BH - Biglari Holdings

[awindenberger]

Makes sense - smaller number of shares is used for a smaller denominator which increases the fees to Biglari. The larger number is the actual number used for voting purposes which also benefits Biglari as he votes the shares held in the funds.

 

I like to use the number of shares that are used in voting as they represent the actual number.

 

Biglari's incentive fees on the operating side are based on change in total book value, not BV/Share, so he's not getting increased fees by shrinking shares. On the investment side, the fees are based on generating returns over the annual 6% hurdle rate.

 

In case you weren't aware, Biglari was paid all of $23k in incentive compensation for 2015, and the amount for this year is currently under $200k. If he's not increasing value to stockholders, he's not getting paid.

[Parsad]

Correct me if I'm wrong here, but Sardar owns Biglari Capital and essentially the Lion Funds...not Biglari Holdings. 

 

The percentage ownership you've listed is actually the percentage invested in the Lion Funds by Biglari Holdings...not ownership, but invested.  Thus those shares cannot be excluded from how incentive fees are calculated...Biglari gets incentive fees on the total amount of the Lion Funds...BH shareholders get nothing.

 

Also, it is a peculiar structure solely to get control:

 

For example, our partnership owns 37% of PDH, but that isn't PDH's capital in our partnership...the capital structure is segregated. 

 

Whereas Lion Fund owns 51% of BH, but alot of that is BH's own capital.  So you have this incestuous relationship in the structure and compensation...a perverse fu*k you to good corporate governance!  Cheers! 

[awindenberger]

As a Biglari fan, I think that the way he managed to lock up control was very creative and well thought out. I also think that when we look back at it in 10-20 years, we'll realize that Biglari really did deliver for long term shareholders.

 

For one, he took control through a tender offer where he drastically underpaid for the shares that were bought back. A conservative valuation of only the SNS and Cracker Barrel stakes makes the shares worth over $700, so buying back 30% of them at $420 is going to be a great move.

[StevieV]

Correct me if I'm wrong here, but Sardar owns Biglari Capital and essentially the Lion Funds...not Biglari Holdings. 

 

The percentage ownership you've listed is actually the percentage invested in the Lion Funds by Biglari Holdings...not ownership, but invested.  Thus those shares cannot be excluded from how incentive fees are calculated...Biglari gets incentive fees on the total amount of the Lion Funds...BH shareholders get nothing.

 

Also, it is a peculiar structure solely to get control:

 

For example, our partnership owns 37% of PDH, but that isn't PDH's capital in our partnership...the capital structure is segregated. 

 

Whereas Lion Fund owns 51% of BH, but alot of that is BH's own capital.  So you have this incestuous relationship in the structure and compensation...a perverse fu*k you to good corporate governance!  Cheers!

 

I think BH is an easy pass.  I wish the shareholders the best of luck, but I don't see any reason to invest.

[gaddis]

How are SB's repurchases through the LF not a case of self-dealing?  He stands on both sides of the transaction (CEO of BH and sole owner of Biglari Capital), and with each share repurchased he transfers voting rights disproportionately to himself and away from shareholders.  Do we have any lawyers on the board who have seen this before?  Why are the institutional investors not holding SB accountable? 

 

I'm sure many of you saw Matt Levine's take on this ~6 months ago, but I'm reposting here if you haven't...https://www.bloomberg.com/view/articles/2016-05-16/mr-grumpy-and-a-case-of-latour

[Parsad]

How are SB's repurchases through the LF not a case of self-dealing?  He stands on both sides of the transaction (CEO of BH and sole owner of Biglari Capital), and with each share repurchased he transfers voting rights disproportionately to himself and away from shareholders.  Do we have any lawyers on the board who have seen this before?  Why are the institutional investors not holding SB accountable? 

 

I'm sure many of you saw Matt Levine's take on this ~6 months ago, but I'm reposting here if you haven't...https://www.bloomberg.com/view/articles/2016-05-16/mr-grumpy-and-a-case-of-latour

 

+1!  Ethics would tell you that it's wrong, but I'm not sure corporate law does.

