BH - Biglari Holdings

[giofranchi]

Yeah!

 

Once again this doesn’t mean that, when I compare how much I pay the Lion Fund to manage BH’s capital with how much FFH charges Fairfax India’s shareholders to manage their capital, I am interested in anything else besides how much cash I give away compared to what service I receive. Period.

 

Yet, on this thread the discourse has a bothersome habit of always shifting towards… ethics!

 

Gio

 

[ragu]

I have a hard time believing that any professional money manager is clueless about the points you allude to, as well as many you don't mention, [...]

 

You'd better believe it. These geniuses think Sardar originally sold the Lion Fund to BH for $4.2 million, not understanding (or deliberately overlooking, to make their point) that this was the general partner's capital balance at the time of the transaction. If I hadn't seen it, I would have refused to believe that such an egregious mistake was even possible.

 

Clueless and deliberately misleading. They'd be an excellent fit on the board. Of CBRL's.

 

Best,

Ragu

 

[mcmaaaaath]

Txvestor: The lack of a Sardar controlled board at CBRL doesn't appear to be that important. The big thing there is that Sardar made a huge bet and absolutely knocked it out of the park. Even skeptics must admit that.

 

Gio: I think people that are actually concerned with the ethics of the situation are the minority. I think most people, like you, are just concerned with their returns. However considering Sardar is in almost complete control, his tendencies and ethics are clearly important. As I'm sure you realized The move to put the investment portfolio in the Lion Fund clearly increased Sardar's economics at the expense of BH shareholders. If people think similar moves will be repeated, the shares should be discounted accordingly.

 

It is especially concerning given the terms of the license agreement, which basically gives Sardar 100% of the companies profits for a minimum of 5 years after he loses control (2.5% of revenues for a company w 2-4% historical operating margins). This entrenches him quite considerably, as you know, although I suspect a new board would sue the old board for breach of fiduciary duty and seek to have this contract abrogated.

 

To everyone: Does anyone plan to go to the shareholder meeting? I just bought one share in my PA so that I could attend.

 

[merkhet]

There are ways to implement poison pills without having the heads I win, tails you lose economics here. For instance, the traditional/normal poison pill mechanics.

[JSArbitrage]

Thus, I have never found the licensing agreement that objectionable, because it is so obvious what it is.

 

The irony is that, if any of SB's targets had an agreement like this place, he'd be raking them over the coals for it.  He's clearly a very unethical person.  It's basically crystal clear.  That being said - even unethical people can make tons of money for themselves and their investors. 

[wescobrk]

If anyone has been a shareholder of Biglari Holdings for four years or so or more, I would love to ask a question.  I just started reading and learning about the company a couple of years ago and while I think I have read almost everything in the world written about this company, as with all of my investments or potential investments, one thing that is unclear to me is what exactly transpired with Biglari Holdings' investment a few years ago in Advanced Auto Parts.  Could anyone just write up a brief history of the facts of what occurred?  What I know is Biglari made an investment, took something like an activist or hostile takeover position, and at some point there was a tender offer.  I would love a fuller account of the timeline of Biglari Holdings' involvement with Advanced Auto Parts.  Thanks amigos and amigas in advance.

 

He offered BH stock for AAP stock but then unveiled the comp plan and BH stock tanked.

He logically cancelled the offer as there wasn't the same ratio of value being received.

[BTShine]

In hindsight an acquisition of AAP in 2010 would have been profitable. 

[bci23]

 

  It's basically crystal clear.  That being said - even unethical people can make tons of money for themselves and their investors.

 

I've spent much of my investing career feeling frustrated that most public companies have management whose whole professional life and net worth are not wrapped up in the company they are working for.  Additionally, most public companies have management that are lavishly compensated with stock options that they then sell more-or-less as soon as they are allowed to sell them.  THIS is unethical from my perspective as someone who is an obsessed capitalist and investor.  Anyone who deeply believes in garnering the profits from investing I think is more frustrated by management who refuses to put their business life and neck on the line for their company, by putting their own capital at risk

 

No opinion on the Biglari situation but could not agree more with this statement.

