BH - Biglari Holdings

[frugalchief]

 

where is the book value per share indicated in his letter?

 

 

I measure BV/MV to help me, but Sardar has never (that I recall) stated book value as a crude proxy for intrinsic value - so I can see why he never posts this in the letter like WEB does. 

 

I wonder how much biglari even works these days. In the last two years, no new businesses acquired, no new major equity investments, steak n shake/western stagnant, he just spending all of his time on Maxim?

 

I felt from the letter that he is trying to 'soften' his public image of being an activist to being a more friendly CEO who offers a great atmosphere for owners looking to cash-out.  Does his persona of being a ruthless activist have something to do with little/no acquisitions...I think so, in some regard.  But I also believe he is ruthless on only making purchases that match what BH wants....i.e., re-read letter, pg. 2, paragraphs 2-5.

 

According to the letter (section about Maxim) and doing some simple math, BH bought Maxim for $12.6m.  Which means First Guard was $55m gross purchase, about $40m net of investments (unsure how much cash was received).  First Guard is doing fantastic - this was a purchase that shows Sardar's patience and attitude towards sitting on his hands until a gem comes around.  Maxim is starting to turn around....hopefully it can gain some traction now.  It's his M.O. to do turn-arounds, so I understand the Maxim purchase....but the sad realization of how small scale it is compared to BH as a whole.  I think he is wasting time as Editor in Chief, etc.

 

He started the deal with JP Morgan on the CBRL position a few years back which was beneficial for BH shareholders.  So he has done a lot with a little activity.  I'm happy but would like to see bigger moves to start moving the needle more.

 

Cheers!

[shalab]

What is the IV of BH in your opinions?

 

This is a holding company that holds (1)its own shares as investment (2) has one other major investment. Its subsidiaries are (1) leveraged restaurant business (2) insurance company and (3) loss making magazine that supposedly became profitable. It is not clear to me that this is a better vehicle than MKL, FRFHF etc. which trade at a lower multiple today. If one includes the compensation scheme which is very unfair to the share holders, it should trade at a wider discount than it should.

 

Can you share your opinion(s) of the intrinsic value of BH and also the reasons why?

 

 

A bunch of recycled news about his saving of SNS during the throes of the recession and just one line about how they did not execute at SNS their main subsidiary this year!

This was the worst annual letter he has written IMHO. And it ironically coincides with his assumption of control of the company.

At this point this is an investment ENTIRELY based on trust and hope.

Yes it is undervalued but that is irrelevant if you do not trust what Biglari is doing.

[Txvestor]

It is a little difficult and obviously prone to subjectivity but I will give it a shot. Take the cbrl holding. It's worth ~800m on paper with a ~160m tax liability which Mr Bigs. calls an interest free loan from the IRS but which for most investors is an unrealized liability since I sincerely doubt that he will EVER gain full control of the enterprise given the reputation he has built up for himself. He has truly made himself irrelevant to the CBRL board and shareholders with his approach in years gone by. Seldom would you see a 20% shareholder so appropriately marginalized.

I would discount the remaining $640m of value by yet another 25% due to his "compensation arrangement".

It is what it is, he says that "the investment might not be appropriate for everyone".  So let's take him at his word and discount by 25%. What's worse is if he ever does manage to compound like Buffett(I highly doubt it) the fact that he will skim 25% off the top will mean he will own a higher and higher percentage of the company. The end result being that he will get a fantastic result even if others get a mediocre result. So let's say $480m.

Then you'd have to consider what SNS leveraged is worth. He has been helped by low interest rates. He has a $35-45m annual run rate cash flow business there. With the leverage etc on the books, the tough fast casual environment and plethora of burger chains etc. and of course his 25% levy. I would have a hard time putting a greater than a 10x value on that. So say another $400m. And keep an eye on it as the numbers have deteriorated YOY due to as he says "poor execution". But I will stick with that as I believe he does have a little bit of pricing power built up there. So $400m.

Maxim is a zero, and I believe he is still in it for less than ideal reasons. What's worse I believe it has contributed to the poor execution at SNS. You could argue that with the $44m invested in it thus far, there's a tax benefit and some residual write off tax value there.

