BH - Biglari Holdings

[frugalchief]

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!

 

Done by CEO.  Not sure about board consent.

[frugalchief]

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.

 

I don't mean to compare them apples to apples, because they are not even close, but simply use the architecture that WEB created with BRK as an example.  Times are definitely different and so are the CEOs.  What WEB did is the best thing I can see SB modeling after.

[giofranchi]

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!

 

See?! In the end you too come back to what I think is the real issue here: CONTROL. Because to everything else I can think of an easy answer, but there is no easy answer for the issue of control…

 

All I can say is this: I look forward to the day Biglari has full control and can do whatever he pleases to do. By then all other shareholders will have just two options: either hold their shares, if they like what Biglari is doing, or else sell their shares, if they don’t like what Biglari is doing.

 

That very same day I guess the word “ethic” on this thread will be replaced by the words “business results”… And that would be fantastic! ;)

 

Cheers,

 

Gio

 

[giofranchi]

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.

 

Ok… Could you please remind me of a single instance during the last 50 years in which the shareholders of Berkshire through the BOD decided to do something Buffett didn’t want to do, and then it was actually done?

 

Buffett has always been very charming indeed, and his behavior has always been impeccable by any standard, but don’t forget this simple truth: he has always had full control over his company.

 

Gio

 

[giofranchi]

http://www.prnewswire.com/news-releases/biglari-holdings-inc-urges-shareholders-to-reject-groveland-nominations-to-board-of-directors-300049371.html

 

 

Gio

[giofranchi]

Interesting news about Maxim:

 

Already, Maxim's print ad revenue for the March 2015 edition has increased more than 200%

from the same publication date last year, and we expect that Maxim will become profitable in 2016. In

addition, we believe that Maxim can develop high-margin lines of businesses such as licensing the Maxim

brand for consumer products and services. We are in the early phases of transforming Maxim, which we

believe presents a tremendous opportunity for our shareholders.

 

 

Gio

[frugalchief]

 

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!

 

 

I'm not here to defend SB's actions, but share my views, like others have.  It is enlightening to see how others look at things, even though many of us differ in opinion. 

 

BH is an entrepreneurial company.  It is like a start up, but had a great business to help jump start it.  While yes, the license agreement is a poison pill, SB made it not entirely prodigious, but hurtful should it be implemented.  Entrench is the wrong word.  As SB has said, and WEB reconfirmed in his annual letter regarding BRK stock, if you don't intend to hold BH stock for at least 10 years, you're the wrong type of owner for the company.  Fluctuations occur and should be evaluated in 5 year periods, whether positive or negative.  But value should start to realize around 10+ years, for a startup like BH.  If you truly care about business performance, you have to invest long-term.  Just sit, wait, and let (competent) management do its thing.  Or, like SB has said, he could've reported extraordinary earnings by selling CBRL stock and not reinvesting capital into the SNS franchise business.  Both moves would've created tens to hundreds of millions in earnings over the past 4 years......and we wouldn't be having this discussion.  If you are building your business, you have a game plan and expectations on what to achieve in 1, 3, 5, 10, 20 years from when you started - both for yourself and your investors.  Would you want someone to come disrupt your plan, while the results show you are making progress (above expectations IMO) towards the end result?  It would be disappointing to you and your investors (who invested alongside you because they believe in you).

 

That is all SB is asking for.  He disrupted a wonderful business that was being lead by bad business people with no plan and no regards to produce greater than $1 in value for each $1 spent.  BH has the structure in place with a phenomenal business, SNS, in addition to SB's great investments (see below), that help augment value and increase investable assets to start acquiring operating businesses.  He has reinvigorated SNS and has made good equity investments:

• Western Sizzlin (benefit of TLF) - 101% in 3.5 years
  
• Friendly Ice Cream (benefit of TLF & Western shareholders - 77.4% in 1 year
  
• Fremont Michigan InsuraCorp (benefit of BH) - 77% in 2 years
  
• Penn Millers Holding Corp (benefit of TLF & BH) - 39.3% in 6 months
  
• Cracker Barrel Old Country Store (benefit of TLF & BH) - 100%+ in 4+ years
  

(while there have been some bad equity investments, they were minor is capital loss, though most are still unrealized as of this date)

 

And time will tell how great First Guard Insurance Co. is and Maxim.  And SB's ability to acquire operating businesses that truly provide significant value to BH.

