BH - Biglari Holdings

[ragnarisapirate]

Maybe he is working on

 

Radio Shack by Biglari!

 

Close, but actually:

 

Shake Shack by Biglari!

 

You say that, but they could actually do a lot of Steak n' Shake Signatures in RSH locations... I doubt it would happen, but those locations were designed to be put in the same type of locations that Radio Shacks are located.

[merkhet]

Also, I'm excited to hear what a few of you think about this sale of CBRL by BH.  Gio and Merkhet come to mind...

 

I prefer to invest with Biglari rather than in Biglari, so I am interested to see what he does with the cash as well. (If he buys back shares, I'm less interested...)

[BTShine]

I think part of his goal is to buy back more shares via the Lion Fund(s).  That gives him more control (which I'm not excited about) and it effectively reduces share count at a price I believe is well below intrinsic value (which I am very excited about) and it also unloads CBRL shares at what I believe is full value ( selling CBRL dollars for a dollar to buy back BH dollars for fifty cents). 

 

I think BH is worth about $500+$750+$100 million = CBRL Stake + SnS + Misc cash, etc = $1,350 million for a net 1.7 million shares.  1.350 Billion / 1.7 is  ~$800 a share. 

[BTShine]

I think part of his goal is to buy back more shares via the Lion Fund(s).  That gives him more control (which I'm not excited about) and it effectively reduces share count at a price I believe is well below intrinsic value (which I am very excited about) and it also unloads CBRL shares at what I believe is full value ( selling CBRL dollars for a dollar to buy back BH dollars for fifty cents). 

 

I think BH is worth about $500+$750+$100 million = CBRL Stake + SnS + Misc cash, etc = $1,350 million for a net 1.7 million shares.  1.350 Billion / 1.7 is  ~$800 a share.

 

Thank you for sharing your thoughts - very interesting.

 

If he sells the entire CBRL stake for anything near the current price, with the cash BH already had on hand, they could almost buy the entire company back.  Not that they will do that, but it is an interesting illustration of how undervalued BH is (in purely valuation terms, without regards to the Biglari personal issues which I realize disqualifies the company for some investors here regardless of the valuation characteristics).

 

Yeah, that's how I look at it. 

[thepupil]

if he is selling the partnership's shares for cash what is the tax and incentive fee leakage as a percentage of the gross CBRL stake?

 

I am not invested and have only looked at this briefly but I always thought Mr. Big would monetize CBRL in a more tax efficient way.

[Jurgis]

I prefer to invest with Biglari rather than in Biglari, so I am interested to see what he does with the cash as well.

 

Did you buy AIRT and ISIG with Biglari? ;)

[merkhet]

I prefer to invest with Biglari rather than in Biglari, so I am interested to see what he does with the cash as well.

 

Did you buy AIRT and ISIG with Biglari? ;)

 

Haha, no. I managed to skip those. :)

[abitofvalue]

I think part of his goal is to buy back more shares via the Lion Fund(s).  That gives him more control (which I'm not excited about) and it effectively reduces share count at a price I believe is well below intrinsic value (which I am very excited about) and it also unloads CBRL shares at what I believe is full value ( selling CBRL dollars for a dollar to buy back BH dollars for fifty cents). 

 

I think BH is worth about $500+$750+$100 million = CBRL Stake + SnS + Misc cash, etc = $1,350 million for a net 1.7 million shares.  1.350 Billion / 1.7 is  ~$800 a share. 

 

Why would buying back shares through the Lion Fund reduce share count? I guess it does to an extent - BH's proportional share of Lion Fund ownership; but they are separate entities. Earnings / Divs will still need to be paid to Lion Fund and Lion Fund will pay taxes / incentive comp to its managers. This is like saying ESL / Eddie own close to 50% of SHLD so just assume the company's sharecount is half of what is reported.  The leakage introduced by this arrangement is beyond unnecessary.

 

Your valuation is reasonable enough but there is also $300M+ of debt and tax leakage to account for CBRL sale. On the other hand you are being conservative in not ascribing any value in Bigs ability to invest the cash so there's one area of addditional upside. No doubt its undervalued if one ignores Biglari exporpriation / ego risk.

[frugalchief]

I think part of his goal is to buy back more shares via the Lion Fund(s).  That gives him more control (which I'm not excited about) and it effectively reduces share count at a price I believe is well below intrinsic value (which I am very excited about) and it also unloads CBRL shares at what I believe is full value ( selling CBRL dollars for a dollar to buy back BH dollars for fifty cents). 