First Guard is a decent operator in a niche industry that seems to be working out well and gaining benefit from the greater financial strength of it she patent holding company. They've been able to take on more risk rather than cede it and appear to be growing more as a result. You could argue for a 15-16x 5m profit value on it. It might have a higher strategic benefit to BH but that is easily discounted by Mr Bigs. 25% levy. So say $80m.

I also notice he has conveniently omitted his reasonable sized VRX purchase etc. Putting all that together, $480m+$400m+~$100m=$980m would be my fair value estimate. Which puts us at ~$470 a share.

As a mental exercise if WEB had put in place such an arrangement with BRKA in the 1960s, one wonders what percentage of the shareholdings he would have ended up with, perhaps well over 80%(I haven't done the numbers and that's just a wild guess). You'd still have had a great investment mainly since Mr WEB has been such a phenomenal outlier and compounded at such a phenomenal rate than even with the 25% of he 19% historical annul return to him you would have beat the S&P by a substantial margin, but in Mr Bigs. case, I suspect HE will have a phenomenal result even as his shareholders will have a far more mediocre result which may or may not beat the S&P index over time. As Mr Buffett espoused in his weekend letter, beating the hedge fund hurdle over any length of time is a near super human task.

Viewed in those terms Mr Market is being quite rational with BH stock price at this time in my view.

[shalab]

Thx Txvestor! I simply value it by book value (holding company) and see that Biglari will get his compensation payment by just holding on to the dividends from cbrl and earnings from SNS.  Book value is ~530 MM right now and may grow by 10% in the coming year. Not sure what will happen to BH share price but at ~1.8 times book, I don't see a bargain.

 

FWIW, I owned this in 2009-2010 and recently when it was in 340-350 range.

 

It is a little difficult and obviously prone to subjectivity but I will give it a shot. Take the cbrl holding. It's worth ~800m on paper with a ~160m tax liability which Mr Bigs. calls an interest free loan from the IRS but which for most investors is an unrealized liability since I sincerely doubt that he will EVER gain full control of the enterprise given the reputation he has built up for himself. He has truly made himself irrelevant to the CBRL board and shareholders with his approach in years gone by. Seldom would you see a 20% shareholder so appropriately marginalized.

I would discount the remaining $640m of value by yet another 25% due to his "compensation arrangement".

It is what it is, he says that "the investment might not be appropriate for everyone".  So let's take him at his word and discount by 25%. What's worse is if he ever does manage to compound like Buffett(I highly doubt it) the fact that he will skim 25% off the top will mean he will own a higher and higher percentage of the company. The end result being that he will get a fantastic result even if others get a mediocre result. So let's say $480m.

Then you'd have to consider what SNS leveraged is worth. He has been helped by low interest rates. He has a $35-45m annual run rate cash flow business there. With the leverage etc on the books, the tough fast casual environment and plethora of burger chains etc. and of course his 25% levy. I would have a hard time putting a greater than a 10x value on that. So say another $400m. And keep an eye on it as the numbers have deteriorated YOY due to as he says "poor execution". But I will stick with that as I believe he does have a little bit of pricing power built up there. So $400m.

Maxim is a zero, and I believe he is still in it for less than ideal reasons. What's worse I believe it has contributed to the poor execution at SNS. You could argue that with the $44m invested in it thus far, there's a tax benefit and some residual write off tax value there.

First Guard is a decent operator in a niche industry that seems to be working out well and gaining benefit from the greater financial strength of it she patent holding company. They've been able to take on more risk rather than cede it and appear to be growing more as a result. You could argue for a 15-16x 5m profit value on it. It might have a higher strategic benefit to BH but that is easily discounted by Mr Bigs. 25% levy. So say $80m.

I also notice he has conveniently omitted his reasonable sized VRX purchase etc. Putting all that together, $480m+$400m+~$100m=$980m would be my fair value estimate. Which puts us at ~$470 a share.