[Parsad]

 

This entrenches him quite considerably

 

 

Yes, exactly.  That was the point of it, the license agreement is just a poison pill.  It is no more and no less than that.  Any corporate lawyer with a client who was an activist and a public company would implore their client to have as meaty of a poison pill as they could have.  This was the board of BH's attempt to do it without calling it that and to do it as quietly as possible and thus without requiring shareholder approval.  The interesting thing about it is that Biglari had no poison pill or really any other corporate protection from an activist until 2013, when this licensing agreement poison pill was adopted.  I'm surprised he was involved in those previous fights (Freemont/etc.) and was over a year into his fight with CBRL's management without any of these types of protections.  Anyway, this is not really a comment on the appropriateness of the licensing agreement or anything, but I know that if I were a CEO of a public company and were an activist or control investor who was engaging in proxy contests with other public companies (and I didn't own a prohibitive portion of the public company), I would want/need something similar to this.  Thus, I have never found the licensing agreement that objectionable, because it is so obvious what it is.

 

Huge difference between a rights poison pill and what Sardar put in place.  Any future board could continue to institute the rights poison pill, and there is no beneficial interest for the board, it's directors or company executives, other than to deter a takeover.  Sardar's licensing agreement has a compensatory benefit that goes directly to him!  Cheers!

[Parsad]

As we wanted the fees to be very fair for the long term investors in Fairfax India, we structured them after negotiations

with Fidelity, the largest cornerstone investor. The fees are as follows: (i) an administration and advisory fee of 1⁄2% of

undeployed capital and 1 1⁄2% of capital invested in India. Fairfax will bear the full compensation costs of Fairfax

India’s senior employees; and (ii) a performance fee, calculated over three-year periods, equal to 20% of any return,

calculated from inception, above a 5% annual hurdle, payable in shares of Fairfax India (if the shares are trading at

more than two times their net asset value, Fairfax has the option of taking the fee in cash).

-- Prem Watsa 2014 AL

 

Am I wrong if I say The Lion Fund might be even cheaper for BH shareholders? Because BH shareholders don't pay the 1 1/2% fixed fee?

 

Gio

 

Nope, you would be correct!  And MPIC Funds and Pabrai Funds are even cheaper for BH's shareholders because our hurdle is 6%, not 5% like Prem's entity or Lion Fund up until November 2010.  The arrangement with the Lion Fund was updated when BH bought Biglari Capital, and it was changed to a 6% hurdle.  I'm not sure what the current arrangement is after Biglari bought back Biglari Capital from BH.  Cheers!

[Parsad]

From 2010 BH Annual Letter:

 

Entering fiscal 2010, I was concurrently managing three separate businesses whose ownership was divergent: (1) Steak n Shake Operations, Inc., (2) Western Sizzlin Corp., a former NASDAQ-listed company whose main businesses lie in investment management and franchising/operating restaurants, and (3) Biglari Capital Corp., general partner to The Lion Fund, L.P.

 

Exiting fiscal 2010, these three businesses became wholly-owned subsidiaries of BH.  Resultantly, all my business affairs have been centralized into BH.  Furthermore, the acquisitions of Western and BCC are small but important steps for BH’s morphing into a diversified holding company....

 

...The next transaction also involved a related business, Biglari Capital Corp. (“BCC”), general partner to The Lion Fund, L.P. (“TLF”), a hedge fund. This purchase was consummated on April 30. Concern for valuation was irrelevant because BCC was folded in for $1.  The transaction was contingent upon a compensation arrangement that I will discuss shortly.  This unifying of BH and TLF was significant given our strategy of purchasing interests in other companies, espousing the unlocking of value.  Removing potential conflicts allows me to invest freely for the benefit of TLF partners and BH shareholders without concern for divergent interests because now, not I, but BH, is the sole beneficiary of incentive fees amassed through its position as general partner.  Additionally, because BH is in the business of obtaining other businesses in whole or in part, an investment arm will assist, mainly in facilitating and expediting the partial ownership of other companies.  The partners of TLF are receiving advantages from the resources of BH, and BH shareholders will gain because of their access to capital as well as to the incentive fees that over time should build.