 

I think BH is worth about $500+$750+$100 million = CBRL Stake + SnS + Misc cash, etc = $1,350 million for a net 1.7 million shares.  1.350 Billion / 1.7 is  ~$800 a share. 

 

Why would buying back shares through the Lion Fund reduce share count? I guess it does to an extent - BH's proportional share of Lion Fund ownership; but they are separate entities. Earnings / Divs will still need to be paid to Lion Fund and Lion Fund will pay taxes / incentive comp to its managers. This is like saying ESL / Eddie own close to 50% of SHLD so just assume the company's sharecount is half of what is reported.  The leakage introduced by this arrangement is beyond unnecessary.

 

Your valuation is reasonable enough but there is also $300M+ of debt and tax leakage to account for CBRL sale. On the other hand you are being conservative in not ascribing any value in Bigs ability to invest the cash so there's one area of addditional upside. No doubt its undervalued if one ignores Biglari exporpriation / ego risk.

 

BH still has to count pro-rata BH's shares held through TLF as Treasury stock (I still believe).  In my calculations I view them as still outstanding, since they are.  TLF could dump them today if they wanted. But some view as actual treasury.  But I'm no IRS rules guru.

 

if he is selling the partnership's shares for cash what is the tax and incentive fee leakage as a percentage of the gross CBRL stake?

 

I am not invested and have only looked at this briefly but I always thought Mr. Big would monetize CBRL in a more tax efficient way.

 

Hasn't he already received the incentive fee?  Or at least the majority of it, since he gets the incentive fee based on annual fund performance.

 

Also, since TLF is a LP, wouldn't BH be responsible to pay taxes on the realized gains at their tax rate since they hold LP shares?  Or is that already counted in as a liability for accrued taxes on BH balance sheet.

[thepupil]

 

 

Hasn't he already received the incentive fee?  Or at least the majority of it, since he gets the incentive fee based on annual fund performance.

 

Also, since TLF is a LP, wouldn't BH be responsible to pay taxes on the realized gains at their tax rate since they hold LP shares?  Or is that already counted in as a liability for accrued taxes on BH balance sheet.

 

He could've deferred the fees until realization (I don't know) and taxes are obviously deferred until they are realized gains.

 

Yes, BH is responsible for paying the taxes, not the Lion Fund.

 

A corporation (highest tax rate) is a very bad way to hold an LP interest and the fees and the tax inefficiency of using a corporation to own stocks are a reason people apply a discount to this stock, in addition to Biglari's rep. Selling CBRL in this manner brings forward the deferred tax liability and justifies that portion of the discount (but it appears that BH is discounted to such a degree that taxes and hedge fund comp fee layer at lions funds isn't all of it).

 

The Original Gangster BH known as Berkshire Hathaway holds its stocks almost perpetually and through insurance subs that have favorable tax treatment of divvies btw.

 

The liability is already on the balance sheet, but I'm pointing out the fee and tax realization because some people may just be using the gross value of CBRL as the amount BH will receive if they sell shares (rather than book value of the partnership interest which has the deferred tax liability built in).

 

 

[BTShine]

I think part of his goal is to buy back more shares via the Lion Fund(s).  That gives him more control (which I'm not excited about) and it effectively reduces share count at a price I believe is well below intrinsic value (which I am very excited about) and it also unloads CBRL shares at what I believe is full value ( selling CBRL dollars for a dollar to buy back BH dollars for fifty cents). 

 

I think BH is worth about $500+$750+$100 million = CBRL Stake + SnS + Misc cash, etc = $1,350 million for a net 1.7 million shares.  1.350 Billion / 1.7 is  ~$800 a share. 

 

Why would buying back shares through the Lion Fund reduce share count? I guess it does to an extent - BH's proportional share of Lion Fund ownership; but they are separate entities. Earnings / Divs will still need to be paid to Lion Fund and Lion Fund will pay taxes / incentive comp to its managers. This is like saying ESL / Eddie own close to 50% of SHLD so just assume the company's sharecount is half of what is reported.  The leakage introduced by this arrangement is beyond unnecessary.