As a mental exercise if WEB had put in place such an arrangement with BRKA in the 1960s, one wonders what percentage of the shareholdings he would have ended up with, perhaps well over 80%(I haven't done the numbers and that's just a wild guess). You'd still have had a great investment mainly since Mr WEB has been such a phenomenal outlier and compounded at such a phenomenal rate than even with the 25% of he 19% historical annul return to him you would have beat the S&P by a substantial margin, but in Mr Bigs. case, I suspect HE will have a phenomenal result even as his shareholders will have a far more mediocre result which may or may not beat the S&P index over time. As Mr Buffett espoused in his weekend letter, beating the hedge fund hurdle over any length of time is a near super human task.

Viewed in those terms Mr Market is being quite rational with BH stock price at this time in my view.

[gfp]

What about the value of their holding of their own shares?  You either have to use a different share count (1.2 vs 2m) or you have to include the BH shares they hold. 

 

It is a little difficult and obviously prone to subjectivity but I will give it a shot. Take the cbrl holding. It's worth ~800m on paper with a ~160m tax liability which Mr Bigs. calls an interest free loan from the IRS but which for most investors is an unrealized liability since I sincerely doubt that he will EVER gain full control of the enterprise given the reputation he has built up for himself. He has truly made himself irrelevant to the CBRL board and shareholders with his approach in years gone by. Seldom would you see a 20% shareholder so appropriately marginalized.

I would discount the remaining $640m of value by yet another 25% due to his "compensation arrangement".

It is what it is, he says that "the investment might not be appropriate for everyone".  So let's take him at his word and discount by 25%. What's worse is if he ever does manage to compound like Buffett(I highly doubt it) the fact that he will skim 25% off the top will mean he will own a higher and higher percentage of the company. The end result being that he will get a fantastic result even if others get a mediocre result. So let's say $480m.

Then you'd have to consider what SNS leveraged is worth. He has been helped by low interest rates. He has a $35-45m annual run rate cash flow business there. With the leverage etc on the books, the tough fast casual environment and plethora of burger chains etc. and of course his 25% levy. I would have a hard time putting a greater than a 10x value on that. So say another $400m. And keep an eye on it as the numbers have deteriorated YOY due to as he says "poor execution". But I will stick with that as I believe he does have a little bit of pricing power built up there. So $400m.

Maxim is a zero, and I believe he is still in it for less than ideal reasons. What's worse I believe it has contributed to the poor execution at SNS. You could argue that with the $44m invested in it thus far, there's a tax benefit and some residual write off tax value there.

First Guard is a decent operator in a niche industry that seems to be working out well and gaining benefit from the greater financial strength of it she patent holding company. They've been able to take on more risk rather than cede it and appear to be growing more as a result. You could argue for a 15-16x 5m profit value on it. It might have a higher strategic benefit to BH but that is easily discounted by Mr Bigs. 25% levy. So say $80m.

I also notice he has conveniently omitted his reasonable sized VRX purchase etc. Putting all that together, $480m+$400m+~$100m=$980m would be my fair value estimate. Which puts us at ~$470 a share.

As a mental exercise if WEB had put in place such an arrangement with BRKA in the 1960s, one wonders what percentage of the shareholdings he would have ended up with, perhaps well over 80%(I haven't done the numbers and that's just a wild guess). You'd still have had a great investment mainly since Mr WEB has been such a phenomenal outlier and compounded at such a phenomenal rate than even with the 25% of he 19% historical annul return to him you would have beat the S&P by a substantial margin, but in Mr Bigs. case, I suspect HE will have a phenomenal result even as his shareholders will have a far more mediocre result which may or may not beat the S&P index over time. As Mr Buffett espoused in his weekend letter, beating the hedge fund hurdle over any length of time is a near super human task.

Viewed in those terms Mr Market is being quite rational with BH stock price at this time in my view.

[arcticfox]

Is anyone headed to the BH annual meeting this year? I have been the past few years and am undecided on if I am going to attend.

[awindenberger]

Is anyone headed to the BH annual meeting this year? I have been the past few years and am undecided on if I am going to attend.

 

I will be going again.

[kh812000]

 

For those that went this yr to the annual mtg, any color on the dual class structure, lic agreement termination, and incentive comp cap?  Seems like each of which are major items...

 

 

==========

Item 7.01. Regulation FD Disclosure.