From 2013 BH Annual Letter:

 

Building an enterprise is messy — the last five years should attest to that.  As an entrepreneurial company, we are constantly experimenting with and adjusting to situations.  As a consequence of this approach, in July 2013 we adapted our structure in an important and vital way:  BH transferred most of its marketable securities to The Lion Fund, L.P. and The Lion Fund II, L.P. (together referred to as The Lion Fund), managed by Biglari Capital Corp., the general partner.  As part of the transaction, I once more became the sole shareholder of the general partner.  For regulatory and financial reasons, BH divested itself of the investment management business.  However, under the new arrangement, BH continues to maintain its economic interest in the transferred marketable securities but without the burdens associated with owning an asset management firm within a public company.  Moreover, I continue to hold full capital allocation responsibility for both entities, Biglari Holdings and The Lion Fund.  As an entrepreneurial investor and operator, I will continue to adjust and manage the organization to fit the circumstances.

 

Gio or Ragu,

 

From the 2010 Letter, it is clear that merging BCC into BH was beneficial to all parties involved and removed conflicts of interest...these were Sardar's own words. 

 

What changed in 2012 and what were the financial and regulatory reasons to divest BCC from BH?  Also, what burdens did BH become encumbered with by managing an asset management company that aren't faced by Sardar managing BCC?  Cheers!

[giofranchi]

As I'm sure you realized The move to put the investment portfolio in the Lion Fund clearly increased Sardar's economics at the expense of BH shareholders.

 

Well, I am not so sure…

 

Before: Biglari was getting a bonus based on operating results + investment results;

 

Now: Biglari is getting a bonus based on operating results as CEO of BH + another bonus based on investment results as the owner of the Lion Fund.

 

Why do you think Biglari is costing BH shareholders more money now than before?

 

Gio

 

[giofranchi]

Gio or Ragu,

 

From the 2010 Letter, it is clear that merging BCC into BH was beneficial to all parties involved and removed conflicts of interest...these were Sardar's own words. 

 

What changed in 2012 and what were the financial and regulatory reasons to divest BCC from BH?  Also, what burdens did BH become encumbered with by managing an asset management company that aren't faced by Sardar managing BCC?  Cheers!

 

The answer imo is very easy: nothing has changed! But I would have done the same anyway.

 

Let me explain:

 

In my company I am the one entitled to have the last word on any truly important matter. As it should be! Because I am the one who built it from scratch, I am the one who is at the office each day at 7.00 am, I am the one who knows how the money flows in and out (to the last Euro!), I am the one who think about it 24 hours a day, each day of the week, and therefore I am the one who truly knows what’s in the best interest of my company for the long term. In other words, it is my brainchild, and no one cares about it like I do. Not even close!

 

Now, let me say that, if I hadn’t control over my company, I would be just furious…

 

The same is true for Biglari, I guess. And that forces him to find other solutions… that most people don’t like and judge unethical.

 

I might not like them as well, but I understand the rationale behind most of them: for instance, what would happen if Biglari got ousted as CEO during the next AM and the LF still were owned by BH? Of course, Biglari would find himself with nothing to manage! Instead, with the LF in his hands, he would still suffer the greatest business defeat of his life so far, but at least he could go on managing money and could have a base from which to start anew. An entity he truly controls 100%.

 

Why shareholders are against a double class share? Imo the simple act of introducing a double class share would solve all our issues with Biglari! ;)

 

Cheers,

 

Gio

 

[AZ_Value]

As I'm sure you realized The move to put the investment portfolio in the Lion Fund clearly increased Sardar's economics at the expense of BH shareholders.

 

Well, I am not so sure…

 

Before: Biglari was getting a bonus based on operating results + investment results;

 

Now: Biglari is getting a bonus based on operating results as CEO of BH + another bonus based on investment results as the owner of the Lion Fund.