 

Imagine if Buffett did not dissolve the Buffett Partnerships, but held 15% of Berkshire's shares through them...and he directly owned only 15-20% of the Buffett Partnership...the rest of the capital was outside money.  And then much of the excess cash flow from Berkshire was re-routed into the Buffett Partnerships to buy more Berkshire shares over the next few years until the Berkshire Partnerships owned over 51% of Berkshire.  All the while, Buffett is getting incentive fees on this and gaining control of Berkshire.

 

Awindenberger is correct...ingenious and creative!  Buffett himself would tell you that it's probably unethical. 

 

“Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without [integrity], you really want them to be dumb and lazy.”

― Warren Buffett

 

I would love to hear Charlie Munger's opinion!  Cheers!

[gg]

I've followed BH for a long time, and own a very small position. I personally view the corporate governance issues to be appalling. But I also think that if you model the BH-owned shares within The Lion Fund as not "real outstanding shares" then the actual shares are unbelievable undervalued (and with easy to value assets). The reality is that there company's capital structure shouldn't be modeled as equivalent to treasury shares, most of all because they pay the incentive fee, and also because you need to take a heavy discount for the corporate structure and personalities involved. Ultimately, whether you view Biglari as the devil incarnate or a baby Buffett, there should be SOME price at which it is attractive to buy, and some price at which it is attractive to sell--and importantly, a lot of these discussions on governance/personality ignore valuation altogether.

[gaddis]

Here the undervaluation is caused in part by a misrepresentation of the shares outstanding among other things.  SB has taken BH funds to repurchase shares through some layered structure while not passing the residual benefits of such repurchases to shareholders in proportion to their interest in BH.  Conflict of interest, self dealing, duty of loyalty and care, misrepresentation.  This can't be legal or every profitable operating business (AAPL, for example) would set up a similar structure.

[shalab]

Good points:

  - The shares in Lion Fund are real ones, so it is not as cheap as it looks.

 

For valuation, using a P/B measure is probably the best for this one as it has substantial debt, insurance operations and a loss making newspaper division.

 

Other operators like FRFHF, Y etc. don't have the hedge fund like compensation and have returned more to the share holders in the last five years than BH. A better comparison may be GLRE.

 

So BH has 2.067 million shares outstanding while a smaller number is used to show profit and loss.  Also, the hedge fund like fee structure on operating income should make the shares available at a discount than would be the case otherwise.

 

Y has a P/B of 1.02 while FRFHF is at 1.25. BH should go for a discount. A price of 0.8 - 0.9 P/B would be fair value in my opinion. GLRE goes for a P/B of 0.94. So, even using awindenberger's 381/share as the book value, this one is worth 300-340$ and not more.

 

This stock is trading where it is at because of people's perception that this is deeply undervalued when in reality it isn't.

 

This, the corporate governance issues and the downturn in restaurant stocks in general and the gradual increase in interest rates it looks as though this is going to be a dead investment for the rest of this decade if not longer.

 

I've followed BH for a long time, and own a very small position. I personally view the corporate governance issues to be appalling. But I also think that if you model the BH-owned shares within The Lion Fund as not "real outstanding shares" then the actual shares are unbelievable undervalued (and with easy to value assets). The reality is that there company's capital structure shouldn't be modeled as equivalent to treasury shares, most of all because they pay the incentive fee, and also because you need to take a heavy discount for the corporate structure and personalities involved. Ultimately, whether you view Biglari as the devil incarnate or a baby Buffett, there should be SOME price at which it is attractive to buy, and some price at which it is attractive to sell--and importantly, a lot of these discussions on governance/personality ignore valuation altogether.

[gfp]

"loss making newspaper division" -?  That's a charitable description of Maxim magazine's business.  Loss making it is.

