BH - Biglari Holdings

[jschembs]

Gio - change of board is a good thing for BH shareholders. It is the catalyst that will unlock value  and remove some of the burdensome agreements in place.

 

 

I don't understand.... Seth has 0 shares of BH. His fund only has 3000 shares. He has almost no skin in the game. What's the point here to push for a change?

 

As I said before, my guess would be they've made an initial purchase to enable the filing (as far as I know, you can't launch a proxy or file a 13D owning zero shares), with plans to build a position. They had a substantial position in SODI and are now AIRT's largest shareholder, so it's certainly not their MO to pull stunts like others I've seen in the microcap world, who launch a proxy with close to zero ownership, and appear only to be trying to make a name for themselves as activists.

[ragu]

Gio - change of board is a good thing for BH shareholders. It is the catalyst that will unlock value  [...]

 

I wouldn't worry about unlocking value (to the tune of 50-100%) when Sardar is the catalyst you need, running the company without distractions, in order to make between 100-200x your money over the next 30 years.

 

Best,

Ragu

[muscleman]

Gio - change of board is a good thing for BH shareholders. It is the catalyst that will unlock value  and remove some of the burdensome agreements in place.

 

 

I don't understand.... Seth has 0 shares of BH. His fund only has 3000 shares. He has almost no skin in the game. What's the point here to push for a change?

 

As I said before, my guess would be they've made an initial purchase to enable the filing (as far as I know, you can't launch a proxy or file a 13D owning zero shares), with plans to build a position. They had a substantial position in SODI and are now AIRT's largest shareholder, so it's certainly not their MO to pull stunts like others I've seen in the microcap world, who launch a proxy with close to zero ownership, and appear only to be trying to make a name for themselves as activists.

 

Ok. Then why not build the positions first and launch the fight later? Wouldn't that give them lower cost basis?

[jschembs]

Gio - change of board is a good thing for BH shareholders. It is the catalyst that will unlock value  and remove some of the burdensome agreements in place.

 

 

I don't understand.... Seth has 0 shares of BH. His fund only has 3000 shares. He has almost no skin in the game. What's the point here to push for a change?

 

As I said before, my guess would be they've made an initial purchase to enable the filing (as far as I know, you can't launch a proxy or file a 13D owning zero shares), with plans to build a position. They had a substantial position in SODI and are now AIRT's largest shareholder, so it's certainly not their MO to pull stunts like others I've seen in the microcap world, who launch a proxy with close to zero ownership, and appear only to be trying to make a name for themselves as activists.

 

Ok. Then why not build the positions first and launch the fight later? Wouldn't that give them lower cost basis?

 

Good point - that being said, I still don't view them as a slash-and-burn activist looking to greenmail BH or use this as an example to build their activist resume.

[OracleofCarolina]

Gio - change of board is a good thing for BH shareholders. It is the catalyst that will unlock value  and remove some of the burdensome agreements in place.

 

 

I don't understand.... Seth has 0 shares of BH. His fund only has 3000 shares. He has almost no skin in the game. What's the point here to push for a change?

 

As I said before, my guess would be they've made an initial purchase to enable the filing (as far as I know, you can't launch a proxy or file a 13D owning zero shares), with plans to build a position. They had a substantial position in SODI and are now AIRT's largest shareholder, so it's certainly not their MO to pull stunts like others I've seen in the microcap world, who launch a proxy with close to zero ownership, and appear only to be trying to make a name for themselves as activists.

 

Ok. Then why not build the positions first and launch the fight later? Wouldn't that give them lower cost basis?

I think that was the deadline for the board nominations so they had to file then even though they had not built up their position

[muscleman]

I think that was the deadline for the board nominations so they had to file then even though they had not built up their position

 

That's a possible explanation, but not a strong one.

If you look at the trading activities of these guys in that SEC filing, you can see that they recently sold a bunch of their positions. So they used to have 6000 shares, accumulated in the past two years, all of a sudden sold 50% of them this year around the rights offering period, and started going activism? Does that make sense?

[NeverLoseMoney]

I think that was the deadline for the board nominations so they had to file then even though they had not built up their position

 

That's a possible explanation, but not a strong one.

If you look at the trading activities of these guys in that SEC filing, you can see that they recently sold a bunch of their positions. So they used to have 6000 shares, accumulated in the past two years, all of a sudden sold 50% of them this year around the rights offering period, and started going activism? Does that make sense?