At the Meeting, the Company advised that its board of directors was considering a number of potential transactions, including the implementation of a dual class structure, the termination of the license agreement between Mr. Biglari and the Company, and the elimination of the limitation on Mr. Biglari’s incentive compensation relating to the Company’s operating businesses. There can be no assurance as to the specific terms and conditions of any such transactions or the timing or likelihood of completion of any such transactions.

 

 

[arcticfox]

Does anyone have an update or notes they would be interested in sharing from the BH annual meeting? It used to be people wrote and had an interest. It now feels like many observers and former owners have lost interest. I would be curious to know the tone of the meeting or any highlights. Thank you in advance.

[OracleofCarolina]

http://www.cornerofberkshireandfairfax.ca/forum/events/biglari-2017-annual-meeting-nyc/msg297651/#msg297651

[arcticfox]

Awindenberger,

 

When do you expect to share your notes on seeking alpha. I am and interested to hear about the meeting, both the content and your take.

 

Thank you

[awindenberger]

Awindenberger,

 

When do you expect to share your notes on seeking alpha. I am and interested to hear about the meeting, both the content and your take.

 

Thank you

 

I'm working on transcribing my notes, but have been very busy with paid work and my baby. I finally made some decent progress this weekend.

[awindenberger]

I'm surprised no one has posted about Biglari's new acquisition...he finally got himself another insurer!

https://seekingalpha.com/article/4076820-biglari-holdings-makes-significant-insurance-company-acquisition

[gfp]

Someone posted about it yesterday.

 

http://www.cornerofberkshireandfairfax.ca/forum/events/biglari-2017-annual-meeting-nyc/msg297651/#msg297651

 

I'm surprised no one has posted about Biglari's new acquisition...he finally got himself another insurer!

https://seekingalpha.com/article/4076820-biglari-holdings-makes-significant-insurance-company-acquisition

[gfp]

NAIC filings for PSIC

3362061.pdf

3275996.pdf

3345563.pdf

[Parsad]

Am I missing something?  Looks like he is paying over 2.5 times book with $25M cash, $175M at 6% over 10 years, and a balloon payment upon owner's death (or 10 years) of $100M to Notre Dame's endowment?  Cheers!

[gfp]

Yeah, we don't really know what we are missing because we don't know the value of Western or the McGraw agency and other McGraw entities.  The texas residential P&C business is included and small ($4.8 million).  Looks like 2x book if everything else is a zero but I bet it's closer to 1.5-1.7x book.  We'll see in a couple quarters I guess.  The balloon payment to Notre Dame could be very far off, paid off by a term life policy in cash or - very importantly - appreciated securities can be delivered to Notre Dame to satisfy that.  So there is quite a bit of flexibility on that last $100 million.  6% is also a lot cheaper leverage than BH was able to get in last year's aborted bond deal - without the onerous conditions Sardar balked at.  It looks like they don't lay off much with General Re, so it won't be like First Guard, where they had a huge lever to pull just in retaining all the risk after the deal.  We'll see.  There was a ton of management turnover in Q1 2017 and a big underwriting loss after a nice record of small underwriting profits / breakeven underwriting.  Fired the CEO/Pres/Chairman, Chief Risk Officer, VP of Underwriting, VP of Human Resources - all in Q1'17.

 

I think it is going to be better than Maxim...

 

Am I missing something?  Looks like he is paying over 2.5 times book with $25M cash, $175M at 6% over 10 years, and a balloon payment upon owner's death (or 10 years) of $100M to Notre Dame's endowment?  Cheers!

[wescobrk]

How much float would this give him from this acquisition?

Is 80 million in the ballpark?

[awindenberger]

How much float would this give him from this acquisition?

Is 80 million in the ballpark?

 

PSIC currently has $130M of policyholder surplus, with assets over $300M. I'll admit to not being entirely sure how float should be calculated. At the very least, its the $130M surplus, but since their combined ratio is around 100% or better, we could consider much if not all of the $280M in invested assets as float.

[gfp]

How much float would this give him from this acquisition?

Is 80 million in the ballpark?