 

Your valuation is reasonable enough but there is also $300M+ of debt and tax leakage to account for CBRL sale. On the other hand you are being conservative in not ascribing any value in Bigs ability to invest the cash so there's one area of addditional upside. No doubt its undervalued if one ignores Biglari exporpriation / ego risk.

 

Seems like you've answered most of your own questions, so I wont add much.  All valuations are my own, approximate, may change at any time and include the non-recourse debt.

 

Cheers!

[frugalchief]

 

 

Hasn't he already received the incentive fee?  Or at least the majority of it, since he gets the incentive fee based on annual fund performance.

 

Also, since TLF is a LP, wouldn't BH be responsible to pay taxes on the realized gains at their tax rate since they hold LP shares?  Or is that already counted in as a liability for accrued taxes on BH balance sheet.

 

He could've deferred the fees until realization (I don't know) and taxes are obviously deferred until they are realized gains.

 

Yes, BH is responsible for paying the taxes, not the Lion Fund.

 

A corporation (highest tax rate) is a very bad way to hold an LP interest and the fees and the tax inefficiency of using a corporation to own stocks are a reason people apply a discount to this stock, in addition to Biglari's rep. Selling CBRL in this manner brings forward the deferred tax liability and justifies that portion of the discount (but it appears that BH is discounted to such a degree that taxes and hedge fund comp fee layer at lions funds isn't all of it).

 

The Original Gangster BH known as Berkshire Hathaway holds its stocks almost perpetually and through insurance subs that have favorable tax treatment of divvies btw.

 

The liability is already on the balance sheet, but I'm pointing out the fee and tax realization because some people may just be using the gross value of CBRL as the amount BH will receive if they sell shares (rather than book value of the partnership interest which has the deferred tax liability built in).

 

Thanks.  Will be interesting to see what he does with CBRL....to make it as efficient as possible when exiting.

[BTShine]

Agreed that there will be a significant tax burden on the shares sold.  That said, at some times it makes sense to sell one holding in order to purchase another (if one is fair valued/over valued, and the other is significantly undervalued). 

 

I believe fee realization only occurs from here on if he outperforms his hurdle, no?  It's also currently capped at $10 million a year.

 

 

[gfp]

I don't think his incentive allocation as manager of the Lion Funds is capped at $10m per year.  Only his incentive comp from Biglari Holdings is capped.

 

Agreed that there will be a significant tax burden on the shares sold.  That said, at some times it makes sense to sell one holding in order to purchase another (if one is fair valued/over valued, and the other is significantly undervalued). 

 

I believe fee realization only occurs from here on if he outperforms his hurdle, no?  It's also currently capped at $10 million a year.

[frugalchief]

I don't think his incentive allocation as manager of the Lion Funds is capped at $10m per year.  Only his incentive comp from Biglari Holdings is capped.

 

Agreed that there will be a significant tax burden on the shares sold.  That said, at some times it makes sense to sell one holding in order to purchase another (if one is fair valued/over valued, and the other is significantly undervalued). 

 

I believe fee realization only occurs from here on if he outperforms his hurdle, no?  It's also currently capped at $10 million a year.

 

Think he earned $14.7m or so in BCC from 2014 incentive.  But with BH he's down $4.9m, so his high-water mark will apply in BH (operating businesses only count now).

[shalab]

Where is Gio? I was expecting him to raise Biglari flag  ;D. Wont be surprised if he sells everything.

 

I don't think his incentive allocation as manager of the Lion Funds is capped at $10m per year.  Only his incentive comp from Biglari Holdings is capped.

 

Agreed that there will be a significant tax burden on the shares sold.  That said, at some times it makes sense to sell one holding in order to purchase another (if one is fair valued/over valued, and the other is significantly undervalued). 

 

I believe fee realization only occurs from here on if he outperforms his hurdle, no?  It's also currently capped at $10 million a year.

 

Think he earned $14.7m or so in BCC from 2014 incentive.  But with BH he's down $4.9m, so his high-water mark will apply in BH (operating businesses only count now).

[giofranchi]

Gio-- apologies if this has been asked before or if it sounds sarcastic-- its not. But is there any one specific thing that Biglari has done that you don't like?

 

For example were you in favor of the dual share class structure? What about the name licensing /change in control contract?

 

Sorry guys,

I am at home with a terrible flu and haven't checked the board for the last 3 days...

 

There are a lot of things I don't like about Biglari right now: the most obviuos is the compensation agreement, I obviously think it would be much better to pay Biglari far less than shareholders are doing right now!