I agree with jschembs' statements about Groveland Capital / Swenson. I was surprised to see their filing for BH. The only way I can make sense of this: they realize they don't have nearly enough capital themselves to be able to put pressure on Biglari and will need a lot of support from some large shareholders (GAMCO?) to get anything done. Considering the targets they have pursued in the past (AIRT, PDEX), I assume they are still working with a relatively small amount of capital. So, you take your token position and do the initial paperwork to show your intent. Now comes the time to gather the support. If there is any indication of support from other large shareholders there is probably still time to buy a more serious position.

 

It doesn't make sense for them to sink a lot of capital into a position like BH if they are unsure about the amount of support they can expect from other holders. I would not want to end up with <5% of BH and no way to tighten the screws on Biglari if I was in their position.

[giofranchi]

This imo doesn’t make any sense at all:

You want to be an activist when you find a company with a management whose behavior is non-entrepreneurial.

That’s the definition of “active investing” according to Icahn and others.

I regard Biglari as entrepreneurial as a human being could possibly become… therefore, this imo doesn’t make any sense at all!!

And I will leave it at that.

 

Gio

 

[randomep]

 

 

The current market value of BH’s CBRL stake is over $550 million.  I realize people could reasonably adjust this up or down based on various beliefs about that company/etc.  I adjust it down to about $450 million based on the associated tax burden with the gain and a liquidity discount.

 

The cash I just take at a dollar for dollar at face value – so $200 million (this includes the $86 million post-rights offering).

 

That means before we even get to Steak n Shake – the value of the components has already reached the market cap of Biglari Holdings. 

 

 

You are saying the value of certain components of assets (cash + partnership investments) are equal to the market cap, but they have a huge balance sheet with $536M in liabilities that you haven't considered!  Are you saying they belong to the operational portion of the business that generates more than $50M in cash flow?

 

[BTShine]

 

 

The current market value of BH’s CBRL stake is over $550 million.  I realize people could reasonably adjust this up or down based on various beliefs about that company/etc.  I adjust it down to about $450 million based on the associated tax burden with the gain and a liquidity discount.

 

The cash I just take at a dollar for dollar at face value – so $200 million (this includes the $86 million post-rights offering).

 

That means before we even get to Steak n Shake – the value of the components has already reached the market cap of Biglari Holdings. 

 

 

You are saying the value of certain components of assets (cash + partnership investments) are equal to the market cap, but they have a huge balance sheet with $536M in liabilities that you haven't considered!  Are you saying they belong to the operational portion of the business that generates more than $50M in cash flow?

 

I'd think that's what he's saying because when you read the Chairman's Letters, etc. it's discussed that the subsidiaries carry all of the debt, which is non-recourse to the parent or holding company.

 

 

[randomep]

 

 

The current market value of BH’s CBRL stake is over $550 million.  I realize people could reasonably adjust this up or down based on various beliefs about that company/etc.  I adjust it down to about $450 million based on the associated tax burden with the gain and a liquidity discount.

 

The cash I just take at a dollar for dollar at face value – so $200 million (this includes the $86 million post-rights offering).

 

That means before we even get to Steak n Shake – the value of the components has already reached the market cap of Biglari Holdings. 

 

 

You are saying the value of certain components of assets (cash + partnership investments) are equal to the market cap, but they have a huge balance sheet with $536M in liabilities that you haven't considered!  Are you saying they belong to the operational portion of the business that generates more than $50M in cash flow?

 

I'd think that's what he's saying because when you read the Chairman's Letters, etc. it's discussed that the subsidiaries carry all of the debt, which is non-recourse to the parent or holding company.

 

Well something doesn't smell right. He attributes all the cash to the parent, but all the liabilities to the subsidiary. And in that case, the subsidiaries would have a net negative equity. So he is saying the subsidiaries are trading at book (which is negative) so it is as if they had negative market value.

 

 

[BTShine]

 

 

The current market value of BH’s CBRL stake is over $550 million.  I realize people could reasonably adjust this up or down based on various beliefs about that company/etc.  I adjust it down to about $450 million based on the associated tax burden with the gain and a liquidity discount.

 

The cash I just take at a dollar for dollar at face value – so $200 million (this includes the $86 million post-rights offering).

 

That means before we even get to Steak n Shake – the value of the components has already reached the market cap of Biglari Holdings. 

 

 

You are saying the value of certain components of assets (cash + partnership investments) are equal to the market cap, but they have a huge balance sheet with $536M in liabilities that you haven't considered!  Are you saying they belong to the operational portion of the business that generates more than $50M in cash flow?

 

I'd think that's what he's saying because when you read the Chairman's Letters, etc. it's discussed that the subsidiaries carry all of the debt, which is non-recourse to the parent or holding company.

