BH - Biglari Holdings

[frugalchief]

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 :)

 

I'm ROFLing  ;D

[kh812000]

BH earnings out.   

https://www.sec.gov/Archives/edgar/data/93859/000092189517002037/form10q07428007_08042017.htm

Not so pretty.  Is his eye off the ball? SNS trends not good....  Anyone see positives here.

[Ballinvarosig Investors]

http://i.imgur.com/lTWyxZy.png

[InelegantInvestor]

http://i.imgur.com/lTWyxZy.png

 

Considering how much of BH is invested in CBRL, and how much was wasted buying shares to cement Biglari's control, this is pretty damning.

[Parsad]

http://i.imgur.com/lTWyxZy.png

 

Considering how much of BH is invested in CBRL, and how much was wasted buying shares to cement Biglari's control, this is pretty damning.

 

Could be perceived as damning or that BH is cheap. 

 

Third view could be that his control of BH and his compensation structure create a Biglari-discount. And is it permanent as long as he has control and retains that compensation structure? 

 

Cheers!

[InelegantInvestor]

http://i.imgur.com/lTWyxZy.png

 

Considering how much of BH is invested in CBRL, and how much was wasted buying shares to cement Biglari's control, this is pretty damning.

 

Could be perceived as damning or that BH is cheap. 

 

Third view could be that his control of BH and his compensation structure create a Biglari-discount. And is it permanent as long as he has control and retains that compensation structure? 

 

Cheers!

 

The third view was the point I was trying to make. Buying CBRL was a great move, but his machinations insured that shareholders saw none of it. Don't go into business with dishonest partners, especially when they are talented.

[Parsad]

http://i.imgur.com/lTWyxZy.png

 

Considering how much of BH is invested in CBRL, and how much was wasted buying shares to cement Biglari's control, this is pretty damning.

 

Could be perceived as damning or that BH is cheap. 

 

Third view could be that his control of BH and his compensation structure create a Biglari-discount. And is it permanent as long as he has control and retains that compensation structure? 

 

Cheers!

 

The third view was the point I was trying to make. Buying CBRL was a great move, but his machinations insured that shareholders saw none of it. Don't go into business with dishonest partners, especially when they are talented.

 

Ah!  Then there are only two scenarios...cheap or Biglari-discount. 

 

Let's not use the word "dis-honest" among others I would love to use...but I certainly get what you mean.  Cheers!

[OracleofCarolina]

maybe cheap?

 

Market Cap is $666 million(yikes!) and from the last 10Q, the value of their share of investment partnerships minus the taxes is $427 million.  Seems like there is a large Biglari discount(rightfully so) and the market is pricing a continued lackluster operational Steak N Shake.

 

It will really get interesting if Cracker Barrel's stock price starts falling.

 

[gfp]

If you use $427m as investments net of taxes the share count to use is 1.23 million.  Quite a few people seems to miss this.  You can use the 2 million share count if you want, but you need to include the value of the BH shares held by the company through the partnerships.  BH shares aren't included in the $427m number.

 

maybe cheap?

 

Market Cap is $666 million(yikes!) and from the last 10Q, the value of their share of investment partnerships minus the taxes is $427 million.  Seems like there is a large Biglari discount(rightfully so) and the market is pricing a continued lackluster operational Steak N Shake.

 

It will really get interesting if Cracker Barrel's stock price starts falling.

[Spekulatius]

Looks like BH is just generating a black zero in operating earnings and all gains come from investments. The restaurant operations have deteriorated quite a bit, costs are up almost 5%YoY and revenues are down.

 

Considering the management issues, BH does not look cheap at all.

[gfp]

The book value per share increased from 229/share to 259/share from Jan 2012 till now. (5.5 years). The P/B value is still > 1.25. I would like to know why people think this is cheap in comparison to FFH.

 

 

I understand that almost everybody on this board hates this management / company enough that they would never spend any time doing their own work on it - but it is so confusing when this group of investment "professionals" uses random yahoo finance-quality data to form their conclusions and make authoritative statements that everyone else accepts as fact.  Several times in this thread, including a couple posts ago, I have tried to explain how errors are being made between share count and which assets are included and they either are disagreed with or ignored completely.  Trust me, I am a big critic of this horrendous management as well - but I don't think simple counting is beyond the scope of most board members.

 

I don't put a lot of weight in book value but since you are citing book value per share in the above post:

Shareholders equity on the recent 10-Q is $535.741 million.  This Balance sheet doesn't include the shares BH owns in BH through the partnerships as asset, it is reflected as treasury stock on the balance sheet.  So that leaves the share count at 1.23 million if you take that book value unadjusted from the SEC filing.

 

1.23 million shares x 322.5 share price gives you a market cap yesterday of $397 million.

 

Which is less than the book value.  .74x BV.

 

The rest of your post ignores the effects of multiple rights offerings as well, but thats a rounding error compared to the share count mix-up.

