because we would not want to leave our money in your care.

 

+1

 

 

Gio