BH - Biglari Holdings

[giofranchi]

Equity right now is $440 million, because I think you should add the BH’s pro-rata ownership of its common stock through the Lion Fund, 99,800 shares.

So, with a market cap of $615 million, BH is trading for 615 / 440 = 1.4 x BV.

New BV will be $440 million + the cash received = $440 + $76 = $516.

With 1,720,540 share outstanding BVPS will be $300.

At the same multiple of 1.4, I expect a share price of $300 x 1.4 = $420.

If my reasoning is wrong, please correct me!

Of course, given the rate of growth in BH’s investments and given how shrewdly Mr. Biglari could deploy the newly raised $76 million, I think BH deserves a much higher multiple than 1.4, and I think the market will realize it, when Mr. Biglari announces his new target.

If you want, it can be viewed this way: Mr. Biglari’s new acquisition could become the catalyst this stock is waiting for a long time.

 

giofranchi

 

[giofranchi]

I am with you  gg....it's a wash

 

unless you oversubscribe and get some shares.

 

wellmont,

how exactly do you oversubscribe? Do you have to purchase rights on the market?

Thank you,

 

giofranchi

 

[Guest wellmont]

Equity right now is $440 million, because I think you should add the BH’s pro-rata ownership of its common stock through the Lion Fund, 99,800 shares.

So, with a market cap of $615 million, BH is trading for 615 / 440 = 1.4 x BV.

New BV will be $440 million + the cash received = $440 + $76 = $516.

With 1,720,540 share outstanding BVPS will be $300.

At the same multiple of 1.4, I expect a share price of $300 x 1.4 = $420.

If my reasoning is wrong, please correct me!

Of course, given the rate of growth in BH’s investments and given how shrewdly Mr. Biglari could deploy the newly raised $76 million, I think BH deserves a much higher multiple than 1.4, and I think the market will realize it, when Mr. Biglari announces his new target.

If you want, it can be viewed this way: Mr. Biglari’s new acquisition could become the catalyst this stock is waiting for a long time.

 

giofranchi

sir new to the story. can you explain why you think this is worth more than 1.4 x book. isn't this an investment company? regards

[giofranchi]

 

sir new to the story. can you explain why you think this is worth more than 1.4 x book. isn't this an investment company? regards

 

Well, that for me is the easy part! Given its relatively small size, I think Mr. Biglari has still many opportunities to go on increasing capital at a 20% CAGR for many years to come. And anything which compounds capital near 20% yearly for many years is worth much more than 1.4 x BV.

 

I don’t want to talk about Mr. Biglari’s ethics here! That subject has already been touched too many times!

 

giofranchi

 

[Guest wellmont]

I am with you  gg....it's a wash

 

unless you oversubscribe and get some shares.

 

wellmont,

how exactly do you oversubscribe? Do you have to purchase rights on the market?

Thank you,

 

giofranchi

 

gio ---exercise all your rights. then tell your broker that you want to oversubscribe  X number of shares where X = # of shares you are subscribing to with your issued rights. you give instructions for both at the same time. good luck!

[gg]

Equity right now is $440 million, because I think you should add the BH’s pro-rata ownership of its common stock through the Lion Fund, 99,800 shares.

So, with a market cap of $615 million, BH is trading for 615 / 440 = 1.4 x BV.

New BV will be $440 million + the cash received = $440 + $76 = $516.

With 1,720,540 share outstanding BVPS will be $300.

At the same multiple of 1.4, I expect a share price of $300 x 1.4 = $420.

If my reasoning is wrong, please correct me!

Of course, given the rate of growth in BH’s investments and given how shrewdly Mr. Biglari could deploy the newly raised $76 million, I think BH deserves a much higher multiple than 1.4, and I think the market will realize it, when Mr. Biglari announces his new target.

If you want, it can be viewed this way: Mr. Biglari’s new acquisition could become the catalyst this stock is waiting for a long time.

 

giofranchi

 

 

Giofranchi - I didn't look up the equity number, but let's assume you are correct, and the company trades at a 1.4x multiple. Adding a highly liquid asset to the balance sheet, such as cash, which has a readily available market price, is unlikely to command the same 1.4x multiple on book value, as, say, an increase in earnings. Essentially, your argument is that the company has a book value of X, and the market values the company at 1.4*X. If they increase cash levels by Y, you are saying that the market should value them at 1.4*(X+Y). While anything is possible in terms of how the market ultimately values information in the short term, I don't think that is how you should account for a cash-raise in valuation. In my opinion, the modeled "new mkt cap" should be = 1.4*X + Y

[wescobrk]

Equity right now is $440 million, because I think you should add the BH’s pro-rata ownership of its common stock through the Lion Fund, 99,800 shares.

