BH - Biglari Holdings

[CorpRaider]

http://spinoffmonitor.com/biglari-holdings-bh-announces-rights-offering/

[giofranchi]

Do you (or any of those that accuse Sardar of lying) actually know the context of Sardar's statement?

 

No, I don’t. And I don’t care either. This whole thing about compensation cannot be really serious… I thought my tone had always been sarcastic enough! ;)

 

What’s serious, instead, is the opportunity we have in BH today. Its shares are constantly put under pressure for a reason that’s very clear to me: BH is stuck with the CBRL investment today. That is exactly the kind of reason for undervaluation I like: because I can be sure it is only temporary.

 

How many times do you find something that not only looks undervalued, but that you also know why it is undervalued, and you have great confidence it is only for a temporary reason too? Not very often, right?! And, when you do, you immediately recognize it as one of the best investment opportunity you have come across in a while.

 

That’s what BH around $400 is today!

 

Gio

 

[wachtwoord]

Do you (or any of those that accuse Sardar of lying) actually know the context of Sardar's statement?

 

No, I don’t. And I don’t care either. This whole thing about compensation cannot be really serious… I thought my tone had always been sarcastic enough! ;)

 

What’s serious, instead, is the opportunity we have in BH today. Its shares are constantly put under pressure for a reason that’s very clear to me: BH is stuck with the CBRL investment today. That is exactly the kind of reason for undervaluation I like: because I can be sure it is only temporary.

 

How many times do you find something that not only looks undervalued, but that you also know why it is undervalued, and you have great confidence it is only for a temporary reason too? Not very often, right?! And, when you do, you immediately recognize it as one of the best investment opportunity you have come across in a while.

 

That’s what BH around $400 is today!

 

Gio

 

Don't you think it's undervalued because the CEO is considered by the general population to be untrustworthy? If so, I imagine that will stay the same (not important if you don't intent to sell, it only limits your liquidity).

[giofranchi]

Don't you think it's undervalued because the CEO is considered by the general population to be untrustworthy?

 

No.

At the end of 2013 BH stock price reached $520.

Do you think the market changed opinion about Biglari in 6 months? ???

 

Gio

 

[Mikenhe]

I'm an ex owner of steak and shake, currently sitting on the sidelines. My biggest concern is that SB is going to try and run everything. I prefer the Watsa method of buying businesses that run themselves.

 

As it happens I'm off to a wood fired grill they own tonight - thought there were a few more of them but it'll be interesting to see the concept first hand.

[Sportgamma]

Don't you think it's undervalued because the CEO is considered by the general population to be untrustworthy?

 

No.

At the end of 2013 BH stock price reached $520.

Do you think the market changed opinion about Biglari in 6 months? ???

 

Gio

 

Previous price is not a reason for something to be undervalued. Right?

[giofranchi]

Previous price is not a reason for something to be undervalued. Right?

 

What I meant is this: until CBRL stock price began to slightly decline (or at least stopped appreciating fast), and until it became obvious that Biglari is facing a long battle with CBRL’s management, the P/B ratio the market was willing to accord to BH was in line with the one of other companies which are expected to grow BVPS at a handsome CAGR for many years to come.

 

Gio

 

[wachtwoord]

Don't you think it's undervalued because the CEO is considered by the general population to be untrustworthy?

 

No.

At the end of 2013 BH stock price reached $520.

Do you think the market changed opinion about Biglari in 6 months? ???

 

Gio

 

Well aren't the clear ego-centrical changes (e.g. everything with his name on it) very recent?

For the record I'm not trying to be annoying, I'm just enjoying the discussion as I would not feel comfortable investing with this CEO and I'm curious whether I'm wrong about that :)

[link01]

Previous price is not a reason for something to be undervalued. Right?

 

What I meant is this: until CBRL stock price began to slightly decline (or at least stopped appreciating fast), and until it became obvious that Biglari is facing a long battle with CBRL’s management, the P/B ratio the market was willing to accord to BH was in line with the one of other companies which are expected to grow BVPS at a handsome CAGR for many years to come.

