BH - Biglari Holdings

[BTShine]

Will the Lion fund charge the typical 2/20 fee and then on top of that, Baglari himself charges the incentive bonus based on book value growth once again? That would be a double charge if that's the case.

 

No, Biglari will be compensated based on the growth in BVPS due solely to operating earnings, The Lion Fund compensation instead will be based solely upon investment results. What I don’t know is how much The Lion Fund will be paid…

 

Gio

 

Do we know for sure that there will not be double fees earned by Mr. Biglari?  It's possible he gets a gross 20% return in the Lion Fund and then the remaining 16.5% return to BH accrues to the book value gains, which get him his incentive comp (up to $10 Million). 

 

Gio, do you know where you saw that his incentive comp will be based on book value growth due solely to operating earnings?

 

This stock selling at a large discount by my cursory observation.   

[muscleman]

Will the Lion fund charge the typical 2/20 fee and then on top of that, Baglari himself charges the incentive bonus based on book value growth once again? That would be a double charge if that's the case.

 

No, Biglari will be compensated based on the growth in BVPS due solely to operating earnings, The Lion Fund compensation instead will be based solely upon investment results. What I don’t know is how much The Lion Fund will be paid…

 

Gio

 

Do we know for sure that there will not be double fees earned by Mr. Biglari?  It's possible he gets a gross 20% return in the Lion Fund and then the remaining 16.5% return to BH accrues to the book value gains, which get him his incentive comp (up to $10 Million). 

 

Gio, do you know where you saw that his incentive comp will be based on book value growth due solely to operating earnings?

 

This stock selling at a large discount by my cursory observation. 

 

Yes. I know for sure. Just check the SEC filings. The compensation will be adjusted for non-economic increases such as rights offering and increase in Lion fund.

[BTShine]

Muscleman,

 

You're right.  I feel dumb for only checking the 10-K.  It's clearly in the First Amendment to the Incentive Agreement.  Here's the language.

 

"WHEREAS, in connection with the foregoing transactions, the parties hereto desire to

amend the Agreement to exclude from the calculation of the Incentive Compensation Amount,

with respect to any period from and after the date hereof, any realized or unrealized gains or

losses and other amounts attributable to investments by Company and its subsidiaries in

investment partnerships (or equivalent) in which Company or any of its subsidiaries is a limited

partner (or equivalent) and Executive (or an affiliate of Executive other than Company or any of

its subsidiaries) is the general partner (or equivalent), including, without limitation, TLF I and LF II to the extent they satisfy the foregoing criteria (“Outside Investment Partnerships”),

and to make certain other changes described below."

[krazeenyc]

Muscleman -- re: the rights offerings...

 

I think BH will continue doing the rights offerings mostly because Biglari indicated he would do so -- unless he had a dual class structure instead. Of course, not sure if they will occur annually but I would expect the answer is yes. It allows he to fulfill his obligation to use a portion of his compensation on buying shares. This allows him to "buy shares" regardless of the price of the shares at the time.

[BTShine]

Also, I haven't seen confirmation in the BH filings that the High Water Mark grows at 6% a year irrespective of if it was met/surpassed by New Book Value. 

 

My guess is that the High Water Mark compounds each year no matter what, but it would be nice to confirm that. 

[TheValueDude]

Muscleman -- re: the rights offerings...

 

I think BH will continue doing the rights offerings mostly because Biglari indicated he would do so -- unless he had a dual class structure instead. Of course, not sure if they will occur annually but I would expect the answer is yes. It allows he to fulfill his obligation to use a portion of his compensation on buying shares. This allows him to "buy shares" regardless of the price of the shares at the time.

 

Engineering a way to buy shares, that he has to buy anyway, at a discount.

 

"BH is no stock for dummies."

 

Indeed.

[muscleman]

Also, I haven't seen confirmation in the BH filings that the High Water Mark grows at 6% a year irrespective of if it was met/surpassed by New Book Value. 

 

My guess is that the High Water Mark compounds each year no matter what, but it would be nice to confirm that.

 

I remember one of the SEC filings that I saw contains explanation about "Adjusted new Book value". If you look for that using Ctrl+f in your browser, it will be fast to find.

[BTShine]

I didn't find that, but did see a reference to a 6% annual hurdle rate.  I'm taking that as it moves the hurdle up 6% every year regardless of whether it was met or not.

[muscleman]

I didn't find that, but did see a reference to a 6% annual hurdle rate.  I'm taking that as it moves the hurdle up 6% every year regardless of whether it was met or not.