 

The license agreement is his way of saying give me some time to build a formidable holding company.  Allow me the opportunity to make you wealthy.  Sure, short-term results can be great (SNS turn-around in 2009, Fremont & Penn investments, Cracker Barrel), and they can be bad, but hopefully not a significant % of net worth (CCA Industries investment, ITEX, etc.), but that is not how we value BH.  I think it has what, 8 years left on it, or so.  But his plan (if he has one) is working out so far. 

 

SB has my vote until I feel he is truly screwing me.  I value my ethical standards as well and I weigh his decisions heavily since I have a large portion of my investable assets in BH (it's small in $$ compared to most here).  But I'm an owner because I believe in my leader and think he will do the right thing.  His having control will increase year-over-year, to both of our benefits b/c he will have more skin in the game.

 

SB has more to gain in 10-20 years by running BH and building it up than by being gone, giving up, and taking the royalty on the license agreement.  Maybe the times have changed (when investors compare WEB (friendly, 'ethical,' good morals) to SB (hostile, 'unethical,' etc.)).  BH has good things going for it.  I look up to WEB, but if SB was anything like WEB was/is today (maybe partly b/c of WEB's celebrity status and others trying to find the "new WEB"), BH wouldn't be where it is.  SB is a highly focused, determined, and intelligent individual.  His intellect and brashness (right word to use?) rubs people the wrong way, I get it.  I see it as confidence and an un-formidable attitude to not listen to those who want to inject their opinion.  SB definitely goes against the crowd which is one reason I believe he has been so successful.  He isn't the folky charming WEB.  But that's OK, because no two of us are alike.  Today's investing environment is more competitive and hostile than ever before (my study of the 30's-70's is minuscule compared to most, but I believe you have more people competing for investments and many un-informed investors in the marketplace) who get persuaded by misguided "activist" investors like Groveland. 

 

I appreciate you lending an eye to reading my thoughts.  I'm sure something will be taken out of context.  But this is part of the thesis on my investing in BH.  I know it isn't for everyone....and that is perfectly OK.  I know there are a small handful of us who believe BH is a fantastic investment.  These are small issues to the bigger picture of what will BH look like 30 and 50 years from now (my personal investment timeline).  We might laugh a few decades from now about the license agreement and learn something about being able to implement a plan without it being disrupted.  But until I don't make any money for a long stretch of time, or like Gio said, "If and when I think shareholders get to pay more than they receive, I will act accordingly," I will remain invested and continue buying more BH.

 

But we haven't had to pay anything ridiculous compared to the value received yet.  So I won't fret or worry about SB continuing to make me money and increase BH's wealth, and therefore, my wealth.

 

Cheers!

 

 

(Disclosure:  Long BH, 26 yrs old, not in investing industry.  Just been studying, reading, and investing in BH since 2009.)

[frugalchief]

Interesting news about Maxim:

 

Already, Maxim's print ad revenue for the March 2015 edition has increased more than 200%

from the same publication date last year, and we expect that Maxim will become profitable in 2016. In

addition, we believe that Maxim can develop high-margin lines of businesses such as licensing the Maxim

brand for consumer products and services. We are in the early phases of transforming Maxim, which we

believe presents a tremendous opportunity for our shareholders.

 

Gio

 

I thought March's issue was great.  Content was better than 1 year ago.  New editor will do some great things with Maxim hopefully.  So far it looks that way.  Better quality ads (high end mens apparel) might help attract more subscribers in the demographics.

 

Anyone know what licensing for consumer products and services would include? 

 

 

[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!

 

 

I'm not here to defend SB's actions, but share my views, like others have.  It is enlightening to see how others look at things, even though many of us differ in opinion. 

