BH - Biglari Holdings

[Picasso]

Gio, I say this was 100% sincerity, but if you have not read it already, I highly suggest you read and relate The Parable of the Scorpion and the Frog to this situation. It may help a little with your cognitive dissonance. Just look it up on google if you aren't familiar.

 

From Wikipedia:

The fable is used to illustrate the position that no change can be made in the behaviour of the fundamentally vicious.

 

In your opinion then Biglari is “fundamentally vicious”… Have you ever met him? Have you ever talked to him? Have you ever spent some time with him? I refrain from giving such kind of judgements of people with whom I spend a large part of my life with…

 

Gio

 

Please actually read the Parable and give it some thought. It will take you a few minutes. Don't rely on Wikipedia. The point of the parable is not to call anyone "fundamentally vicious" but it does address your question as to, perhaps, with Biglari would do things that don't make "rational" sense - things counter to his best interest. I have thought about the scorpion's final words many times.

 

To answer your question, I met the man briefly once but most of my judgments of him come from following his actions for many years, speaking with those who have interacted more closely with him, and seeing him in action many times at annual meetings. In any case, beside my point.

 

I think we can all agree that the way in which Sardar went about getting his incentive compensation in place was poor.

 

However, its pretty clear from his start at the Lion Fund that Sardar feels that this is the fairest way to be compensated for his work. Its extremely similar to the setup Buffett used with his partnerships, which built up his stake to the point where he could be the controlling owner of BRK when it came around. Biglari got the opportunity to control an entity he liked way before he had enough capital to fully do so, so the incentive compensation agreement is the way for him to own a larger part of this entity over time.

 

Because of the fact that he now has the compensation set up the way he likes, I don't believe that he will take any further actions in the future that would result in further reductions to the respective returns of shareholders vs himself. If anything, I think that at the point where his ownership stake in the company has growth enough, it will be more beneficial to him to remove any compensation for himself, as the resulting stock price increase would make up for the lost future income on his end. But at this point, this simply isn't the case, and so Sardar wants the current agreement in place so he can profit fairly (in his mind as least) from the value he's creating for shareholders.

 

Excellent point.

[giofranchi]

Because of the fact that he now has the compensation set up the way he likes, I don't believe that he will take any further actions in the future that would result in further reductions to the respective returns of shareholders vs himself. If anything, I think that at the point where his ownership stake in the company has growth enough, it will be more beneficial to him to remove any compensation for himself, as the resulting stock price increase would make up for the lost future income on his end. But at this point, this simply isn't the case, and so Sardar wants the current agreement in place so he can profit fairly (in his mind as least) from the value he's creating for shareholders.

 

This is exactly what ragu has been saying all along, and what I believe is the most rational explanation of Biglari’s past and future behavior.

 

But who really knows, right? Therefore, like I have always said, I will take the evidence as it comes.

 

Cheers,

 

Gio

 

[wescobrk]

Because of the fact that he now has the compensation set up the way he likes, I don't believe that he will take any further actions in the future that would result in further reductions to the respective returns of shareholders vs himself. If anything, I think that at the point where his ownership stake in the company has growth enough, it will be more beneficial to him to remove any compensation for himself, as the resulting stock price increase would make up for the lost future income on his end. But at this point, this simply isn't the case, and so Sardar wants the current agreement in place so he can profit fairly (in his mind as least) from the value he's creating for shareholders.

 

This is exactly what ragu has been saying all along, and what I believe is the most rational explanation of Biglari’s past and future behavior.

 

But who really knows, right? Therefore, like I have always said, I will take the evidence as it comes.

 

Cheers,

 

Gio

 

Maybe it ends with the revenue agreement which is about 17 years away.

[giofranchi]

Maybe it ends with the revenue agreement which is about 17 years away.

 

Ah! The evidence of what I am monitoring right now (things that I have numbered from 1) to 5) some posts ago) hopefully will become clear much sooner! ;) (Therefore, I won't be stuck for long with this investment, if I don't like what I see.)