 

Why do you think Biglari is costing BH shareholders more money now than before?

 

Gio

 

I can't tell if Gio is kidding with his question here because one would think that he'd be on top of this stuff given that he follows BH and is heavily invested in it.

If he's kidding then this is to be disregarded.

 

If on the other hand the question is serious then it's quite a disturbing one to be asking at this stage of the game given how many times this has been mentioned, but I'll keep my thoughts for myself.

 

Anyways I'll answer it for you Sanjeev as this is an easy one.

 

The reshuffling that had you, the shareholders, sell back to Biglari the Lion Fund, for a faction of what he had sold it to you just a few years before, all of it without any shareholder input, also came with this amendment:

 

The modification of the Incentive Bonus Agreement between Biglari Holdings 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 Biglari Holdings 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.

 

To put it in concrete terms. The year before this happened , his incentive pay was capped at $10M (you know, the same cap that him and the BOD said was in place to limit how shareholder unfriendly the whole comp plan was).

And the year this change was made he was paid an additional $15M.

 

So Gio, he is costing you more money now for the same reasons that the $25M he was paid in 2013 is a lot more money than the $10M he had promised his comp would be capped at.

[giofranchi]

AZ_Value,

 

I don’t think my question has anything to do with a cap in compensation… A cap might be in place both if the LF were owned by Biglari and if the LF were owned by BH. Or it might not.

 

Another thing I will never understand is why people enjoy writing on this thread in such a rude way… Beyond me! ::)

 

Cheers,

 

Gio

 

[APG12]

The reshuffling that had you, the shareholders, sell back to Biglari the Lion Fund, for a faction of what he had sold it to you just a few years before

 

The sale price paid by the holding co. was $1 adjusted for cash.

 

http://www.sec.gov/Archives/edgar/data/93859/000092189510000667/form8k07428_04302010.htm

[giofranchi]

Moreover:

 

I would say that a cap in compensation makes a lot of sense for operating earnings, simply because that’s the way peers compensate their CEOs.

Instead, I don’t think a cap in compensation makes sense for earnings from investments, because almost no other money manager is compensated that way.

 

When the LF was owned by BH, there was no way to make a distinction between the two.

 

Whenever I want to understand whether I am paying too much for an employee of mine, I always like to look at what my competitors are doing: if I am paying less than my competitors for the same kind of services, I feel fine! ;)

 

Gio

 

[Parsad]

Gio or Ragu,

 

From the 2010 Letter, it is clear that merging BCC into BH was beneficial to all parties involved and removed conflicts of interest...these were Sardar's own words. 

 

What changed in 2012 and what were the financial and regulatory reasons to divest BCC from BH?  Also, what burdens did BH become encumbered with by managing an asset management company that aren't faced by Sardar managing BCC?  Cheers!

 

The answer imo is very easy: nothing has changed! But I would have done the same anyway.

 

Let me explain:

 

In my company I am the one entitled to have the last word on any truly important matter. As it should be! Because I am the one who built it from scratch, I am the one who is at the office each day at 7.00 am, I am the one who knows how the money flows in and out (to the last Euro!), I am the one who think about it 24 hours a day, each day of the week, and therefore I am the one who truly knows what’s in the best interest of my company for the long term. In other words, it is my brainchild, and no one cares about it like I do. Not even close!

 

Now, let me say that, if I hadn’t control over my company, I would be just furious…

 

The same is true for Biglari, I guess. And that forces him to find other solutions… that most people don’t like and judge unethical.

 

I might not like them as well, but I understand the rationale behind most of them: for instance, what would happen if Biglari got ousted as CEO during the next AM and the LF still were owned by BH? Of course, Biglari would find himself with nothing to manage! Instead, with the LF in his hands, he would still suffer the greatest business defeat of his life so far, but at least he could go on managing money and could have a base from which to start anew. An entity he truly controls 100%.