 

I did remember seeing that somewhere. It says the hurdle compounds at 6% per year and keeps going up.

[muscleman]

Muscleman -- re: the rights offerings...

 

I think BH will continue doing the rights offerings mostly because Biglari indicated he would do so -- unless he had a dual class structure instead. Of course, not sure if they will occur annually but I would expect the answer is yes. It allows he to fulfill his obligation to use a portion of his compensation on buying shares. This allows him to "buy shares" regardless of the price of the shares at the time.

 

Engineering a way to buy shares, that he has to buy anyway, at a discount.

 

"BH is no stock for dummies."

 

Indeed.

 

Are you sure about that? I think the agreement was that once he received the year end bonus, he has to use at least 30% of that to buy BH shares in the open market, within 120 days.

Rights offering does not count as open market purchases, right?

[krazeenyc]

Muscleman -- re: the rights offerings...

 

I think BH will continue doing the rights offerings mostly because Biglari indicated he would do so -- unless he had a dual class structure instead. Of course, not sure if they will occur annually but I would expect the answer is yes. It allows he to fulfill his obligation to use a portion of his compensation on buying shares. This allows him to "buy shares" regardless of the price of the shares at the time.

 

Engineering a way to buy shares, that he has to buy anyway, at a discount.

 

"BH is no stock for dummies."

 

Indeed.

 

Are you sure about that? I think the agreement was that once he received the year end bonus, he has to use at least 30% of that to buy BH shares in the open market, within 120 days.

Rights offering does not count as open market purchases, right?

 

I think ... You're right.

[Kuhndan]

"I didn't find that, but did see a reference to a 6% annual hurdle rate.  I'm taking that as it moves the hurdle up 6% every year regardless of whether it was met or not."

 

I've reviewed Sardar's compensation agreement specifically to see if it moves up 6% per year. While I assumed that was the case, I sure couldn't find it in the agreement. At this point, I don't think it moves. Any one else have insight this?

[OracleofCarolina]

Someone asked him at the annual meeting last year if there was a "high watermarK" and he said yes.

[Kuhndan]

Someone asked him at the annual meeting last year if there was a "high watermarK" and he said yes.

 

He definitely has a high watermark and he gets paid once he exceeds it by 6%, but I do not see any where that it says he has to grow 6% per year. I could be wrong, but my understanding is if he has returns of 0% in year 1, 0% year 2 and 10% in year 3, Sardar would be paid incentive comp in year three.

[rayfinkle]

Someone asked him at the annual meeting last year if there was a "high watermarK" and he said yes.

 

He definitely has a high watermark and he gets paid once he exceeds it by 6%, but I do not see any where that it says he has to grow 6% per year. I could be wrong, but my understanding is if he has returns of 0% in year 1, 0% year 2 and 10% in year 3, Sardar would be paid incentive comp in year three.

 

anyone find exhibit a to this: http://www.biglariholdings.com/IncentiveAgreement.pdf#zoom=100 ???

[muscleman]

Someone asked him at the annual meeting last year if there was a "high watermarK" and he said yes.

 

He definitely has a high watermark and he gets paid once he exceeds it by 6%, but I do not see any where that it says he has to grow 6% per year. I could be wrong, but my understanding is if he has returns of 0% in year 1, 0% year 2 and 10% in year 3, Sardar would be paid incentive comp in year three.

 

anyone find exhibit a to this: http://www.biglariholdings.com/IncentiveAgreement.pdf#zoom=100 ???

 

Yeah. This was the SEC filing I saw. :)

[rayfinkle]

See page 3: 

 

https://www.sec.gov/Archives/edgar/data/93859/000092189510001420/def14a07428_11052010.htm

[rayfinkle]

Exhibit a is at the end

[muscleman]

Here is my rough estimates on the investment return of Steak n Shake's franchisee training expenses.

 

10-K:

"General and administrative expenses increased from $64,286 or 8.7% of total net revenues in 2012 to $76,799 or 10.2% of total net revenues in the current year".

 

Annual letter 2013:

Franchisee revenue 2012: 6,499, 2013: 8,707

In fiscal 2012, these costs increased to 14.8% of G&A. We have steadily intensified our investment, upping it to 24.8% of G&A in fiscal 2013.

 

2012 franchisee training expense is 9.47 Million. 2013 is 18.8 Million. The 9 million increase resulted in 2.3 Million increase in Franchisee revenue. Not a bad return.

 

in fiscal 201l as direct franchising costs represented 10.4% of G&A.