 

Well something doesn't smell right. He attributes all the cash to the parent, but all the liabilities to the subsidiary. And in that case, the subsidiaries would have a net negative equity. So he is saying the subsidiaries are trading at book (which is negative) so it is as if they had negative market value.

 

Randomep, I'm not following your logic.  The subsidiaries might have significant assets, such as real estate, that are valuable and larger than the debt load.  It's not weird for subsidiaries to carry the recourse debt and the parent to hold the cash.  I believe Berkshire Hathaway is structured similarly.

 

 

[randomep]

 

 

The current market value of BH’s CBRL stake is over $550 million.  I realize people could reasonably adjust this up or down based on various beliefs about that company/etc.  I adjust it down to about $450 million based on the associated tax burden with the gain and a liquidity discount.

 

The cash I just take at a dollar for dollar at face value – so $200 million (this includes the $86 million post-rights offering).

 

That means before we even get to Steak n Shake – the value of the components has already reached the market cap of Biglari Holdings. 

 

 

You are saying the value of certain components of assets (cash + partnership investments) are equal to the market cap, but they have a huge balance sheet with $536M in liabilities that you haven't considered!  Are you saying they belong to the operational portion of the business that generates more than $50M in cash flow?

 

I'd think that's what he's saying because when you read the Chairman's Letters, etc. it's discussed that the subsidiaries carry all of the debt, which is non-recourse to the parent or holding company.

 

Well something doesn't smell right. He attributes all the cash to the parent, but all the liabilities to the subsidiary. And in that case, the subsidiaries would have a net negative equity. So he is saying the subsidiaries are trading at book (which is negative) so it is as if they had negative market value.

 

Randomep, I'm not following your logic.  The subsidiaries might have significant assets, such as real estate, that are valuable and larger than the debt load.  It's not weird for subsidiaries to carry the recourse debt and the parent to hold the cash.  I believe Berkshire Hathaway is structured similarly.

 

OK from their 10k filed this month:

 

assets=1174k

liabilities=536k

equity=639k

 

now as I recall the original poster said there is value of 200k cash + 500k CBRL, so that is 700k value to the parent. If you remove 700k of assets from the above balance sheet you have negative equity attributed to Shake and Steak, Maxim etc etc.

 

right?

 

so fundementally the value of those businesses is not negative, so the market value of the stock must trade much higher than equity and right now it is trading exactly AT equity, so hence you are getting those businesses for free? right?

 

 

[treasurehunt]

OK from their 10k filed this month:

 

assets=1174k

liabilities=536k

equity=639k

 

now as I recall the original poster said there is value of 200k cash + 500k CBRL, so that is 700k value to the parent. If you remove 700k of assets from the above balance sheet you have negative equity attributed to Shake and Steak, Maxim etc etc.

 

There is also about 97 million (as of the 10K, a higher number now) in deferred tax liability attributed to the parent. So the subs probably have positive equity, but it's a fairly small number. I think it's likely that the subs are worth much more than their book value.

[BTShine]

Yeah, I think that's pretty much right. 

 

Personally, I think the company is worth about $1.4 Billion, which is much higher than its book value.

[giofranchi]

Personally I do not attribute too much importance to BH's book value.

 

NBL0303,

Could you please tell us what you actually think? Is BH FV:

 

a) way below BV

b) little below BV

c) circa BV

d) little above BV

e) way above BV

 

;)

 

Thank you,

 

Gio

[BTShine]

For those that do think BH's book value is important, it is interesting that BH has a higher book value at $639 million than Cracker Barrel at $538 million, but Cracker Barrel's market price is almost 5 times higher than Biglari Holdings' market price ($3 billion plus versus around $700 million).

 

That is very interesting. 

 

On a valuation via Free Cash Flow note -- Cracker Barrel seems to bring in about $120 million/year in FCF (which is a growing number thus far, hence the higher multiple?), while BH brings in about $75 million in FCF (If you apply BH 20% of CBRL's FCF).  Steak 'N Shake brings in about $50 million and the CBRL brings in about $25 million in 'look-through-earnings'.

 

CBRL sells for approximately 25 Times FCF

BH sells for approximately 9 Times FCF

 

 

 

[giofranchi]

(Also, I know you, Gio, have a ton of faith in Sardar Biglari's ability to deliver a great return to his shareholders, my valuation is not based on that at all but rather on the current value of its components without assuming a great return on future deployments of capital.)