 

BH is an entrepreneurial company.  It is like a start up, but had a great business to help jump start it.  While yes, the license agreement is a poison pill, SB made it not entirely prodigious, but hurtful should it be implemented.  Entrench is the wrong word.  As SB has said, and WEB reconfirmed in his annual letter regarding BRK stock, if you don't intend to hold BH stock for at least 10 years, you're the wrong type of owner for the company.  Fluctuations occur and should be evaluated in 5 year periods, whether positive or negative.  But value should start to realize around 10+ years, for a startup like BH.  If you truly care about business performance, you have to invest long-term.  Just sit, wait, and let (competent) management do its thing.  Or, like SB has said, he could've reported extraordinary earnings by selling CBRL stock and not reinvesting capital into the SNS franchise business.  Both moves would've created tens to hundreds of millions in earnings over the past 4 years......and we wouldn't be having this discussion.  If you are building your business, you have a game plan and expectations on what to achieve in 1, 3, 5, 10, 20 years from when you started - both for yourself and your investors.  Would you want someone to come disrupt your plan, while the results show you are making progress (above expectations IMO) towards the end result?  It would be disappointing to you and your investors (who invested alongside you because they believe in you).

 

That is all SB is asking for.  He disrupted a wonderful business that was being lead by bad business people with no plan and no regards to produce greater than $1 in value for each $1 spent.  BH has the structure in place with a phenomenal business, SNS, in addition to SB's great investments (see below), that help augment value and increase investable assets to start acquiring operating businesses.  He has reinvigorated SNS and has made good equity investments:

• Western Sizzlin (benefit of TLF) - 101% in 3.5 years
  
• Friendly Ice Cream (benefit of TLF & Western shareholders - 77.4% in 1 year
  
• Fremont Michigan InsuraCorp (benefit of BH) - 77% in 2 years
  
• Penn Millers Holding Corp (benefit of TLF & BH) - 39.3% in 6 months
  
• Cracker Barrel Old Country Store (benefit of TLF & BH) - 100%+ in 4+ years
  

(while there have been some bad equity investments, they were minor is capital loss, though most are still unrealized as of this date)

 

And time will tell how great First Guard Insurance Co. is and Maxim.  And SB's ability to acquire operating businesses that truly provide significant value to BH.

 

The license agreement is his way of saying give me some time to build a formidable holding company.  Allow me the opportunity to make you wealthy.  Sure, short-term results can be great (SNS turn-around in 2009, Fremont & Penn investments, Cracker Barrel), and they can be bad, but hopefully not a significant % of net worth (CCA Industries investment, ITEX, etc.), but that is not how we value BH.  I think it has what, 8 years left on it, or so.  But his plan (if he has one) is working out so far. 

 

SB has my vote until I feel he is truly screwing me.  I value my ethical standards as well and I weigh his decisions heavily since I have a large portion of my investable assets in BH (it's small in $$ compared to most here).  But I'm an owner because I believe in my leader and think he will do the right thing.  His having control will increase year-over-year, to both of our benefits b/c he will have more skin in the game.

 

SB has more to gain in 10-20 years by running BH and building it up than by being gone, giving up, and taking the royalty on the license agreement.  Maybe the times have changed (when investors compare WEB (friendly, 'ethical,' good morals) to SB (hostile, 'unethical,' etc.)).  BH has good things going for it.  I look up to WEB, but if SB was anything like WEB was/is today (maybe partly b/c of WEB's celebrity status and others trying to find the "new WEB"), BH wouldn't be where it is.  SB is a highly focused, determined, and intelligent individual.  His intellect and brashness (right word to use?) rubs people the wrong way, I get it.  I see it as confidence and an un-formidable attitude to not listen to those who want to inject their opinion.  SB definitely goes against the crowd which is one reason I believe he has been so successful.  He isn't the folky charming WEB.  But that's OK, because no two of us are alike.  Today's investing environment is more competitive and hostile than ever before (my study of the 30's-70's is minuscule compared to most, but I believe you have more people competing for investments and many un-informed investors in the marketplace) who get persuaded by misguided "activist" investors like Groveland. 