 

Gio

gio, I think that's only part of it. besides the cbrl concerns you mention there's also sns: operating earnings declined from 19m to 12m 2012 to 2013, $ ebit from 46.5m to 28.4m.

 

tho biglari states that he believe sns never the less increased its intrinsic value I don't think there are a lot of investors disposed to take him at his word or give him the benefit of a doubt. however, on this point I do. when he says "We willingly traded near-term profits for higher long-term cash flows. In fact, we could have had record earnings in fiscal 2013. Instead, we chose to reinvest rather achieve a low cost structure, and to grow through franchising. We will continue to allocate capital on the basis of creating significantly greater dollar value per dollar spent." I believe him. he may be in a hurry to get rich but he has strongly held value investing principles & business operating beliefs that I don't think he will compromise, even if it hampers short term performance. "We are subscribing to Sam Walton’s philosophy in which he stated, “By cutting your price, you can boost your sales to a point where you earn far more at the cheaper retail price than you would have by selling the item at the higher price.”

 

here's how he traded higher costs now for a stronger franchise & profits down then road:

 

" Restaurant operating costs increased because of, inter alia, increased staffing in our stores of $4.3 million, higher supply costs of $2.3 million, and higher insurance costs of $1.6 million. Increased training in 2013 resulted in a $2.7 million higher expense, largely tied to franchise openings. In addition, our efforts to franchise the Steak n Shake concept domestically and internationally has steadily increased General and administrative expenses. In fiscal 2013, direct franchising costs represent 24.8% of Steak n Shake’s general and administrative expenses, up from 14.8% in fiscal 2012."

 

and I estimate direct franchise costs were 9.5m in 201 & 19m in 2013. adding the increase in all these investment related costs up YOY is real money at +20.4m. that more than offsets the -17.2 decrease in YOY ebit mentioned above. BH does indeed look undervalued, tho whether its enough to compensate for the mistrust biglari has engendered will help determine how much more undervalued it can get before the scales are finally tipped the other way.

 

edit: oh, & if biglari continues with these rights offerings below book value its going to take some adjustments to calc bh's real growth in bvps when attempting to plot his scorecard on that metric. I thought it was interesting that he said he'll continue to make use of rights offerings at least until he's able to push thru a shareholder vote for a dual class of stock, tho I don't remember where I read that at this time

 

 

 

 

 

 

 

 

[bargainman]

You are being vague and cryptic here. I'm not sure what you are getting at.

 

This is not unusual.  I don't think I have seen a single message from Ragu that is not vague and cryptic.

[bargainman]

Previous price is not a reason for something to be undervalued. Right?

 

What I meant is this: until CBRL stock price began to slightly decline (or at least stopped appreciating fast), and until it became obvious that Biglari is facing a long battle with CBRL’s management, the P/B ratio the market was willing to accord to BH was in line with the one of other companies which are expected to grow BVPS at a handsome CAGR for many years to come.

 

Gio

 

I think that the issue here is what will big man be able to do in the future?  Given his less than sterling reputation and the ability of Target companies to put up a reasonable fight as demonstrated by Cracker Barrel, Will Bigs be able to police sorts of returns in the future?  He definitely deserves some credit in the cracker case in that he has pushed management to make or at least pretend to make changes that have increased the stock-price and presumably the value of cracker.  So perhaps it is not important that in the future he will be able to get a board seat or take control as long as he's able to move management to make changes.

 

I am curious if anybody is first in the history of raiders and "jerk activist investors out to make themselves rich" like perhaps Icahn would care to comment on how big Larry compares?

[bargainman]

"When you have eliminated the impossible, whatever remains, however improbable, must be the truth." - Sherlock Holmes

 

As per Cooley, the vast majority of the money in the Lion Fund comes locally from San Antonio. These are folks that have known Sardar for a very long time.

 

It's no surprise to me that they stick with him. It's also no surprise why: Their assessment is that he is trustworthy. I agree.

 

Best,

Ragu

 

This statement is incredibly flawed.  Think about it at the extreme. The people who know you the longest are your parents. Your parents stick with you and trust you. Therefore everybody else should stick with you and trust you.

 

The people who have been with you the most are most likely to stick with you for many reasons other than you being trustworthy.  Just watch a few episodes of that addict rehab show "Intervention" and this will be absolutely clear.