So, with a market cap of $615 million, BH is trading for 615 / 440 = 1.4 x BV.

New BV will be $440 million + the cash received = $440 + $76 = $516.

With 1,720,540 share outstanding BVPS will be $300.

At the same multiple of 1.4, I expect a share price of $300 x 1.4 = $420.

If my reasoning is wrong, please correct me!

Of course, given the rate of growth in BH’s investments and given how shrewdly Mr. Biglari could deploy the newly raised $76 million, I think BH deserves a much higher multiple than 1.4, and I think the market will realize it, when Mr. Biglari announces his new target.

If you want, it can be viewed this way: Mr. Biglari’s new acquisition could become the catalyst this stock is waiting for a long time.

 

giofranchi

 

Your equity "right now" is incorrect, Cbrl alone added over 80 million from last q

You need to add another 80-100 million to your "right now" post.

[wescobrk]

Just curious for Bh shareholders, why not just buy what he buys and keep 100% instead of roughly 75% through Bh?

[ragnarisapirate]

 

Your equity "right now" is incorrect, Cbrl alone added over 80 million from last q

You need to add another 80-100 million to your "right now" post.

 

Liquidity my friend. Liquidity!

 

He won't be able to add another 80-100mm from CBRL in the next year, as he can't just dump the stock and move on. Additionally, it will be increasingly difficult to repeat that success with equity prices where they are... Imposible? No. However, it isn't as if he can roll the profits from CBRL into some other value stock, which as you point out, is likely the rationale for this capital raise, but that still gets us to the problem where equity prices are higher than they were a year or 2 ago.

 

Another item, is that it will be a lot more tax efficient to mirror the BH portfolio than to go through BH. The notable exception being, if he makes a bid for a whole company where he has no disclosed position. However, that doesn't seem to be how he operates historically.

 

 

[giofranchi]

 

sir new to the story. can you explain why you think this is worth more than 1.4 x book. isn't this an investment company? regards

 

Well, that for me is the easy part! Given its relatively small size, I think Mr. Biglari has still many opportunities to go on increasing capital at a 20% CAGR for many years to come. And anything which compounds capital near 20% yearly for many years is worth much more than 1.4 x BV.

 

I don’t want to talk about Mr. Biglari’s ethics here! That subject has already been touched too many times!

 

giofranchi

 

Thank you wellmont, for the explanation about how oversubscription works! :)

 

I would like to explain a little bit better why I think a 20% increase in BVPS is achievable by BH for many years into the future.

BH has $400 million in equity + $40 million of its own shares held by the Lion Fund. So let’s see what would be required to increase those $400 million in equity by 20%, the $40 million invested in BH shares will follow suit.

20% of $400 million is an increase of $80 million. Now, from restaurant operations alone BH enjoys an earning power in between $35 million and $40 million, that’s to say 9% to 10% of equity. Therefore, investment should make up for the remaining $40 to $45 million. Investments are worth $386 million, and a gain of $40 to $45 million would mean a return in between 10.5% and 11.5%. This kind of required return from investments could be further decreased, if Mr. Biglari is successful in getting control of a soundly managed and conservatively reserved insurance company, adding its float as a source of cheap and safe leverage. That’s why I like the announced raising of capital!

Moreover, operating earnings from restaurants are still growing: they grew 9% in 2012, and franchise royalties and fees still count for only a tiny fraction of revenues. They could go on growing very fast for a long time! So, I don’t see the contribution of operating earnings to BV growth become irrelevant anytime soon. Actually, the way Mr. Biglari invests in the stock market leads me to believe that operating earnings will become ever more meaningful: in fact, once he has invested in a business through the stock market, Mr. Biglari very often strives to acquire the whole company. And, when successful, he will increase earning power substantially.

So, yes! BH is an holding company, but also with meaningful earning power. Imo, a great platform for doing business!

 

Of course the ethics issue remains… But the fact is what I have just written is clear and easily understood… ethics and behavioral traits, on the other hand, are extremely difficult to fathom… at least for me!

 

giofranchi

 

[giofranchi]

Equity right now is $440 million, because I think you should add the BH’s pro-rata ownership of its common stock through the Lion Fund, 99,800 shares.

So, with a market cap of $615 million, BH is trading for 615 / 440 = 1.4 x BV.

New BV will be $440 million + the cash received = $440 + $76 = $516.

With 1,720,540 share outstanding BVPS will be $300.

At the same multiple of 1.4, I expect a share price of $300 x 1.4 = $420.

If my reasoning is wrong, please correct me!

Of course, given the rate of growth in BH’s investments and given how shrewdly Mr. Biglari could deploy the newly raised $76 million, I think BH deserves a much higher multiple than 1.4, and I think the market will realize it, when Mr. Biglari announces his new target.