 

"people's perception that this is deeply undervalued when in reality it isn't. " - you either use 2.067 million shares AND add the value of those BH shares owned by the Lion Funds, OR you use the lower share count that the SEC requires for reporting and do not count the value of BH shares owned by the Lion Funds.

 

It's one or the other.  You don't use the higher share count and ignore hundreds of millions of dollars of assets, and of course you don't use the lower share count and then count the BH shares additionally.

 

The value of BH's stake in the Lion Funds with BH shares excluded will fluctuate with the price of CBRL stock.  CBRL was down over 20% in the quarter, but we don't know how the BH-CBRL story ends yet.

 

[shalab]

Umm... do you (or others) have a valuation model for BH that is different than mine? If so please share.

 

Calculating book value with all the outstanding shares is a bit of work - the easier one is to do what awindenberger has done. Either way, the estimate with my model of using a discount to book is that today, the shares are overvalued.

 

"loss making newspaper division" -?  That's a charitable description of Maxim magazine's business.  Loss making it is.

 

"people's perception that this is deeply undervalued when in reality it isn't. " - you either use 2.067 million shares AND add the value of those BH shares owned by the Lion Funds, OR you use the lower share count that the SEC requires for reporting and do not count the value of BH shares owned by the Lion Funds.

 

It's one or the other.  You don't use the higher share count and ignore hundreds of millions of dollars of assets, and of course you don't use the lower share count and then count the BH shares additionally.

 

The value of BH's stake in the Lion Funds with BH shares excluded will fluctuate with the price of CBRL stock.  CBRL was down over 20% in the quarter, but we don't know how the BH-CBRL story ends yet.

[gfp]

Yes, it appears we are arriving at different appraisals of the company's value.  That's what makes a market.  Governance issues aside, there are very few examples I can think of where a company has been as aggressive in sucking up it's own shares over a short period of time.  Despite my well documented reservations about how he went about accomplishing it, the CEO has control of this company and I do not believe he will do anything material that is irrational and not in his own self interest.  As far as working as the editor in chief of Maxim goes, I believe it is a huge waste of managements time but I don't think it is material to my valuation of the parent company. 

[shalab]

And your valuation of BH and the method to evaluate BH is?

 

Yes, it appears we are arriving at different appraisals of the company's value.  That's what makes a market.  Governance issues aside, there are very few examples I can think of where a company has been as aggressive in sucking up it's own shares over a short period of time.  Despite my well documented reservations about how he went about accomplishing it, the CEO has control of this company and I do not believe he will do anything material that is irrational and not in his own self interest.  As far as working as the editor in chief of Maxim goes, I believe it is a huge waste of managements time but I don't think it is material to my valuation of the parent company. 

[Greg]

  Cracker Barrel has a market cap of $3+ billion and a book value of $500+ million. Assuming the market cap is fair value, someone who gets control and gets 25% of the increase in book value may be able to do transactions to get the book value much closer to the market cap and make hundreds of millions for himself.

  But why stop there? On to McDonald's and The Coca Cola Company.

 

 

[awindenberger]

  Cracker Barrel has a market cap of $3+ billion and a book value of $500+ million. Assuming the market cap is fair value, someone who gets control and gets 25% of the increase in book value may be able to do transactions to get the book value much closer to the market cap and make hundreds of millions for himself.

  But why stop there? On to McDonald's and The Coca Cola Company.

 

You clearly don't understand the incentive agreements.

 

Biglari is paid 25% of the increase in Book Value above 6%/year of Biglari Holdings' fully owned operating companies (SNS, First Guard, Western Sizzlin, Maxim).

 

Biglari is separately paid 25% of the returns over 6%/annually on the performance of his investments held in the Lion Funds. CBRL is held in those funds.

[bci23]

So if Biglari is able to earn 15% pre tax returns on his investments, after performance fees that is 12.75%, after the 38% corporate federal/state taxes shareholders only realize 7.9%. In the long run wouldn't we expect this to be close to the annualized return on the stock? 15% is pretty good but the 7.9% that shareholders would actually realize is nothing special. This is why I think BH will always be a simply mediocre investment. 