 

I really hope that you are not making your investment decisions based on big Larry's initial investors sticking with him.

[bargainman]

One question about the rights offering. I'm pretty sure this has been discussed in the past but I can't remember the Outcome. Why is he offering shares at a price so far below the current market shareprice?

 

I think in the past the conclusion was that, given the over subscription clause, this will allow him to pick up shares quite cheaply and increase his control of the company (assuming some number of shareholders did not fully subscribe).

 

is this is everybody else's assessment?  Are most rights offerings like this? I would think that if he wanted to raise money he would be able to do it in a manner that was less dilutive and would give him more cash. It seems like an awfully large discount..

[WideMoat]

Why is he offering shares at a price so far below the current market shareprice? ...

 

Are most rights offerings like this? I would think that if he wanted to raise money he would be able to do it in a manner that was less dilutive and would give him more cash. It seems like an awfully large discount..

 

What if an executive was required to purchase shares with a certain percentage of his annual compensation?  Would be nice to do so at a discount, right?

 

"The Incentive Agreement provides that Mr. Biglari will use an amount equal to at least 30% of his annual pre-tax incentive compensation to purchase shares of BH’s common stock on the open market within 120 calendar days of his receipt of such payment, subject to restrictions under the Corporation’s insider trading policy. This requirement represents approximately 50% of his after-tax incentive  compensation. Mr. Biglari is then required to hold such shares for a minimum of three years from the date of purchase, subject to the terms of the Incentive Agreement." [http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=7480538-1192-220709&type=sect&TabIndex=2&companyid=11049&ppu=%252fdefault.aspx%253fcik%253d93859]

[Myth465]

I am glad I have my popcorn, this is a most entertaining show.

Will be interesting to see what great lengths Gio and Ragu go to to make this seem perfectly normal, and actually advantageous to the company and its shareholders.....

 

Who ever said cognitive dissonance was on to something.

 

Leon Festinger's theory of cognitive dissonance focuses on how humans strive for internal consistency. When inconsistency (dissonance) is experienced, individuals largely become psychologically distressed. His basic hypotheses are listed below:

 

Consistently inconsistent as it relates to BH - Biglari Holdings......

I still think Ragu is Mr. Biglari, he is a bit too personally attached to this idea and the perception of its CEO...

[peter1234]

I am glad I have my popcorn, this is a most entertaining show.

Will be interesting to see what great lengths Gio and Ragu go to to make this seem perfectly normal, and actually advantageous to the company and its shareholders.....

 

Who ever said cognitive dissonance was on to something.

 

Leon Festinger's theory of cognitive dissonance focuses on how humans strive for internal consistency. When inconsistency (dissonance) is experienced, individuals largely become psychologically distressed. His basic hypotheses are listed below:

 

Consistently inconsistent as it relates to BH - Biglari Holdings......

I still think Ragu is Mr. Biglari, he is a bit too personally attached to this idea and the perception of its CEO...

 

This just elevated it to a whole new level. Now we have conspiracies as well...

 

;D

[ragu]

I still think Ragu is  Sardar Mr. Biglari [...]

 

Get with the program. We want to keep Sanjeev happy, don't we? ;)

 

Best,

Ragu

[QLEAP]

I still think Ragu is  Sardar Mr. Biglari [...]

 

Get with the program. We want to keep Sanjeev happy, don't we? ;)

 

Best,

Ragu

 

LoL Myth. I hate to burst your bubble but I have met Ragu in person and he is no Sardar!

 

Supremely rational and outstanding investor too :=)

 

 

 

[Myth465]

I still think Ragu is  Sardar Mr. Biglari [...]

 

Get with the program. We want to keep Sanjeev happy, don't we? ;)

 

Best,

Ragu

 

Yes we do, yes we do  :)

 

I still think Ragu is  Sardar Mr. Biglari [...]

 

Get with the program. We want to keep Sanjeev happy, don't we? ;)

 

Best,

Ragu

 

LoL Myth. I hate to burst your bubble but I have met Ragu in person and he is no Sardar!