 

But what matters to me the most is if I see rational behavior, or not.

 

I try to put myself in Biglari's shoes, and ask what I would do: he finds himself managing a company which he owns only a small percentage of... But his goal should obviously be to buy much more of BH over time, and to get control over it through direct ownership.

 

Could he ever achieve that goal without an income? No.

 

Therefore, he is not working for us for free. How much is he asking to be paid then? His roles are both the one of CEO and the one of funds manager... It seems to me he asks to be paid as much as any external CEO would demand, and as much as any external funds manager would demand.

 

As things stand right now, I don't think it could be any different.

 

Of course, we will continue monitoring how the situation evolves: at one point I would like to see him tie his personal wealth solely to the BH stock performance. But right now it simply is not possible: if you think about it, in fact it is the right opposite! The more BH stock price appreciates, the less he will be able to buy...

 

What I want to see him doing right now is to continue accumulating BH stocks, as I try to accumulate them myself.

 

When he finally owns enough, should he go on asking to be paid a very generous incentive, I will question the rationale behind such a decision.

 

Gio

[giofranchi]

Also, I'm excited to hear what a few of you think about this sale of CBRL by BH.  Gio and Merkhet come to mind...

 

I had already expressed the view that, if I were in Biglari's shoes, I would have sold CBRL. ;)

 

Therefore, another good decision imo! :)

 

Cheers,

 

Gio

[BTShine]

Also, I'm excited to hear what a few of you think about this sale of CBRL by BH.  Gio and Merkhet come to mind...

 

I had already expressed the view that, if I were in Biglari's shoes, I would have sold CBRL. ;)

 

Therefore, another good decision imo! :)

 

Cheers,

 

Gio

 

Agree!  Great decision to sell CBRL.  Hopefully he buys back 1/2 the shares of BH with the proceeds. We'd be left with about 900,000 shares and ~$50 mm FCF a year.  Sounds like a good situation to me.

 

My guess is that we'd see a much higher share price before he gets to spend his CBRL proceeds on buybacks of BH.

[gfp]

He just completed a capital raise through the rights offering.  He hasn't retired any of the shares he buys through the Lion Funds.  I highly doubt he is going to sell stock at $250 and retire it over $400 months later.  I would not hold my breath for a true share repurchase / cancel.

[BTShine]

He just completed a capital raise through the rights offering.  He hasn't retired any of the shares he buys through the Lion Funds.  I highly doubt he is going to sell stock at $250 and retire it over $400 months later.  I would not hold my breath for a true share repurchase / cancel.

 

Agree he won't cancel the shares, but the outcome is similar. 

 

As for the capital raise at $250 and repurchase at $400, well it's already happening.  The shares are just kept in the Lion Fund and I'd bet we see him sell the BH shares back into the market if BH stock starts selling for a much higher price.  I see nothing illegal or immoral with this. Raise capital efficiently at $250.  Buyback vastly undervalued stock at $415 and resell/issue stock at $700+ (Or whatever price you think he'd be willing to sell back BH shares into the market).

[gfp]

Does anyone know what percentage of the Lion Fund I (the original Lion fund with outside investors) is owned by Biglari Holdings?  I know the majority of Lion Fund II is BH capital.

 

The recent purchases of BH stock by Biglari Capital was done in the Lion Fund I.

[giofranchi]

I have used my cash reserve today.

Partly I have bought more FFH, partly I have bought more BH.

Mostly I have used it to buy a new investment.

 

Right now my portfolio allocation is:

48% FFH

22% BH

15% OAK

15% fourth investment

 

Cheers,

 

Gio

[frugalchief]

Does anyone know what percentage of the Lion Fund I (the original Lion fund with outside investors) is owned by Biglari Holdings?  I know the majority of Lion Fund II is BH capital.

 

The recent purchases of BH stock by Biglari Capital was done in the Lion Fund I.

 

BH share of TLF - 52.1%

BH share of TLF2 - 96.3%

 

[gfp]

Thanks!

 

Does anyone know what percentage of the Lion Fund I (the original Lion fund with outside investors) is owned by Biglari Holdings?  I know the majority of Lion Fund II is BH capital.

 

The recent purchases of BH stock by Biglari Capital was done in the Lion Fund I.

 

BH share of TLF - 52.1%

BH share of TLF2 - 96.3%