 

Why shareholders are against a double class share? Imo the simple act of introducing a double class share would solve all our issues with Biglari! ;)

 

Cheers,

 

Gio

 

Gio,

 

You have full control of your company, as the owner, thus you can do as you please. 

 

Sardar is not in control of his company, and is not the owner, but an executive who is directly responsible to and reports to the board of directors.  The owners of BH are its shareholders not Sardar!

 

You completely disregard the fact that Sardar bought back BCC because he could not get the cap removed...it was as simple as that.  Nothing about control, but compensation...and rightfully so if he felt that he deserved more compensation.

 

But this is why people on here get rude (unfortunate), because you openly deny the true reason why the action was undertaken, and make whatever excuse you can to justify the behavior.  And he spins it in his own letters as well...there was no "financial and regulatory" reasons...they just couldn't get shareholders to remove the cap, and he would be getting compensated less than if those assets were within TLF alone and he was eligible for an incentive fee. 

 

The corollary argument shareholders could make is that TLF would also not have as much assets under management now, if it weren't partly due to all of the capital raised from shareholders...thus Sardar would only be entitled to a portion of those incentive fees...less than he is taking.  Again, the question of ethics and double-dipping come to mind here.  Cheers!

 

 

[Guest Schwab711]

Gio or Ragu,

 

From the 2010 Letter, it is clear that merging BCC into BH was beneficial to all parties involved and removed conflicts of interest...these were Sardar's own words. 

 

What changed in 2012 and what were the financial and regulatory reasons to divest BCC from BH?  Also, what burdens did BH become encumbered with by managing an asset management company that aren't faced by Sardar managing BCC?  Cheers!

 

The answer imo is very easy: nothing has changed! But I would have done the same anyway.

 

Let me explain:

 

In my company I am the one entitled to have the last word on any truly important matter. As it should be! Because I am the one who built it from scratch, I am the one who is at the office each day at 7.00 am, I am the one who knows how the money flows in and out (to the last Euro!), I am the one who think about it 24 hours a day, each day of the week, and therefore I am the one who truly knows what’s in the best interest of my company for the long term. In other words, it is my brainchild, and no one cares about it like I do. Not even close!

 

Now, let me say that, if I hadn’t control over my company, I would be just furious…

 

The same is true for Biglari, I guess. And that forces him to find other solutions… that most people don’t like and judge unethical.

 

I might not like them as well, but I understand the rationale behind most of them: for instance, what would happen if Biglari got ousted as CEO during the next AM and the LF still were owned by BH? Of course, Biglari would find himself with nothing to manage! Instead, with the LF in his hands, he would still suffer the greatest business defeat of his life so far, but at least he could go on managing money and could have a base from which to start anew. An entity he truly controls 100%.

 

Why shareholders are against a double class share? Imo the simple act of introducing a double class share would solve all our issues with Biglari! ;)

 

Cheers,

 

Gio

 

Gio,

 

You have full control of your company, as the owner, thus you can do as you please. 

 

Sardar is not in control of his company, and is not the owner, but an executive who is directly responsible to and reports to the board of directors.  The owners of BH are its shareholders not Sardar!

 

You completely disregard the fact that Sardar bought back BCC because he could not get the cap removed...it was as simple as that.  Nothing about control, but compensation...and rightfully so if he felt that he deserved more compensation.

 

But this is why people on here get rude (unfortunate), because you openly deny the true reason why the action was undertaken, and make whatever excuse you can to justify the behavior.  And he spins it in his own letters as well...there was no "financial and regulatory" reasons...they just couldn't get shareholders to remove the cap, and he would be getting compensated less than if those assets were within TLF alone and he was eligible for an incentive fee. 

 

The corollary argument shareholders could make is that TLF would also not have as much assets under management now, if it weren't partly due to all of the capital raised from shareholders...thus Sardar would only be entitled to a portion of those incentive fees...less than he is taking.  Again, the question of ethics and double-dipping come to mind here.  Cheers!

 

Very well written!