 

Supremely rational and outstanding investor too :=)

 

All may be true, but I have so rarely seen someone so passionate in the defense of a CEO.

Just trying to figure out why. Ultimately this will all sort itself out via SEC fillings and BH events.

 

This is fast becoming about as useful a thread as the one on Sears or the one on LVLT.

[giofranchi]

edit: oh, & if biglari continues with these rights offerings below book value its going to take some adjustments to calc bh's real growth in bvps when attempting to plot his scorecard on that metric. I thought it was interesting that he said he'll continue to make use of rights offerings at least until he's able to push thru a shareholder vote for a dual class of stock, tho I don't remember where I read that at this time

 

My guess is that he will continue to do rights offerings so he can get more of the company when he has the capital at a lower price. Makes perfect sense - IMO.

 

Well, to calculate BVPS I simply use the number of shares in the first page of the 10-K filing. Just like Biglari himself has suggested to do. That number has increased from 2010 to 2013, and, if Biglari keeps making use of these rights offerings, it will get larger and larger.

 

Gio

 

[giofranchi]

gio, I think that's only part of it. besides the cbrl concerns you mention there's also sns: operating earnings declined from 19m to 12m 2012 to 2013, $ ebit from 46.5m to 28.4m.

 

tho biglari states that he believe sns never the less increased its intrinsic value I don't think there are a lot of investors disposed to take him at his word or give him the benefit of a doubt. however, on this point I do. when he says "We willingly traded near-term profits for higher long-term cash flows. In fact, we could have had record earnings in fiscal 2013. Instead, we chose to reinvest rather achieve a low cost structure, and to grow through franchising. We will continue to allocate capital on the basis of creating significantly greater dollar value per dollar spent." I believe him. he may be in a hurry to get rich but he has strongly held value investing principles & business operating beliefs that I don't think he will compromise, even if it hampers short term performance. "We are subscribing to Sam Walton’s philosophy in which he stated, “By cutting your price, you can boost your sales to a point where you earn far more at the cheaper retail price than you would have by selling the item at the higher price.”

 

here's how he traded higher costs now for a stronger franchise & profits down then road:

 

" Restaurant operating costs increased because of, inter alia, increased staffing in our stores of $4.3 million, higher supply costs of $2.3 million, and higher insurance costs of $1.6 million. Increased training in 2013 resulted in a $2.7 million higher expense, largely tied to franchise openings. In addition, our efforts to franchise the Steak n Shake concept domestically and internationally has steadily increased General and administrative expenses. In fiscal 2013, direct franchising costs represent 24.8% of Steak n Shake’s general and administrative expenses, up from 14.8% in fiscal 2012."

 

and I estimate direct franchise costs were 9.5m in 201 & 19m in 2013. adding the increase in all these investment related costs up YOY is real money at +20.4m. that more than offsets the -17.2 decrease in YOY ebit mentioned above. BH does indeed look undervalued, tho whether its enough to compensate for the mistrust biglari has engendered will help determine how much more undervalued it can get before the scales are finally tipped the other way.

 

Guys,

We could go on talking about ethics, about psychology, about cognitive dissonance (you like that, don’t you? Sounds very intellectual!),… if you’d like, we could also talk about religion and astrology (maybe Biglari’s horoscope isn’t that favorable after all!)…

 

In the end what matters in business is our willingness to be rational. Period. And, when someone has a great business, honesty is always the best policy. To be a thief and a liar, like detractors call Biglari, would be a stupid behavior, would be bad investing, would be seriously limiting his own long term wealth. Do you have any doubt Biglari is not stupid? Do you have any doubt Biglari is a great investor? Do you have any doubt Biglari knows how to maximize his own long term wealth?

 

And don’t be mistaken: Biglari has a wonderful business! If you have any doubt about this, read link01’s post again and again.

 

Listen,

Have you seen what I did with Lancashire? When I say I don’t fall in love with a business, I really mean it: Lancashire was a much bigger investment for me, than BH is today. This notwithstanding, as soon as Lancashire ceased to be what I thought it to really be, I sold my whole position. I disposed of a 25% position the very same day Lancashire announced Brindle’s retirement.

 

When the facts change, I change my mind.