 

I appreciate you lending an eye to reading my thoughts.  I'm sure something will be taken out of context.  But this is part of the thesis on my investing in BH.  I know it isn't for everyone....and that is perfectly OK.  I know there are a small handful of us who believe BH is a fantastic investment.  These are small issues to the bigger picture of what will BH look like 30 and 50 years from now (my personal investment timeline).  We might laugh a few decades from now about the license agreement and learn something about being able to implement a plan without it being disrupted.  But until I don't make any money for a long stretch of time, or like Gio said, "If and when I think shareholders get to pay more than they receive, I will act accordingly," I will remain invested and continue buying more BH.

 

But we haven't had to pay anything ridiculous compared to the value received yet.  So I won't fret or worry about SB continuing to make me money and increase BH's wealth, and therefore, my wealth.

 

Cheers!

 

 

(Disclosure:  Long BH, 26 yrs old, not in investing industry.  Just been studying, reading, and investing in BH since 2009.)

 

Great post frugalchief! 

 

I have no doubt that Sardar will make plenty of money over time...it's why I owned Western Sizzlin, then Steak'n Shake and eventually Biglari Holdings.  I actually interviewed Sardar back in 2002 when no one knew who he was.  I also owned as much of Steak'n Shake (through call options and equity) as Sardar did before it became Biglari Holdings.  I was also one of the few people to speak to him extensively about the compensation plan the weekend it was announced...for two hours in Omaha...several years ago!  And I was the only person to actually send a letter to the board voting against the name change to Biglari Holdings when it was announced.  So, I know Sardar and his abilities as well as anyone on here!

 

Sardar making money has never been a doubt!  That is a certainty that he would be very rich one day, and naturally shareholders alongside him would also be wealthy.  But there is far more to life than making money...especially how you make the money!  We would not compromise our ethics on these issues.  But many have and will continue to do so to justify how they are making that wealth.  From the name change, compensation plan changes, share structure changes, buying and then selling back Biglari Capital, etc...these are ethical lapses.  But people naturally have to draw the line where they believe a line should be drawn.  Perhaps, ours is too conservative...or yours is too liberal.  I don't know the answer to that.

 

In terms of some of the posters questioning how Buffett conducted himself, well that is a different cup of tea.  When shareholders became involved with Berkshire, they knew he had a very large controlling shareholder stake...but Buffett still took everything to a vote, including changes in share structure, etc.  He fixed his compensation, so that was never an issue.  All in all, Berkshire shareholders were treated like partners, even though Buffett was calling the shots. 

 

This was not the case at Biglari Holdings.  He never had a controlling stake.  If votes did not pass, find another way...be it buying back Biglari Capital and then moving BH assets into it.  This is not the same at all when compared to Berkshire and corporate governance.  Again, perhaps we are too conservative and others are too liberal in their stance on these issues.  All I know is if it doesn't feel right, you can't stand behind it.  Cheers! 

[BTShine]

Yes, thank you both for your insight.

[frugalchief]

Great post frugalchief! 

 

I have no doubt that Sardar will make plenty of money over time...it's why I owned Western Sizzlin, then Steak'n Shake and eventually Biglari Holdings.  I actually interviewed Sardar back in 2002 when no one knew who he was.  I also owned as much of Steak'n Shake (through call options and equity) as Sardar did before it became Biglari Holdings.  I was also one of the few people to speak to him extensively about the compensation plan the weekend it was announced...for two hours in Omaha...several years ago!  And I was the only person to actually send a letter to the board voting against the name change to Biglari Holdings when it was announced.  So, I know Sardar and his abilities as well as anyone on here!

 

Sardar making money has never been a doubt!  That is a certainty that he would be very rich one day, and naturally shareholders alongside him would also be wealthy.  But there is far more to life than making money...especially how you make the money!  We would not compromise our ethics on these issues.  But many have and will continue to do so to justify how they are making that wealth.  From the name change, compensation plan changes, share structure changes, buying and then selling back Biglari Capital, etc...these are ethical lapses.  But people naturally have to draw the line where they believe a line should be drawn.  Perhaps, ours is too conservative...or yours is too liberal.  I don't know the answer to that.