 

[Parsad]

Another question comes to mind here in terms of the whole TLF and BH situation.  One that I'm more than happy to bring up and have Gio and Ragu answer: 

 

Was there a shareholder vote and resolution to move the assets from BH to TLF? 

 

Or was this done solely by the CEO with/without board consent?

 

BH shareholders, who own the underlying assets contributed to TLF, are now paying Sardar a huge incentive fee through TLF.  BH shareholders would probably do better by investing that capital into Fairfax Financial, Markel, Dhandho or several other stocks that will do as well as Sardar over the next 15-20 years, but with more of the profits being retained in shareholder equity, rather than lining Sardar's pockets! 

 

This would be like me moving Premier's assets that we raised in the private placement, and putting them into the MPIC Funds.  A completely unethical endeavour if there was one and what should make what happened at BH a bit disturbing to shareholders!  Cheers!

[giofranchi]

Sanjeev,

I just try to put myself in Biglari's shoes: if I were him, I would be much more concerned about control than compensation. And that's why I tend to think many actions of his are more due to a lack of control than a compensation which he would like to be higher...

 

But you seem to be sure he has sold the LF back to himself only because of compensation, therefore I might be wrong about the importance of control...

 

If this is so, things are even easier imo! The control issue is the one which might be truly controversial... In comparison the compensation issue is very clear! Do I, as a shareholder of BH, get enough for what I give away? That's all! And, as I have already said, my answer is YES! Because Biglari, even after selling the LF back to himself, costs BH shareholders less than the average money manager out there, while being (imo!!) much better than average.

 

If and when I think shareholders get to pay more than they receive, I will act accordingly.

 

Cheers,

 

Gio

[giofranchi]

I agree there are companies in which management compensation is less than Biglari's... But you should agree with me that management compensation is only one of many parameters investors take into consideration while investing their capital... Am I wrong?

 

The fact BH cannot be liked as much as Fairfax nor Markel, as far as management compensation is concerned, doesn't automatically mean it lacks other very interesting features which might make it an investment just as good as those other two companies.

 

Cheers,

 

Gio

[frugalchief]

We can control what we can control. 

 

I've invested in BH b/c I believe SB will make me a lot of money....over the long-term....and I accept the idiosyncrasies.  Like NBL said, that is what makes it unique.  If SB is truly trying to get a controlling ownership, he is dealing with a much larger beast than WEB did back in the 60's.  He got control of a profitable operation b/c of his investment partnership, didn't have the cash or assets to personally get a very large stake, and now has to slowly build his ownership.  I don't fault him for making money through his incentive agreement at BCC and BH - like I've mentioned before, he should get paid accordingly for a great job, or not get paid for a bad job.  Like at BH in 2014, not get paid if he can't increase BV.  But got paid at BCC/TLF b/c he made us (BH shareholders) and limited partners in TLF money.

 

Like Gio, when I feel like he is truly screwing me over, I'll exit.  Just like NBL also said, I also value BH at approx. a 50 cent dollar and if BH can become the young BRK of my generation, cool.  I see SB's skills and short experience a plus as well, which hasn't been valued yet, IMO.

 

I would not mind seeing some change on the board, so they don't seem like all they do is blindly approve his ideas.  (add to it the average age, excluding SB, is like 70).  You might think some younger more aggressive talent could help BH & SB (not necessarily saying Groveland), but would also not go with his tactics too.  To each his own.

 

Unless anyone here can buy a controlling stake, I believe we invest in BH like SB says in his letters - as if it were a partnership with conditions we find agreeable.  At least that's why I do.  But a lot of people here don't.

[Parsad]

All wonderful answers, but unrelated to my questions:

 

Was there a shareholder vote and resolution to move the assets from BH to TLF? 

 

Or was this done solely by the CEO with/without board consent?

 

Simply put, did shareholders vote on this change?  Cheers!

 

[bookie71]

He definitely should not be compared to WEB.  When WEB does something, he lets his "partners" pick which way they want to go, then he takes what is left.  When he stopped hi partnerships , he let the partners pick either the cash or Berkshire stock.