 

Gio

 

[writser]

The Lancashire episode demonstrated that your judgement of entrepreneurs is not infallible. But instead of being cautious, the next investment you make is based solely on your judgement of a highly controversial entrepreneur that everybody here is trying to warn you about. In defense of your investment decision you spend half of your time on this forum praising mr. Biglari post after post and by doing so you are effectively maneuvering yourself into a position where it will be very difficult to change your mind about him. Hence somebody mentioning the risk of cognitive dissonance.

 

If the biggest (only?) risk in your investment process is that you are sometimes wrong when judging people, why would you a) invest in somebody who is highly controversial in the first place and b) work yourself into a position where all you do is defend the guy? Wouldn't the inverse process be much safer? Only invest in the most reputable businessmen and always try to find reasons to knock them of their pedestal.

 

It looks like you are inadvertedly setting up a situation where you maximize the chances of something going wrong. Regardless of who is right about mr. Biglari Sardar.

 

Do you have any doubt Biglari knows how to maximize his own long term wealth?

 

Nobody is doubting that. Question is whether he will do it at your expense or not ;) .

[tombgrt]

Listen,

Have you seen what I did with Lancashire? When I say I don’t fall in love with a business, I really mean it: Lancashire was a much bigger investment for me, than BH is today. This notwithstanding, as soon as Lancashire ceased to be what I thought it to really be, I sold my whole position. I disposed of a 25% position the very same day Lancashire announced Brindle’s retirement.

 

When the facts change, I change my mind.

 

Gio

 

 

You speak of rationality and LRE in the same sentence?  :o Lancashire suddenly ceased what it was because Brindle left? How much of an impact do you think exactly Brindle had those last few months/years with the exact same team, operations and culture in place? If you think Brindle was worth a 30% premium (you bought at +- 800 GBX yet don't buy now) I simply don't know what magical powers you think Brindle brought to the table! LRE is simply a good insurer with great corporate culture that is likely to do very well for quite some time.

 

In the end what matters in business is our willingness to be rational. Period. And, when someone has a great business, honesty is always the best policy. To be a thief and a liar, like detractors call Biglari, would be a stupid behavior, would be bad investing, would be seriously limiting his own long term wealth. Do you have any doubt Biglari is not stupid? Do you have any doubt Biglari is a great investor? Do you have any doubt Biglari knows how to maximize his own long term wealth?

 

And don’t be mistaken: Biglari has a wonderful business! If you have any doubt about this, read link01’s post again and again.

 

 

You don't have to be stupid to do really stupid shit.

 

Gio, sorry to say but you are the master of platitudes.

[tombgrt]

The Lancashire episode demonstrated that your judgement of entrepreneurs is not infallible. But instead of being cautious, the next investment you make is based solely on your judgement of a highly controversial entrepreneur that everybody here is trying to warn you about. In defense of your investment decision you spend half of your time on this forum praising mr. Biglari post after post and by doing so you are effectively maneuvering yourself into a position where it will be very difficult to change your mind about him. Hence somebody mentioning the risk of cognitive dissonance.

 

If the biggest (only?) risk in your investment process is that you are sometimes wrong when judging people, why would you a) invest in somebody who is highly controversial in the first place and b) work yourself into a position where all you do is defend the guy? Wouldn't the inverse process be much safer? Only invest in the most reputable businessmen and always try to find reasons to knock them of their pedestal.

 

It looks like you are inadvertedly setting up a situation where you maximize the chances of something going wrong. Regardless of who is right about mr. Biglari Sardar.

 

Do you have any doubt Biglari knows how to maximize his own long term wealth?

 

Nobody is doubting that. Question is whether he will do it at your expense or not ;) .

 

Writser, I liked your post better before the edit. That was exactly how it went down. ;)

 

Gio, have you met mr. Raina? He is a great compounder, very intelligent and very young! He also talks in terms we value guys appreciate.

[writser]

Haha, I didn't want to make my post too rude so I removed it again :) . I agree with you though. Selling a 25% portfolio stake at far lower prices the same morning the CEO announces his retirement doesn't sound rational to me. It was consistent with Gio's previous posts, sure, but not a rational assesment of the business.