 

Cheers,

 

Gio

 

[coc]

Let me give a quick example of bizarre behavior that I've never heard anyone point out. In Sardar's 2002 letter to TLF clients, he has a section on diversification (p12 - someone posted the letters a few pages back in this thread). When I was reading it, I felt some of the wording was awfully familiar. Well, here's why:

 

TLF:

However, given the capricious marketplace dealt us, I believe the way I choose stocks is more rational, simply because I always demand value and seek opportunities in which, relative to the S&P, I have a much greater expected point advantage. Among those few I find, the expectancy varies vis-a-vis the S&P by a wide margin. The key question I ask myself is, How much of the Fund's assets do I earmark for the highest expectation stock (relative to the S&P performance) versus, say, the fifth highest? The answer isn't so simple because it's contingent on both the spread in mathematical expectancy between stock number 1 to stock number 5 and also on the probability and degree of each stock's underperforming the S&P. Should both stocks share the same mathematical expectancy, but number one has a higher chance of underperforming the S&P than does number five, then the figures dissuade us from investing heavily in stock number one.

 

My rationale may seem very scientific, but that appearance is far from the truth. My job is to evaluate facts, apply logical reasoning based on my knowledge and experience, and take advantage of others emotions making the nature of the business rather unscientific. A given year's or interim-year's results will not demonstrate how well I've made my calculations to reach expectations, but over several years time they will. I apply several statistical models in my decision-making process. One of our advantages is the fact that we are cognizant of the paths we're taking; I call this our Bayesian Advantage.

(TLF 2002 Annual Letter)

 

Buffett:

We have to work extremely hard to find just a very few attractive investment situations. Such a situation by definition is one where my expectation (defined as above) of performance is at least ten percentage points per annum superior to the Dow. Among the few we do find, the expectations vary substantially. The question always is, “How much do I put in number one (ranked by expectation of relative performance) and how much do I put in number eight?" This depends to a great degree on the wideness of the spread between the mathematical expectation of number one versus number eight.” It also depends upon the probability that number one could turn in a really poor relative performance. Two securities could have equal mathematical expectations, but one might have .05 chance of performing fifteen percentage points or more worse than the Dow, and the second might have only .01 chance of such performance. The wider range of expectation in the first case reduces the desirability of heavy concentration in it.

 

The above may make the whole operation sound very precise. It isn't. Nevertheless, our business is that of ascertaining facts and then applying experience and reason to such facts to reach expectations. Imprecise and emotionally influenced as our attempts may be, that is what the business is all about. The results of many years of decision-making in securities will demonstrate how well you are doing on making such calculations - whether you consciously realize you are making the calculations or not. I believe the investor operates at a distinct advantage when he is aware of what path his thought process is following.

(BPL 1965 Annual Letter)

 

It goes on from there. Normally I would say, who cares - he likes Buffett and it's a sound idea. But isn't this the same man who protests vehemently when people compare him to Buffett?

 

I don't know. I suppose as long as the "business results" are good, this stuff doesn't matter.

[tombgrt]

Regardless of whether this could be labeled under plagiarism, the two fragments shows very clearly what a great writer and teacher Buffett really is. Thank you coc!

[giofranchi]

I would like to understand better, coc: the issue you are pointing out is that Biglari in 2002 shouldn’t repeat what Buffett has already written in 1965, or that Biglari shouldn’t complain about being compared to Buffett?

 

Gio

 

[coc]

I would like to understand better, coc: the issue you are pointing out is that Biglari in 2002 shouldn’t repeat what Buffett has already written in 1965, or that Biglari shouldn’t complain about being compared to Buffett?

 

Gio

 

I wanted to point this out for anyone reading to make their own judgment. It's clear what I'm implying. I'm really not going to get into it with you. I know what your stance is and I know I ain't gonna change it. I respect your view.

 

Regardless of whether this could be labeled under plagiarism, the two fragments shows very clearly what a great writer and teacher Buffett really is. Thank you coc!

 

Agreed- he's an incredible talent.