 

In terms of some of the posters questioning how Buffett conducted himself, well that is a different cup of tea.  When shareholders became involved with Berkshire, they knew he had a very large controlling shareholder stake...but Buffett still took everything to a vote, including changes in share structure, etc.  He fixed his compensation, so that was never an issue.  All in all, Berkshire shareholders were treated like partners, even though Buffett was calling the shots. 

 

This was not the case at Biglari Holdings.  He never had a controlling stake.  If votes did not pass, find another way...be it buying back Biglari Capital and then moving BH assets into it.  This is not the same at all when compared to Berkshire and corporate governance.  Again, perhaps we are too conservative and others are too liberal in their stance on these issues.  All I know is if it doesn't feel right, you can't stand behind it.  Cheers!

 

Hi Parsad,

 

Your unique insights are always appreciated since you've had "hands on" contact with Sardar.  When I first joined the board I saw the archives with all the Sardar posts which were enlightening, since I hadn't read about some of that stuff in news or my own research.

 

I sure hope I'm not emotionally attached to my BH investment, b/c to be honest, it's my first substantial investment in a stock.  (I'm an honest guy, so, it's actually my only single stock holding, rest of money is in mutual funds.  But my time is limited on reading/researching other companies, so when I get the chances I do look at other companies that meet my criteria). 

 

I like to call myself a numbers guy, and view investments solely on what is my educated prediction of its value, possible returns, etc. (to leave out emotions), but I have fully gotten engrossed in valuing the management team as well (which is certainly a large item to consider at BH) because as we are seeing, it is equally as important in some cases.  In short, I guess BH has been a good company to cut my teeth on.

 

And not to prove a point or get political, but on my ethics scale, when I saw the license agreement go through (w/o shareholder approval) I was livid and thought it was very unethical.  Same when BCC was sold back to Sardar.  (To further confuse my ethical compass, is it a coincidence that BCC has received massive compensation for investment results only after Sardar took back ownership?  I realized that's when BH & TLF heavily invested in CBRL and it's price skyrocketed, but.....was it a play on his part (b/c of the cap)....?)

 

It contradicts my earlier long post, but I (might) have forgone my ethical standards on BH (see emotion attachment above lol) to give Sardar a chance because I see how unique he is in todays environment.  I still stand behind my thesis for investing in BH, I just hope it's not a costly lesson...  Again, time will tell.

 

And thanks to each poster on the board.  Seeing people's comments that are smarter and more experienced than myself is beneficial.  Thanks again for everyone's input.

 

Looking forward to NBL's analysis.  I might write mine out as well to share.

 

Anyone here going to annual meeting in NYC in a few weeks?

 

Take care,

FC

 

[petey2720]

Really good posts.  Thank you NBL, Sanjeev and Frugal.

 

I can't help but think that one day Ed Campbell (First Guard Ins.) will call Sardar and mention there is an opportunity to acquire a similar insurance operation for BH if it can act quickly.......and a significant portion of BH's liquid assets are in the Lion Fund.  I just wonder whether Sardar would hesitate before liquidating the funds necessary from the Lion Fund, transfer the funds to BH to make the acquisition for BH ----or -----would he pass on the acquisition to keep the funds in the Lion Fund because it is in his personal interest as he gets compensated twice for investment appreciation.

 

It is this conflict of interest that makes an investment in BH troubling.

 

Buffett has no such conflict.

 

I hope the above makes sense.

[frugalchief]

Really good posts.  Thank you NBL, Sanjeev and Frugal.

 

I can't help but think that one day Ed Campbell (First Guard Ins.) will call Sardar and mention there is an opportunity to acquire a similar insurance operation for BH if it can act quickly.......and a significant portion of BH's liquid assets are in the Lion Fund.  I just wonder whether Sardar would hesitate before liquidating the funds necessary from the Lion Fund, transfer the funds to BH to make the acquisition for BH ----or -----would he pass on the acquisition to keep the funds in the Lion Fund because it is in his personal interest as he gets compensated twice for investment appreciation.

 

It is this conflict of interest that makes an investment in BH troubling.

 

Buffett has no such conflict.