 

So - to recap...  If you don't count the BH shares BH owns through the partnerships (as the SEC requires), you are left with BH itself owning $426m net of tax and liabilities in the partnerships, which is the CBRL stock.  That is net of a loan against it and a bunch of deferred tax.  The market cap is less than $400 million.  Reasonable people can disagree with what discount to apply for Sardar's fee structure (there is no fee structure if he doesn't make BH 6% past the high water mark on approx 1 Billion dollars).  Reasonable people can disagree on the value of a currently break-even (but cash flow generative), leveraged, has-been burger chain with owned real estate and a de novo international franchising business; a break-even no-hope of profitability has-been magazine brand trying to license its name to parties and work out powders; a niche trucking insurer with a very nice business and track record; and a $300 million P&C insurer that is overcapitalized and basically owner-financed.

 

Oh, and there is $87 million of cash and put-protected investments on the corporate balance sheet (CAW is paired with a put to sell to Funston at $6/share and in the corporate till, not the partnership.  Interesting on it's own if you like third-rate personal care products since the CEO is willing to buy shares at $6 in a few years time, he may have an opinion on future value)

---------

 

Since many have philosophical issues against using the 1.23m share count, it also works to use the 2 million share count.  But you have to count all the assets when you use that share count...

 

So everything above plus the shares that BH owns in itself (a dollar value that is declining day by day), vs a market cap of $650m or thereabouts. 

 

So BH owns 841,223 shares in itself through its share of the partnerships.  No gains of course, but it won't owe tax even if it had gains.  So those shares are currently worth $271 million in the market (more at the balance sheet date of course)

 

So that puts book value at $806 million vs market cap of $650 million - .8x book value, which is a bit of a mismatch because I used balance sheet (6/30) numbers mixed with current numbers, but the gist is the same.

 

--------

 

In neither scenario does BH trade above the value of the investments held in the partnerships.  So in both scenarios you are paying a negative price for the rest of the assets listed above (net of their liabilities of course - SnS has been leveraged to take capital out of it)

 

[Ballinvarosig Investors]

Looks like BH is just generating a black zero in operating earnings and all gains come from investments. The restaurant operations have deteriorated quite a bit, costs are up almost 5%YoY and revenues are down.

 

Considering the management issues, BH does not look cheap at all.

Even considering management issues, it looks cheap to me.

 

Cash $32m (halved this as some cash will need to be retained by rest/ins biz)

Investments $23m

Investment partnerships $586m

Restaurants $400m

First Guard $40m

Maxim $0

 

Debt -$262m

Deferred taxes -$155m (CRBL unrealized gain)

 

SOTP value $664m or ~$545 per share using the 1.22m share count. Even putting a 20% discount on the thing because of what Biglari has done before, this is cheap at ~$440 a share.

[enoch01]

thanks globalfinancepartners

[gfp]

I tried to include the 2m share count in the second half so nobody would be confused.  I get it.  I explained it both ways.

[awindenberger]

I tried to include the 2m share count in the second half so nobody would be confused.  I get it.  I explained it both ways.

 

As you laid out in excellent detail, BH is really cheap right now, no matter how you analyze it. And yet one has to dig in a bit to understand just how cheap it is, and so people look at it casually and think its not cheap.

 

I believe that new insurance company Biglari bought is going to be a big time winner for BH. I've been cycling funds out of other investments into BH the last couple days.

[NBL0303]

I tried to include the 2m share count in the second half so nobody would be confused.  I get it.  I explained it both ways.

 

As you laid out in excellent detail, BH is really cheap right now, no matter how you analyze it. And yet one has to dig in a bit to understand just how cheap it is, and so people look at it casually and think its not cheap.

 

I believe that new insurance company Biglari bought is going to be a big time winner for BH. I've been cycling funds out of other investments into BH the last couple days.

 

Just curious, why do you think Pacific is going to be a big winner for BH?

[Packer16]

IMO the main issue here is that even if it is cheap how do you know you will get anything after Biglari takes his cut?  This is akin to investing in a private business where the management enriches itself.  These companies have fair values at a discounts from estimated value of 35% + depending upon how much is being "skimmed".  You can do a quick calc here if you can estimate Biglari's excess comp at cap it at 10%.  So if we use his average $20.8m in management fees the discount is $208m or about 30% of your SOTP value.  So the net fair value is $456m of about $356/share if you use 1.2m shares.  This about where the shares are trading today.

 

Packer 

[kh812000]

So what are the reasonable actions Biglari could do to unwind the discount.  Clearly he's fed up with the discount. And all investors are also fed up with him.

Stock is undervalued possibly severely, but the question is how to fix this bad situation.

 

I think at the annual mtg Biglari mentioned 1) unwind of the licensing fee if removed from the company, and 2) move to dual class structure to maintain control w/o need to hold all those BH shares and possibly retire them. 

 

Other ideas are:

1.  Exit CBRL investment to fully unlock hidden value.  Seems Trump's tax needs resolution to catalyze.

2.  Sale to SNS to a larger entity eg KFC/etc.

3.  Hire true restaurant operator and let Biggie manage investment arm.

4.  Sell Maxim.  All the noise and analysis about Maxim is just a waste.  Maxim doesnt move the needle period.

5.  Others?

 

 

[Packer16]

These ideas are cosmetic & still does not deal with economic reason for the discount, the big payment to himself.  So absent a change to this payment all you are doing is moving chairs around on the deck of the SS Biglari.