 

BVPS is always meaningful. Because that’s the shareholders’ capital. Of course, if you are in a business which generates lots of free cash with small amount of capital, you might be more interested in BVPS growth, rather than BVPS alone (and that’s why I think Biglari’s capital allocation skills are very important!). Yet, the discounted value of the future BVPS, which is FV, takes into consideration both BVPS and its rate of growth for many years into the future. The only exception might be a company that distributes a large percentage of the free cash it generates trough dividends… BH doesn’t seem to be the case! ;)

 

Gio

 

[BTShine]

BVPS is not always meaningful to value investors.

 

Agreed. 

 

Some companies have used strong FCF to buy back their own stock, which can create negative book value but huge returns thanks in part to the buybacks and continued FCF (see Autozone starting in '09 when their BV went negative).

[giofranchi]

Ok, so now let’s just follow the money:

 

With every dime my companies earn, I can do two things:

1) I can distribute that dime to my shareholders through a dividend

2) I can keep that dime inside the companies, in which case it goes to increase the capital shareholders own inside the companies

 

If you are aware of something else I could do with that dime, please let me know!

 

Let’s just take into consideration 2), because it seems to be the case that best fits with the BH situation.

Each dime I keep inside the companies must be:

a) Used to increase my companies’ cash reserve

b) Used to be invested in some productive assets (either my own companies, or some new assets)

If my companies were public, I’d have a third choice, and that dime could be:

c) Used to buy back shares

 

So for instance, Biglari uses shareholders capital to invest in CBRL through the LF, and to buy BH shares that get reported on the books as Treasury Shares.

 

If CBRL were a stupid investment, as soon as Biglari makes use of shareholders capital to buy it, shareholders capital decreases significantly. The vice versa is true, if CBRL were a brilliant investment.

 

NBL0303,

The same applied to Enron and Lehman: though they reported positive BV, true shareholders capital already was at zero, because of the stupid ways management decided to make use of it.

 

When I calculate BH BVPS, I always add to reported BV also the market value of the Treasury Shares held by the LF on behalf of BH shareholders.

 

BTShine,

The same was true in the case of Autozone: of course, true shareholders capital was not reported BV, which was negative, but reported BV plus all the capital used to buy back shares.

 

Shareholders capital is always meaningful. Because it is a starting point. Apply to that whichever rate of growth you deem appropriate, and calculate what shareholders will own 30 years from now. Discount that number to the present, and you get FV.

 

But all this is obvious… therefore, I must be missing something! ;)

 

Gio

 

[giofranchi]

Maybe the misunderstanding lies in the fact that by “BV” I don’t mean the exact number reported on the Balance Sheet… Instead, I quite arbitrarily mean the true value at any given time of the capital invested by shareholders in a company… Which, of course, is wrong, because by definition “BV” is the number you find on the “books”… ;)

 

Gio

 

[BTShine]

Maybe the misunderstanding lies in the fact that by “BV” I don’t mean the exact number reported on the Balance Sheet… Instead, I quite arbitrarily mean the true value at any given time of the capital invested by shareholders in a company… Which, of course, is wrong, because by definition “BV” is the number you find on the “books”… ;)

 

Gio

 

I assumed people were talking about the BV you see on the books according to GAAP. So, yes that's probably where the misunderstanding comes from.

[randomep]

 

I just started looking at BH last weekend. And I have a question that I hope you guys can answer. If the boss wants to invest in a business, how will he do it? Through buying it as a wholly owned BH subsidiary or through investing in the lion funds and buy it through the funds?

 

thanks

[muscleman]

 

I just started looking at BH last weekend. And I have a question that I hope you guys can answer. If the boss wants to invest in a business, how will he do it? Through buying it as a wholly owned BH subsidiary or through investing in the lion funds and buy it through the funds?

 

thanks

 

Buying whole businesses is directly through BH parent. Buying marketable securities is through the Lion fund.

He bought Maxim magazine and First guard insurance this year. I think these two as well as Steak n Shake franchisee platform are sufficient investing platforms for him for the next few years. He will plow earnings into these platforms and grow from there.

[randomep]

 

I just started looking at BH last weekend. And I have a question that I hope you guys can answer. If the boss wants to invest in a business, how will he do it? Through buying it as a wholly owned BH subsidiary or through investing in the lion funds and buy it through the funds?

 

thanks

 

Buying whole businesses is directly through BH parent. Buying marketable securities is through the Lion fund.

He bought Maxim magazine and First guard insurance this year. I think these two as well as Steak n Shake franchisee platform are sufficient investing platforms for him for the next few years. He will plow earnings into these platforms and grow from there.

 

Muscleman, is this your general impression or is this something in the articles of incorporation?

 

I want to know is the decision at his discretion with the only constraint on his actions is his fiduciary duty to the BH sharedholders?

 

BTW, you have quite a bit invested in BH huh? certainly gives me a bit more confidence