 

PSIC's float is $150 to $160 million.  We don't know the financials of the parent organizations included in the deal.  Policyholder surplus is not float, it is shareholders equity.  Losses, Loss Adjustment Expenses, Unearned Premiums - that kind of stuff is float.  PSIC is very overcapitalized for the amount of business they write and has taken large dividends out to the owners in the recent past.  If I had to speculate, I would say that the recently fired, short tenured CEO was tasked with increasing business to take advantage of the extra capacity and the underwriting results deteriorated resulting in him being fired and a return to their break-even or better underwriting philosophy.  With First Guard, Biglari was able to stop laying off a bunch of the risk with reinsurers, immediately expanding the size of the business just by retaining that premium.  An easy lever to pull that he factored into the price he was willing to pay.  With PSIC, they have the capacity to write more business but they don't lay off much with their reinsurer (like 10 million dollars if I remember correctly).

 

PSIC has $279m total invested assets, $331.9m total assets, $150-160m "float", $177.76m total liabilities.

 

There are other businesses included in the deal.  They could be nothing - just owning the stock of PSIC, or they could have businesses, assets, etc.  I don't know.

[NBL0303]

How much float would this give him from this acquisition?

Is 80 million in the ballpark?

 

PSIC's float is $150 to $160 million.  We don't know the financials of the parent organizations included in the deal.  Policyholder surplus is not float, it is shareholders equity.  Losses, Loss Adjustment Expenses, Unearned Premiums - that kind of stuff is float.  PSIC is very overcapitalized for the amount of business they write and has taken large dividends out to the owners in the recent past.  If I had to speculate, I would say that the recently fired, short tenured CEO was tasked with increasing business to take advantage of the extra capacity and the underwriting results deteriorated resulting in him being fired and a return to their break-even or better underwriting philosophy.  With First Guard, Biglari was able to stop laying off a bunch of the risk with reinsurers, immediately expanding the size of the business just by retaining that premium.  An easy lever to pull that he factored into the price he was willing to pay.  With PSIC, they have the capacity to write more business but they don't lay off much with their reinsurer (like 10 million dollars if I remember correctly).

 

PSIC has $279m total invested assets, $331.9m total assets, $150-160m "float", $177.76m total liabilities.

 

There are other businesses included in the deal.  They could be nothing - just owning the stock of PSIC, or they could have businesses, assets, etc.  I don't know.

 

As regards to the float - exactly.  $160 million-ish.  Another way some public insurance companies calculate it is: Net Invested Assets minus Total Capital = Float.  That calculation would get you to about the same place. 

 

One First Guard type component of this in terms of a not-quite-immediate but a significant short-term business booster sort of thing is the fact that Pacific has close to $250 million in cash and fixed income - $200 million in bonds alone.  The income from that should more than double, potentially much more than that, as interest rates go up over the next few years.  Of course, interest rates going up is purely hypothetical at this point and I remember the 2010 Berkshire Shareholders Meeting when Warren said basically, "Though interest rates are currently zero - zero % interest rates is new territory - AND WE PROBABLY WON'T BE IN THIS TERRITORY FOR VERY LONG."  And here we are.  IF interest rates go up - that would be quite significant to the Pacific deal - just the way the First Guard re-insurance situation was significant to that deal.

[OracleofCarolina]

https://www.sec.gov/Archives/edgar/data/1067294/000134100417000375/sc13da.htm

 

Looks like Mr. Bigs settled the prepaid forward contract with cash by borrowing $200M. Wonder what the terms are for this loan?

[gfp]

Terms are probably pretty good since he pledged $600 million in collateral for a $200 million loan.

 

https://www.sec.gov/Archives/edgar/data/1067294/000134100417000375/sc13da.htm

 

Looks like Mr. Bigs settled the prepaid forward contract with cash by borrowing $200M. Wonder what the terms are for this loan?

[arcticfox]

Awindenberger- are you still planning to share your meeting notes from the BH annual meeting on seeking alpha or this board?

 

Thank you

[OracleofCarolina]

https://www.sec.gov/Archives/edgar/data/1067294/000119312517243826/d421842dex991.htm

 

I am sure they asked Biglari first and he said no , so they choose someone else, right :)