[awindenberger]

Biglari consistently pointed out that he follows the same investing principles as Buffett, especially back in 2002.

 

He has said many times that he doesn't want to be compared to Buffett recently, but I think that has more to do with his operational style, rather than the way he chooses his investments.

 

Biglari has also quoted Buffett and attached things Buffett has written to his annual reports in the past, so I don't see this as him trying to come off as the person that invented that line of thinking to his partners.

[gfp]

Q1 report out -

http://www.biglariholdings.com/reports.htm

[InelegantInvestor]

YoY restaurant franchising revenue declined from 4,252,000 to 3,656,000 despite large investments in franchising.

 

Maxim losses were nearly $6 million.

 

Looking like Biglari's plans are not working quite the way he'd like.

[gfp]

Franchise revenue includes fees from new franchises as well as ongoing royalties.  There was only one new SnS franchise opened in Q2 2015, while last year's quarter had 2 company owned stores sold to franchisees (austin tx i think?) and 5 new franchised units opened.

 

But, yeah, I agree with your basic point that the number of franchised units isn't growing as quickly as shareholders would like to see.

 

YoY restaurant franchising revenue declined from 4,252,000 to 3,656,000 despite large investments in franchising.

 

Maxim losses were nearly $6 million.

 

Looking like Biglari's plans are not working quite the way he'd like.

[InelegantInvestor]

Only one franchised unit in the quarter is a dismal failure that Biglari wouldn't tolerate as an investor.  It certainly does not validate the strategy. It just deepens the questions about the company's relationship with franchisees. Imagine how few franchisees they would have gotten without the Biglari licensing deal. Good thing they were able to get that deal.

 

 

Franchise revenue includes fees from new franchises as well as ongoing royalties.  There was only one new SnS franchise opened in Q2 2015, while last year's quarter had 2 company owned stores sold to franchisees (austin tx i think?) and 5 new franchised units opened.

 

But, yeah, I agree with your basic point that the number of franchised units isn't growing as quickly as shareholders would like to see.

 

YoY restaurant franchising revenue declined from 4,252,000 to 3,656,000 despite large investments in franchising.

 

Maxim losses were nearly $6 million.

 

Looking like Biglari's plans are not working quite the way he'd like.

[wescobrk]

Maybe it ends with the revenue agreement which is about 17 years away.

 

Ah! The evidence of what I am monitoring right now (things that I have numbered from 1) to 5) some posts ago) hopefully will become clear much sooner! ;) (Therefore, I won't be stuck for long with this investment, if I don't like what I see.)

 

Cheers,

 

Gio

 

Just to be clear Gio, I actually think Sardar is doing a brilliant job.

My comment wasn't suppose to be an attack. I was being sincere.

It might take that long for him to get 50% voting control.

I would love for the price to really drop so I can load up.

[Txvestor]

YoY restaurant franchising revenue declined from 4,252,000 to 3,656,000 despite large investments in franchising.

 

Maxim losses were nearly $6 million.

 

Looking like Biglari's plans are not working quite the way he'd like.

 

But Mr Bigs will claim that you are asinine for saying that, because the 'intrinsic value' of the business went up.  ;D

[giofranchi]

YoY restaurant franchising revenue declined from 4,252,000 to 3,656,000 despite large investments in franchising.

 

Maxim losses were nearly $6 million.

 

Looking like Biglari's plans are not working quite the way he'd like.

 

But Mr Bigs will claim that you are asinine for saying that, because the 'intrinsic value' of the business went up.  ;D

 

I still have to understand which is the case:

 

1) You have never managed a business and don't have a clue what it means to manage one,

2) You are just trying to be sarcastic...

 

Adjusted for $4 million lost by Maxim and $6 million invested in the sns franchise effort, BVPS increased 2.4% in Q1 2015.

 

A mediocre result, but:

a) Investments earned only 2.1%, far below average,

b) The franchise effort is still costing money, instead of earning money,

c) Maxim is still costing money, instead of earning money.

 

The number of franchise openings is a disappointment. To open new stores, though, is a long process and it takes time... Let's have some patience and monitor how this thing evolves.