 

I hope the above makes sense.

 

That is a great question.  B/c TLF has a 5 year lockup, then 2 years to pay out requested funds, I highly doubt Sardar would consider sending funds back to BH for such an acquisition by breaking that rule (treat one investor like that, shouldn't you treat the other limited partners the same?)

 

I've always kept this in the back of my mind - BH, at the holding company, held $82.3 million in cash at their 9/24/14 yearend.  I'm sure Sardar has $20-40 million earmarked as BH's "emergency fund", "liquidity reserve," etc.  So, I'd estimate, paying all cash for an acquisition today, he could only pay $40 million or so.  Which no doubt, could be a good buy for BH. 

 

While it's important to grow the "liquid" assets of BH (I use " " b/c of the lockup in TLF), BH needs more cash to make acquisitions that help start moving the needle.  I mean, Sardar spent $40 million in 2014 just on First Guard (probably paid a fair price for a great business) and Maxim (paid a bargain price for a defunct business). 

 

It also makes me wonder what the use of that $135 million that was borrowed against the CBRL shares within TLF will be used for.  Purchasing more of the investment that he has been omitting from the 13F, or lending to BH for a purchase, or sending back to BH.  Or, or.

 

This is a great question....Thanks Petey

[Parsad]

Great post frugalchief! 

 

I have no doubt that Sardar will make plenty of money over time...it's why I owned Western Sizzlin, then Steak'n Shake and eventually Biglari Holdings.  I actually interviewed Sardar back in 2002 when no one knew who he was.  I also owned as much of Steak'n Shake (through call options and equity) as Sardar did before it became Biglari Holdings.  I was also one of the few people to speak to him extensively about the compensation plan the weekend it was announced...for two hours in Omaha...several years ago!  And I was the only person to actually send a letter to the board voting against the name change to Biglari Holdings when it was announced.  So, I know Sardar and his abilities as well as anyone on here!

 

Sardar making money has never been a doubt!  That is a certainty that he would be very rich one day, and naturally shareholders alongside him would also be wealthy.  But there is far more to life than making money...especially how you make the money!  We would not compromise our ethics on these issues.  But many have and will continue to do so to justify how they are making that wealth.  From the name change, compensation plan changes, share structure changes, buying and then selling back Biglari Capital, etc...these are ethical lapses.  But people naturally have to draw the line where they believe a line should be drawn.  Perhaps, ours is too conservative...or yours is too liberal.  I don't know the answer to that.

 

In terms of some of the posters questioning how Buffett conducted himself, well that is a different cup of tea.  When shareholders became involved with Berkshire, they knew he had a very large controlling shareholder stake...but Buffett still took everything to a vote, including changes in share structure, etc.  He fixed his compensation, so that was never an issue.  All in all, Berkshire shareholders were treated like partners, even though Buffett was calling the shots. 

 

This was not the case at Biglari Holdings.  He never had a controlling stake.  If votes did not pass, find another way...be it buying back Biglari Capital and then moving BH assets into it.  This is not the same at all when compared to Berkshire and corporate governance.  Again, perhaps we are too conservative and others are too liberal in their stance on these issues.  All I know is if it doesn't feel right, you can't stand behind it.  Cheers!

 

Hi Parsad,

 

Your unique insights are always appreciated since you've had "hands on" contact with Sardar.  When I first joined the board I saw the archives with all the Sardar posts which were enlightening, since I hadn't read about some of that stuff in news or my own research.

 

I sure hope I'm not emotionally attached to my BH investment, b/c to be honest, it's my first substantial investment in a stock.  (I'm an honest guy, so, it's actually my only single stock holding, rest of money is in mutual funds.  But my time is limited on reading/researching other companies, so when I get the chances I do look at other companies that meet my criteria). 

 

I like to call myself a numbers guy, and view investments solely on what is my educated prediction of its value, possible returns, etc. (to leave out emotions), but I have fully gotten engrossed in valuing the management team as well (which is certainly a large item to consider at BH) because as we are seeing, it is equally as important in some cases.  In short, I guess BH has been a good company to cut my teeth on.