 

Packer

[John Hjorth]

...  So absent a change to this payment all you are doing is moving chairs around on the deck of the SS Biglari.

 

Packer

 

I hereby nominate you as the CoBF poster of this week, Packer. Thank you for making my day.

[NBL0303]

So what are the reasonable actions Biglari could do to unwind the discount.  Clearly he's fed up with the discount.

 

 

Just curious, why are you sure he is fed up with the discount at this time?

[awindenberger]

So what are the reasonable actions Biglari could do to unwind the discount.  Clearly he's fed up with the discount.

 

 

Just curious, why are you sure he is fed up with the discount at this time?

 

If I was Biglari I would have little to no issues with this discount. I'd be buying back more shares, both for myself and for the company.

[Ballinvarosig Investors]

So what are the reasonable actions Biglari could do to unwind the discount.  Clearly he's fed up with the discount. And all investors are also fed up with him.

This sounds very naive.

 

You say Biglari is fed up with the discount - what evidence is there of that?

 

If anything, the scenario that the company is in (increasing book value per share/low share price) is actually ideal for Biglari. Increasing book value means the incentive agreement gets triggered, guaranteeing Biglari first dibs on any increase in intrinsic value. All the poison pills, control arrangements and incentive structures guarantee that the share price is kept low. This offers him the chance to buy shares on the cheap, solidifying his control on the company. The whole circular arrangement feeds back on itself. The better the company does, the more he benefits, the more he benefits, the more control he gains and the less appetising the company gets as the market factors in what crazy compensation benefit he can think of next that shareholders will have no say on.

[gfp]

There's certainly no reason to think he is fed up with the discount in the share price, although he (the company BH) is basically out of money to take advantage of it by purchasing additional shares in size.  He may announce another trading plan but they are getting stretched pretty thin unless they sell some CBRL shares.  I think he will wait for a hoped-for corporate tax cut but who knows, one may never come, CBRL could tank, etc...

 

By making BH shares the only other large position in the investment partnerships, he has made the performance of BH stock a big factor in his incentive compensation, if any. 

 

If Biglari Holdings' investment in the Lion Funds [which are currently dominated by CBRL & BH shares] doesn't compound at over 6% annually, there is no fee to Biglari Capital.  The other part of the company's net worth, the owned businesses, would have to be profitable and increasing net worth on their side in order for him to make any incentive compensation from that half of the company.  And, of course, the two compensation structures are separate - there is no double counting or double incentive payment.

 

The reason people point to a huge pay package is because he chose an investment that made a few hundred million dollars for the company's account.  In years he doesn't produce investment gains above the hurdle & high water mark, he isn't highly paid.

 

He has acted to try to take advantage of the share price of BH when he felt it was high (didn't work, an auto parts retailer exchange offer if I remember correctly), and he has taken action when he felt it was undervalued (multiple 10b5-1 purchase plans & tender offer).  Sure, this was for him to gain voting control after a proxy contest - but it also had the effect of tying his future compensation to the performance of the BH share price to a much greater extent.

-------------

The reason I have a big problem with his actions is because he took over an existing corporation with existing shareholders and decided to divert the funds to a fee paying vehicle.  There are plenty of others, likely Bonhoeffer fund included, who charge similar fees to manage capital in private partnerships - some even have a management fee, incentive fee, and no hurdle rate.  Other companies, like Greenlight Re and Third Point Re, divert shareholder funds plus float into fee paying hedge funds - but with the key difference that the arrangement was spelled out as such when they raised capital from new investors.

 

At least with Biglari there are no fees unless fairly large sums are earned for the company's account.  It's something like $50 million over the high water mark that he would have to make for the company's account before he would start getting a quarter of the additional gains on top of that each year.  And the $50 million number - or whatever the exact number is - will only go up each year unless capital is taken out and returned to the corporate till.

 

edit: - I should also add that the biggest issue for me with the company Biglari Holdings is the board of directors.  There is no indication that they are capable or interested in being a check on management or representatives for shareholders.

 

Also, a very important distinction:  When a limited partner of an investment partnership is unhappy with performance, fees, ethics, personality - anything at all - they have the option to withdraw their capital when their lockup expires.  There is a "customer" to please.  With BH's investments in the Lion Funds, there is no "customer" - and the above mentioned board of directors isn't even close to filling that role.  Anytime the same person is on both sides of the negotiating table and the money is other people's - it should make you nervous.

 

[gfp]

Sorry, hadn't seen this before I posted.  There are a few possibilities, one is that he is running low on extra capital and two that he is about to announce another purchase plan, however small.

 

 

You say Biglari is fed up with the discount - what evidence is there of that?

 

 

Exactly.  In the past he took action to close the discount (10b5 plans) - yet this year he has let it run down completely without filing a plan which he could easily do - so it seems to me that he is, perhaps, not quite fed up with the discount.  But I'm open to other ideas on this point as well.