 

Cheers,

 

Gio

[giofranchi]

At the end of Q1 2015 BH had a BV of $834 million, while its market cap today is $750 million: a multiple of 0.9x.

 

Cheers,

 

Gio

[frugalchief]

Franchise revenue includes fees from new franchises as well as ongoing royalties.  There was only one new SnS franchise opened in Q2 2015, while last year's quarter had 2 company owned stores sold to franchisees (austin tx i think?) and 5 new franchised units opened.

 

But, yeah, I agree with your basic point that the number of franchised units isn't growing as quickly as shareholders would like to see.

 

Agree, but it's only one quarter.  SB anticipates 20+/yr franchise openings.

 

From report:

 

"The decrease in franchise fees is primarily attributable to the timing of area development fees forfeited and thereby realized in 2014."

 

 

[OracleofCarolina]

At least the Saudi Arabian SNS is allegedly opening this month , right?

[wescobrk]

At the end of Q1 2015 BH had a BV of $834 million, while its market cap today is $750 million: a multiple of 0.9x.

 

Cheers,

 

Gio

 

Where are you getting that? From memory, I thought shareholders equity is around 730 million?

[giofranchi]

At the end of Q1 2015 BH had a BV of $834 million, while its market cap today is $750 million: a multiple of 0.9x.

 

Cheers,

 

Gio

 

Where are you getting that? From memory, I thought shareholders equity is around 730 million?

 

Treasury shares are outstanding and are therefore used to calculate market cap. BV is equity + treasury shares.

 

Cheers,

 

Gio

[gaddis]

I've been following this board for some time and truly appreciate the thoughtful dialogue--thanks to everyone, but esp. the frequent contributors. 

 

I attended the AM this year and found it more entertaining than most.  However, I was a little surprised at the lack of understanding in the shareholder base.  Part of this could be owing to BH's <$1bn market cap, low liquidity and paucity of analyst coverage.  The rights offerings and compensation plan are straightforward, yet not everyone in the room seemed to have read them.  While I can understand that some legacy holders might feel they were misled regarding the LF compensation plan,  I think they would be hard pressed to find more shareholder-/LP-friendly agreements (no dilution, hurdles, and HWMs).

 

That said, I don't think the sophistication of the shareholder base is going to change overnight.  Share turnover still seems to be quite high for a company that is looking for long-term partners.  ~2.2m shares turned over in the TTM through 20150331.  Considering >365k are held in LF1, share turnover was ~1.3x float over the same time period.  I don't think this fact is lost on Sardar.  Without taking action over the next year, he truly risks a well-articulated proxy contest 1) distracting from his long term goal and 2) usurping his executive control.

 

Given the proxy contest this year and the general tone of the AM, I would expect Sardar to be considering ways to purchase large stakes.  I think NBL originally noted that a self tender would be a possible use of capital.  To put numbers to it, BH could use on-hand hold co cash and its CBRL stake (net of taxes) to repurchase >1.3m shares of BH at a 30% premium to Friday's price.  This could be a quick way to consolidate control because all of the tendered shares would be placed into LF1 and Sardar as GP would assert voting control.  If I were in his shoes, this is what I would do.  Doing so would 1) take out some passive investors and short term holders, 2) dissuade anyone from a 2015 proxy contest, 3) consolidate control and thus remove it as a point of contention from future meetings and 4) lift intrinsic per share value.

[jawn619]

Nice thoughtful first post. Welcome to the boards!

 

I've been following this board for some time and truly appreciate the thoughtful dialogue--thanks to everyone, but esp. the frequent contributors. 

 

I attended the AM this year and found it more entertaining than most.  However, I was a little surprised at the lack of understanding in the shareholder base.  Part of this could be owing to BH's <$1bn market cap, low liquidity and paucity of analyst coverage.  The rights offerings and compensation plan are straightforward, yet not everyone in the room seemed to have read them.  While I can understand that some legacy holders might feel they were misled regarding the LF compensation plan,  I think they would be hard pressed to find more shareholder-/LP-friendly agreements (no dilution, hurdles, and HWMs).