"General and administrative expenses increased from $48,404 or 6.8% of total net revenues in 2011"

 

So 2011 franchisee training expense is about $4.8 Million. The increase from 2011 to 2012 is about $4.67 Million for franchisee training. This resulted in 1.1 Million increase in Franchisee revenue increase. Again not a bad return.

 

Not that this assumes that same store sales for existing franchisees' revenue didn't increase, which makes the number look better than it actually is. But the same store sales between 2011 and 2013 increased only about 3-4% per year. Taking that into account, the return on franchisee training expenses should be about 18%. Still not bad.

 

Note that these franchisee training expenses are NOT capitalized into the book value. Therefore these investments have no effect on book value increase, and Biglari won't get any incentive payments on this.

 

I don't see why most value investors hate Biglari so much. If he is a real blood sucker, he could use very aggressive accounting to boost book value and get him big pay checks. Most people would rather prefer typical executives who have big stock option plans and use aggressive accounting to pump up stock prices so they can STEAL money from shareholders, rather than Biglari who "Robs" shareholders.

 

No one seems to criticize Buffet partnerships though. Why is that?

Just curious, how much does Sanjeev's hedge fund charge? How much does Pabrai's hedge fund charge?

[muscleman]

I found it:

http://www.cornermarketcapital.com/MPIC_Funds.html

"Compensation:  25% of profits above a 6% annual hurdle carried year to year"

 

Does anyone know about Pabrai's fee structure?

 

Sanjeev's fund charges the same as Biglari, so why are you so unhappy about Biglari? I'd like to understand the difference.  :)

[BTShine]

At risk of my speaking out of turn...

 

I think people are angry about his compensation because he took cash of the company (one which he owns a small % of) and put it into his own fund.  So, some shareholders might feel like they didn't sign up for him to charge a fee.  They assumed he'd perform this work for free, like Buffett did.  Personally I'm not mad about it, but I just came onto this company recently, so I wasn't there for the 'bait and switch' or whatever the frustrated shareholders would call it.

 

Also, you said "Note that these franchisee training expenses are NOT capitalized into the book value. Therefore these investments have no effect on book value increase, and Biglari won't get any incentive payments on this."  I totally agree.  An additional franchise revenue stream of $5 million might be worth $75 million to the company (assuming there's little ongoing costs associated with the annual $5 million)

 

 

[peter1234]

Does anyone know about Pabrai's fee structure?

 

25% above 6%

 

;)

[BTShine]

Doesn't Einhorn earn fees of his Reinsurance Company  GLRE?  This BH setup seems not uncommon when you look around. 

 

On another note:

- Incentive Comp Fees

- Names on Signage

- Pictures of him in restaurant

- Company named after himself

- Goal of a low cost structure

 

These are all things done by other successful and revered businessmen in America (Dave Thomas of Wendy's, Sam Walton of Walmart, etc.)  For some reason people are frustrated because Biglari didn't start the company himself, whereas the others started their respective company.  I'm not sure the frustration is warranted. 

[muscleman]

At risk of my speaking out of turn...

 

I think people are angry about his compensation because he took cash of the company (one which he owns a small % of) and put it into his own fund.  So, some shareholders might feel like they didn't sign up for him to charge a fee.  They assumed he'd perform this work for free, like Buffett did.  Personally I'm not mad about it, but I just came onto this company recently, so I wasn't there for the 'bait and switch' or whatever the frustrated shareholders would call it.

 

Also, you said "Note that these franchisee training expenses are NOT capitalized into the book value. Therefore these investments have no effect on book value increase, and Biglari won't get any incentive payments on this."  I totally agree.  An additional franchise revenue stream of $5 million might be worth $75 million to the company (assuming there's little ongoing costs associated with the annual $5 million)

 

I get it now, and I can see how the "Buffet premium" turns into "Biglari discount" due to this.

 

[muscleman]

Doesn't Einhorn earn fees of his Reinsurance Company  GLRE?  This BH setup seems not uncommon when you look around. 

 

On another note:

- Incentive Comp Fees

- Names on Signage

- Pictures of him in restaurant

- Company named after himself

- Goal of a low cost structure

 

These are all things done by other successful and revered businessmen in America (Dave Thomas of Wendy's, Sam Walton of Walmart, etc.)  For some reason people are frustrated because Biglari didn't start the company himself, whereas the others started their respective company.  I'm not sure the frustration is warranted.

 

GLRE charged 2/20 before and lowered to 1.5/15. However, they have stock option grants on top of that. I think that's a double rip off.