If you want, it can be viewed this way: Mr. Biglari’s new acquisition could become the catalyst this stock is waiting for a long time.

 

giofranchi

 

Your equity "right now" is incorrect, Cbrl alone added over 80 million from last q

You need to add another 80-100 million to your "right now" post.

 

Yes! You are right... I meant at the end of Q2 2013. Also the numbers I used in my last post make reference to the 10q-q2-2013 file.

 

giofranchi

[wescobrk]

You need to adjust the book value down for taxes - check the wesco acquisition by Berkshire.

 

Otoh, copying Biglari ideas is the way to go...

 

Fair enough, but one only has to subtract 15% as half of his position is already long term gains and knowing sardar I bet the second half he'll only pay long term as well, thus, the 80 million figure I think still stands.

[wescobrk]

Actually about 60 million is a more accurate figure.

 

[dcollon]

Biglari Holdings Inc. News Release

Wednesday, August 21, 2013 08:52:33 PM (GMT)

 

 

SAN ANTONIO, TX, Aug. 21, 2013 /PRNewswire/ -- Biglari Holdings Inc. (NYSE: BH) ("Biglari Holdings" or the "Company") announced that it has commenced its offering of transferable subscription rights (the "Rights Offering") initially announced on February 5, 2013. Pursuant to the Rights Offering, the Company will distribute one transferable subscription right ("Right") for each share of its common stock to shareholders of record at the close of business on August 27, 2013.

 

Every five (5) Rights will entitle a shareholder to subscribe for one share of common stock at a price of $265.00 in cash per share. The Rights (excluding oversubscription privileges) will be transferable and will be admitted for trading on the New York Stock Exchange (the "NYSE") (NYSE: BH WS) during the course of the Rights Offering. The subscription period will commence on August 27, 2013 (the record date) and terminate 20 days later on September 16, 2013 (the expiration date), unless the Rights Offering is extended.

 

Shareholders on the record date who fully exercise the Rights distributed to them will also be entitled to subscribe for and purchase additional shares of common stock not purchased by other Rights holders through their basic subscription privileges. The maximum number of shares that a shareholder may purchase under this oversubscription privilege is equal to the number of shares such shareholder purchased under its basic subscription privilege, subject to pro-rata allotment.  A shareholder will be entitled to exercise the oversubscription privilege only if he or she is a shareholder on the record date and exercises the basic subscription privilege in full.

 

The Rights will begin trading "when issued" on the NYSE on August 22, 2013, and shares of common stock of the Company are expected to trade "ex-Rights" on August 23, 2013. The Rights are expected to begin trading for normal settlement on the NYSE on or about August 29, 2013 and continue through the opening of trading on the expiration date.

 

The Company expects to mail subscription certificates evidencing the Rights and a copy of the prospectus for the Rights Offering to record date shareholders beginning on or about August 28, 2013.

 

This announcement does not constitute an offer to sell or the solicitation of an offer to buy these securities, nor shall there be any offer or sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.  The Rights Offering will be made only by means of a prospectus.  A copy of the prospectus, when available, may be obtained from the information agent, Morrow & Co., LLC, at (877) 849-0763.

 

[keerthiprasad]

Biglari in the WSJ:

 

http://online.wsj.com/article/SB10001424127887323455104579014972501456820.html?mod=WSJ_hp_EditorsPicks

[APG12]

welp, BH is getting crushed today on that WSJ 'news.' All of that info has been available to anyone with access to Google for a while now. Considering revenue from franchisees was up significantly this quarter and same store sales rose 4%+ this move seems even more ridiculous. Mr. Market never ceases to amaze me.  :o

[giofranchi]

welp, BH is getting crushed today on that WSJ 'news.' All of that info has been available to anyone with access to Google for a while now. Considering revenue from franchisees was up significantly this quarter and same store sales rose 4%+ this move seems even more ridiculous. Mr. Market never ceases to amaze me.  :o

 

Hi agaglio,

Like you can read in David's post, BH shares started trading "ex-Rights" today.

The correspondig decrease in price has nothing to do with the WSJ article...

 

giofranchi

[APG12]

Haha. My post should have read, my stupidity never ceases to amaze me.  ;D

[APG12]

By the way, did anyone notice this in the prospectus: "You may exercise any number of your subscription rights, or you may choose not to exercise any subscription rights.  We will not distribute any fractional shares of common stock or pay cash in lieu of fractional shares.  We will round up the aggregate number of shares of common stock you are entitled to receive to the nearest whole number provided you fully exercise your rights and pay the full subscription price."