 

And not to prove a point or get political, but on my ethics scale, when I saw the license agreement go through (w/o shareholder approval) I was livid and thought it was very unethical.  Same when BCC was sold back to Sardar.  (To further confuse my ethical compass, is it a coincidence that BCC has received massive compensation for investment results only after Sardar took back ownership?  I realized that's when BH & TLF heavily invested in CBRL and it's price skyrocketed, but.....was it a play on his part (b/c of the cap)....?)

 

It contradicts my earlier long post, but I (might) have forgone my ethical standards on BH (see emotion attachment above lol) to give Sardar a chance because I see how unique he is in todays environment.  I still stand behind my thesis for investing in BH, I just hope it's not a costly lesson...  Again, time will tell.

 

And thanks to each poster on the board.  Seeing people's comments that are smarter and more experienced than myself is beneficial.  Thanks again for everyone's input.

 

Looking forward to NBL's analysis.  I might write mine out as well to share.

 

Anyone here going to annual meeting in NYC in a few weeks?

 

Take care,

FC

 

Hi frugalchief,

 

There is nothing wrong with what you are doing.  If there is anything I hope that readers take away from my comments, because unlike many others, I've been on both sides of the coin with Sardar...is that shareholders don't become complacent.  Hold him accountable!  Whether it's an issue today or some time in the future.  Hold him accountable!

 

With Buffett, partners were treated like partners.  There was no need to hold him accountable, because essentially he and Munger did that for shareholders.  That is a rare sight in corporate governance!  Cheers!

[giofranchi]

This is a great question....Thanks Petey

 

You see what I meant? To any other question except CONTROL there is an easy reply. And here is my reply to Petey’s question:

 

Biglari’s job imo is to make the best use possible of BH’s capital. If the best use is to deploy it in the stock market, he will send it to the LF; if on the other hand the best use is to buy another operating business, he will keep the cash needed at the parent company level.

Because this is the behavior I demand to a rational owner/manager. And the very first time I realize Biglari’s behavior ceases to be the one of a rational owner/manager, as I have often repeated, I will change my view on the quality of an investment in BH and act accordingly.

 

The question of CONTROL, instead, inevitably involves “ethics” and shifts the focus from “business results”, which are easy enough for me to quantify and judge, to something much more undefined and confusing (as far as I am concerned at least!).

 

And that’s why I really would like to see the day in which Biglari finally has full control over BH. Because by then all this talk about “ethics” will have simply disappeared! Not because “ethics” won’t matter anymore… But because also Biglari will start to magically behave in an impeccable way!

 

Anyone here should realize and admit how much easier it is to behave “ethically” when one has full control. Think of this: how much easier is it to behave fairly and friendly towards anyone, when you know for sure that, whatever other people think or wish, your decisions will always prevail in the end?

Again: Buffett, for all his fairness and friendliness, has always done whatever he wanted to (if I am wrong, I am asking again an example which shows other shareholders’ will prevailing over Buffett’s).

 

That’s when Biglari’s compensation will come down, when he will put every changes to the vote of shareholders, etc. … “ethics” won’t be a problem anymore, and all that matters will be “business results”.

 

By the way, if you are interested in “business results”, don’t forget to read the letter published yesterday by the independent directors of BH! ;)

 

Gio

 

[RichardGibbons]

 

Anyone here should realize and admit how much easier it is to behave “ethically” when one has full control. Think of this: how much easier is it to behave fairly and friendly towards anyone, when you know for sure that, whatever other people think or wish, your decisions will always prevail in the end?

 

Anyone here should realize and admit how much easier it is to behave "ethically" when one kills anyone who disagrees with them.  Think of this: how much easier is to behave fairly and friendly towards anyone when you know for sure that, if anyone disagrees, you can simply murder them and eventually there will be nobody disagreeable left?

[Jurgis]

LOL, RichardGibbons, made my day.

 

A quote to live by.  8)

[OracleofCarolina]

http://finance.yahoo.com/news/biglari-holdings-inc-news-release-200800287.html

 

results out

[Parsad]

LOL, RichardGibbons, made my day.