[TwoCitiesCapital]

So if Biglari is able to earn 15% pre tax returns on his investments, after performance fees that is 12.75%, after the 38% corporate federal/state taxes shareholders only realize 7.9%. In the long run wouldn't we expect this to be close to the annualized return on the stock? 15% is pretty good but the 7.9% that shareholders would actually realize is nothing special. This is why I think BH will always be a simply mediocre investment.

 

+1

 

Unless if it were to trade at a substantial discount to it's investments, it's hard to envision a path forward where shareholders are greatly enriched...this and the apparent lack of ethics are what has always kept me from pulling the trigger on BH. I'd rather own any number of companies before even looking at this one.

[awindenberger]

So if Biglari is able to earn 15% pre tax returns on his investments, after performance fees that is 12.75%, after the 38% corporate federal/state taxes shareholders only realize 7.9%. In the long run wouldn't we expect this to be close to the annualized return on the stock? 15% is pretty good but the 7.9% that shareholders would actually realize is nothing special. This is why I think BH will always be a simply mediocre investment.

 

+1

 

Unless if it were to trade at a substantial discount to it's investments, it's hard to envision a path forward where shareholders are greatly enriched...this and the apparent lack of ethics are what has always kept me from pulling the trigger on BH. I'd rather own any number of companies before even looking at this one.

 

BH does trade at a substantial discount right now. I believe each share is worth over $700, but lets use $660. At that value, the stock is trading at 66% of true value, so the 8% return you talk about is actually 12%.

[bci23]

Doesn't that require you to  assume that the 33% discount to your fair value closes over time? What if it doesn't?

 

Edit: or i guess you are saying the "biglari discount" is a fixed $ amount. In this case $660 - $440 = $220/share. I'm not sure if that is reasonable because his compensation limits in the lion fund are not capped.

[NBL0303]

or i guess you are saying the "biglari discount" is a fixed $ amount. In this case $660 - $440 = $220/share. I'm not sure if that is reasonable because his compensation limits in the lion fund are not capped.

 

That is a good point. I would also point out that the incentive payments only kick in if there is value growth of the investments and because the high-water mark is substantially higher than the current value of the Lion Fund holdings, at this moment, there has to be quite significant value appreciation before the incentive agreement payments kick in.  So there is a limiting factor to considering future growth - the incentive payments - but that incentive agreement portion of the "Biglari discount" is also limited because of the implied growth before it becomes relevant.

[bci23]

In the long run though you would expect these payments to be in play, if they are not that means returns to shareholders are under 6% and thats certainly not a good result.

[jimjam]

BH is down 6% today.

Google finance is showing that there was a downgrade by CL King.

Anyone have access to the report?

I assume this is just noise but I'd like to know.

Thanks.

 

[OracleofCarolina]

Annual report and results come out Saturday. It will be interesting to see how same store sales at Steak -n-Shake look. I was thinking there might be a decrease and that is why they came out with the aggressive promotion of all kids under 12 eat free for the rest of the year with $9 purchase

 

http://www.steaknshake.com/promotion/kids-eat-free

 

I am sure 1st Guard earnings will be steady and who knows with Maxim. Biglari said it would be making money by now so we will see. Still would not be surprised if Biglari brings out a new share class of non-voting BH stock and does a reverse split on the current shares like 10 for 1.

 

In other new, looks like Biglari finally got Nick Swenson to resign from the ISIG board yesterday.

[gfp]

I would be shocked if Maxim was even run-rate break-even for the last month of the year, much less the quarter.

[awindenberger]

I would be shocked if Maxim was even run-rate break-even for the last month of the year, much less the quarter.

 

In the grand scheme it doesn't matter anyways. Most of the revenue and expenses have been eliminated from Maxim, so the question is, do they have a shot long term, not whether they make or lose $500k in Q4.