 

That said, I don't think the sophistication of the shareholder base is going to change overnight.  Share turnover still seems to be quite high for a company that is looking for long-term partners.  ~2.2m shares turned over in the TTM through 20150331.  Considering >365k are held in LF1, share turnover was ~1.3x float over the same time period.  I don't think this fact is lost on Sardar.  Without taking action over the next year, he truly risks a well-articulated proxy contest 1) distracting from his long term goal and 2) usurping his executive control.

 

Given the proxy contest this year and the general tone of the AM, I would expect Sardar to be considering ways to purchase large stakes.  I think NBL originally noted that a self tender would be a possible use of capital.  To put numbers to it, BH could use on-hand hold co cash and its CBRL stake (net of taxes) to repurchase >1.3m shares of BH at a 30% premium to Friday's price.  This could be a quick way to consolidate control because all of the tendered shares would be placed into LF1 and Sardar as GP would assert voting control.  If I were in his shoes, this is what I would do.  Doing so would 1) take out some passive investors and short term holders, 2) dissuade anyone from a 2015 proxy contest, 3) consolidate control and thus remove it as a point of contention from future meetings and 4) lift intrinsic per share value.

[giofranchi]

Given the proxy contest this year and the general tone of the AM, I would expect Sardar to be considering ways to purchase large stakes.  I think NBL originally noted that a self tender would be a possible use of capital.  To put numbers to it, BH could use on-hand hold co cash and its CBRL stake (net of taxes) to repurchase >1.3m shares of BH at a 30% premium to Friday's price.  This could be a quick way to consolidate control because all of the tendered shares would be placed into LF1 and Sardar as GP would assert voting control.  If I were in his shoes, this is what I would do.  Doing so would 1) take out some passive investors and short term holders, 2) dissuade anyone from a 2015 proxy contest, 3) consolidate control and thus remove it as a point of contention from future meetings and 4) lift intrinsic per share value.

 

Well, many people on the board would say that is just another way for Biglari to entrench himself more and more using shareholders’ money…

 

I would answer that your points from 1) to 4) are beneficial to all shareholders. ;)

 

If I were in his shoes, I would do exactly what you have suggested.

 

Cheers,

 

Gio

 

[awindenberger]

Given the proxy contest this year and the general tone of the AM, I would expect Sardar to be considering ways to purchase large stakes.  I think NBL originally noted that a self tender would be a possible use of capital.  To put numbers to it, BH could use on-hand hold co cash and its CBRL stake (net of taxes) to repurchase >1.3m shares of BH at a 30% premium to Friday's price.  This could be a quick way to consolidate control because all of the tendered shares would be placed into LF1 and Sardar as GP would assert voting control.  If I were in his shoes, this is what I would do.  Doing so would 1) take out some passive investors and short term holders, 2) dissuade anyone from a 2015 proxy contest, 3) consolidate control and thus remove it as a point of contention from future meetings and 4) lift intrinsic per share value.

 

Well, many people on the board would say that is just another way for Biglari to entrench himself more and more using shareholders’ money…

 

Gio

 

Great observation regarding the tender idea Gaddis. However, my guess is that Biglari has no interest in getting rid of his CBRL steak. Something tells me he sees a lot more untapped potential at the company, and is simply biding his time until we hit a recession and their recent "success" falls apart.

 

Sardar currently controls just under 400k shares of BH right now. 1.05mil shares would be enough to control half the company. That means an extra 650k shares need to be purchased. Thats less than $240mil at current prices, or about $310m assuming a tender offer 30% over the current price.

 

Personally, I think that Biglari should simply continue to buy shares on the open market. I think he could probably buy 5k/day and end up with the 650k in about 4 months. I bet this method would likely lead to a lower average price than a tender offer.

 

However, I think that Biglari prefers the price to be low, because it means that he gets better value for the shares he's accumulating himself. As long as he doesn't think he will lose a proxy battle, why not enjoy the low stock price as long as possible.