 

In other words, you could buy one share for $467 and exercise your right for $265. In the end you'll have spent $732 and have two shares worth $866 @ $433 a piece. That's a free $134! Hey, it might not be much but at least you can order 33 things off of the $4 Steak and Shake menu.

[giofranchi]

On August 07, 2013, like I have written in a post of mine, I doubled my firm’s investment in BH. The price I paid was little less than $430. After the shares started trading “ex-Rights” yesterday, BH stock price closed at $431.71. Of course, it might fall from here, but on Monday morning, if I wish so, I will be able to sell half of my shares for the same price I paid on August 07, and yet receive a number of Rights that are double the number I would receive, if I had kept my firm’s investment in BH like it was on August 06, 2013. So basically, I enjoy the possibility to buy twice the number of BH shares at $265 for free.

Furthermore, my average cost on August 06 was $370, and so, if I decide to keep my whole investment in BH, I will see an average cost not much higher than it was previously: ($430 + $370) / 2 = $400, ($400 x 5 + $265) / 6 = $377.5. And I will possess 2.2 x the number of shares I possessed previously. This means that, whatever paper profit I was seeing on August 06, next Tuesday, when I will be buying shares at $265, and if BH stock price stays around $430, that paper profit will be more than double: ($370 / $377.5) x 2.2 = 2.15.

And this is without taking into account any more share that I might be able to buy oversubscribing, which I will certainly do.

It surely might have been just good luck, but it doesn’t look like a wash to me at all! :)

 

giofranchi

 

[vpagano]

By the way, did anyone notice this in the prospectus: "You may exercise any number of your subscription rights, or you may choose not to exercise any subscription rights.  We will not distribute any fractional shares of common stock or pay cash in lieu of fractional shares.  We will round up the aggregate number of shares of common stock you are entitled to receive to the nearest whole number provided you fully exercise your rights and pay the full subscription price."

 

In other words, you could buy one share for $467 and exercise your right for $265. In the end you'll have spent $732 and have two shares worth $866 @ $433 a piece. That's a free $134! Hey, it might not be much but at least you can order 33 things off of the $4 Steak and Shake menu.

 

agaglio - this section is worded oddly to me. Have you confirmed this with your broker? Mine says this section refers to treatment of fractional shares of BH and the rights associated you will receive is based on the next whole number. Personally, the rep wasn't that knowledgeable (probably very wrong) and I had her reference it to the Reorg. department to read over and email me back.

 

The reason I ask is because if what you say is true, you could simply buy one right and exercise it to buy a discounted share. As long as right + exercise cost + $265 < $430 then you made a few dollars. Non-retail guys around here can laugh but hey it's free beer money.

[APG12]

Hey Vince,

 

I actually have no idea if it would work as I described. I have a number of shares divisible by 5 so it doesn't affect me. Sorry I'm not more help.

[giofranchi]

From what I can see on its 10q-q3-2013 filing, BH equity at July 3, 2013, was $482 million.

The Company’s proportional share of its common stock, as held by the investment partnerships and recorded as Treasury stock, amounted to 105,670 shares, which at yesterday price of $408 are worth $43 million.

BH will receive $76 million in cash from the issuance of 286,767 shares.

Therefore, total equity will be: $482 + $43 + $76 = $601 million.

 

Shares outstanding at August 5, 2013, were 1,433,835. With the issuance of new shares the total outstanding will be: 1,433,835 + 286,767 = 1,720,602.

At yesterday share price of $408, market cap is: $408 x 1,720,602 = $702 million.

 

Therefore, BH is selling for $702 / $601 = 1.17 x BV.

 

If my numbers are wrong, please correct me!

 

giofranchi

10q-q3-2013.pdf

[gg]

Giofranchi - are you sure that the $43m treasury shares are not already accounted for in the $482m figure? I'm not entirely sure how BH accounts for stock that they own in themselves through an 'investment partnership'. If the company-owned BH stock is held in the Lion Fund, then that $43m might be included in the "Equity in investment partnerships" of $337m, in which case you are double counting it.

[giofranchi]

Giofranchi - are you sure that the $43m treasury shares are not already accounted for in the $482m figure? I'm not entirely sure how BH accounts for stock that they own in themselves through an 'investment partnership'. If the company-owned BH stock is held in the Lion Fund, then that $43m might be included in the "Equity in investment partnerships" of $337m, in which case you are double counting it.

 

As of July 3, 2013 the carrying value of the equity in the investment partnerships was $337,479, excluding $43,581 classified as Treasury stock representing our proportional share of Company common stock held by the investment partnerships.

--page 8

 

Treasury stock on the Balance Sheet are a reduction to Shareholders’ equity. Therefore, I don’t think I am double counting it.

But I might be wrong… If anyone is sure about this, I would gladly hear from her/him! :)

 

giofranchi