 

A quote to live by.  8)

 

+1!

[giofranchi]

 

Anyone here should realize and admit how much easier it is to behave “ethically” when one has full control. Think of this: how much easier is it to behave fairly and friendly towards anyone, when you know for sure that, whatever other people think or wish, your decisions will always prevail in the end?

 

Anyone here should realize and admit how much easier it is to behave "ethically" when one kills anyone who disagrees with them.  Think of this: how much easier is to behave fairly and friendly towards anyone when you know for sure that, if anyone disagrees, you can simply murder them and eventually there will be nobody disagreeable left?

 

Ah!... But that would be comunism or nazism... Capitalism, instead, always leaves you a choice: you might either hold your shares, or sell them... You have the freedom to choose what you think is best for your future financial well-being...

 

I hope the difference is clear to anyone... Because I think it is self-evident!

 

Gio

[giofranchi]

One thing I never got was why Gio doesnt invest through the Lion Fund - he will get everything he is looking for and likely better returns...  ;D

 

Because then I would not be owning the operating businesses, a part of BH which I like and care a lot about.

 

Gio

[giofranchi]

Do you care about the operating businesses or the cash flow they generate? The cash is all plowed into the Lion fund anyway and in all likelihood, Lion fund will make the next acquisition not BH. The capital is at Lion Fund.

 

Not at all! Imo any new acquisition of operating businesses will always be done by BH, not the LF. The LF will only manage stock market investments. Just like NBL0303 has clearly explained.

 

Again: if and when something different happens, I will review and possibly alter my thesis on BH.

 

Gio

 

[giofranchi]

http://finance.yahoo.com/news/biglari-holdings-inc-news-release-200800287.html

 

results out

 

Speaking about results, BVPS from September 25, 2013 to December 31, 2014 increased 10.8%.

 

September 25, 2013:

Equity + Treasury stocks = $640,505,000

Shares outstanding = 1,778,819

BVPS = $360

 

December 31, 2014:

Equity + Treasury stocks = $823,990,000

Shares outstanding = 2,065,586

BVPS = $399

 

G&A expenses in 2010, when the efforts to franchise the Stake n Shake concept began were 6.2% of total revenues. In 2014 they have been 8.3% of total revenues. If G&A expenses had been 6.2% of total revenues in 2014, they would have cost BH shareholders $16.5 million less. And BVPS would have grown by 13% instead of 10.8%.

 

In other words, clearly 2014 has not been a stellar year, but not bad either.

 

Long-term notes payable and other borrowings = $312,595,000

Cash and cash equivalents = $129,669,000

Net debt = $312,595,000 - $129,669,000 = $182,926,000, or 22.2% of Equity + Treasury stocks at December 31, 2014.

 

Today the market is pricing BH stock at 1.06 x BVPS (at the end of 2014): with the only exception of FFH, BH already is the company in which I have made the most money so far (of course thanks to the large % of my firm’s capital that I have invested in BH), and yet it is still among the cheapest stocks I know.

 

Cheers,

 

Gio

 

[cobafdek]

Thanks.  Your write-up is a worthy exception to the point of this article:  http://www.wsj.com/articles/why-lawyers-object-to-making-legal-briefs-briefer-1426207344

 

Regarding the Biglari Discount, I understand the portion of the Biglari Toll is at least semi-quantitative, since it's not clear when or how much it will take it's cut.

 

Regarding the other portion of the Discount, the Biglari/Underwood factor, it's still a mystery to me whether or not you consider this purely qualitative.  A couple weeks ago, you stated that BH is a "small portion" of your portfolio.  Why small?  Since you are a concentrated value investor, is it "small" as a result of some semi-quantitative discount you are applying to your calculation of IV?  Do you use some form of a Kelly formula (or half-Kelly, or quarter-Kelly) to translate the Biglari/Underwood factor into quantitative terms?  (Perhaps an actual percentage of portfolio also might be helpful to help us understand - unless of course there are some unrelated external constraints to your position sizing.)

[gfp]

Excellent Post(s) NBL.  Thank you for sharing your extremely well reasoned thoughts on BH.