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Note Worthy Developments at Biglari Holdings

October 17, 2010 | About:
Warren Buffett has many admirers and some imitators. Sardar Biglari of Biglari Holdings (BH) is one of them. This article records the noteworthy steps taken by him in creating value for himself and his shareholders.

Getting into Restaurant Business

Before all these happened, Sardar ran Biglari Capital, through which he hedge fund the Lion Fund.

In 2008, through his hedge fund, Biglari took control of money losing restaurant chain Steak n Shake and instituted a series cost cutting measures. Among other things, capital expenditure was cut from $31.4 million in 2008 to $5.74 million in 2009.

The restaurant chain turned around in 2009 by reporting a profit of about $6 million.

On March 30, 2010, the Company acquired 100% of the outstanding equity interests of Western Sizzlin.

Today, the Company's restaurant operations consist of Steak n Shake and Western Sizzlin. As of July 7, 2010, Steak n Shake operated 412 company-owned restaurants and 70 franchised units in 21 states. Western Sizzlin operated 5 company-operated restaurants and 91 franchised units in 17 states.

Restaurant business continues to do well in 2010. Through July 7, 2010, the end of the company’s third fiscal quarter of 2010, the Steak n Shake same-store sales increased 8.5% compared with the same period of the prior year. Net sales increased 8.5% from $464,342 to $503,929 in the current year. YTD earning has been 19.7 million or 13.82 per share, contrasted with net earnings of $2,616 or $1.83 per diluted share for the same period in fiscal year 2009.

Bringing the Portfolio Management In-house

On April 30, 2010, Steak n Shake acquired Biglari Capital and its hedge fund – the Lion Fund. Steak n Shake has since changed its name to Biglari Holdings (BH). The Lion Fund functions as an investment arm for Biglari Holdings to assist, principally in facilitating the partial ownership of other publicly traded companies.

Reverse Stock Split

During the first quarter of fiscal 2010, the Board of Directors approved a 1-for-20 reverse stock split. Instead of trading under 20 dollars, the stock has traded above $260 since then. Like Warren Buffett, Sardar Biglari does not like people to trade his stocks for the fun of doing it. He wants to surround himself with long term investors.

As of August 26, 2010, Sardar Biglari controls 207,878 shares of 1.43 million shares of stocks outstanding, or about 15% (More on his holdings later).

Controversy Surrounding Sardar Biglari’s Bonus Package

On April 30, 2010, at the same time when the company buys Biglari Capital, the company announced the following proposed Incentive Bonus Agreement:
The Incentive Bonus Agreement provides Mr. Biglari the opportunity to receive annual incentive compensation payments based on the Company's book value growth for each fiscal year. If the Company exceeds a 5% annual book value growth hurdle, Mr. Biglari would receive an incentive compensation payment equal to 25% of the Company's book value in excess of that hurdle. Mr. Biglari will not receive incentive compensation payments under the Incentive Bonus Agreement unless the Company's book value exceeds a 5% annual growth rate over the Company's previous highest book value achieved during the term of the agreement, or the "high water mark." Accordingly, in a fiscal year where book value declines, the hurdle for subsequent fiscal years will require the complete recovery of the deficit from the last high water mark, plus a 5% annual growth rate from the last high water mark. Determinations of book value and the incentive compensation payments to Mr. Biglari under the Incentive Bonus Agreement are subject to the approval of the Governance, Compensation and Nominating Committee of the Board of Directors of the Company.
Shareholders resisted and the company gave in. It delayed the special shareholder’s meeting that was scheduled to vote on the plan to November 5, 2010, and more importantly, modified the terms of the package. The hurdle rate is raised from 5% to 6% and the incentive payments have been capped at $10 million, also, the 25% book value growth sharing has been replaced by a much more moderate schedule that is capped at 12.5%. See this link for details.

Sardar Biglari the Successful Investor

In his own company’s stock, that is.

Since June 1, 2010, Sardar Biglari has been buying his own company’s stock. The following is the insider buying and selling activities that happened to the company’s stock recently. You can see Mr. Biglari has been a very consistent buyer of his own company’s stock when the company’s stock dipped below $300 per share during the weakness in the summer of 2010.

Insider Position Date Trades Shares Trade Price ($) Change (%) Regan William Joseph Director 2010-09-15 Buy 50 $332.7 9.78 BIGLARI, SARDAR , Director, 10% Owner 2010-08-26 Buy 3400 $278.11 31.33 BIGLARI, SARDAR , Director, 10% Owner 2010-08-17 Buy 1970 $288.93 26.41 BIGLARI, SARDAR , Director, 10% Owner 2010-06-23 Buy 11001 $313.96 16.34 BIGLARI, SARDAR , Director, 10% Owner 2010-06-18 Buy 16833 $321.83 13.49 BIGLARI, SARDAR , Director, 10% Owner 2010-06-14 Buy 15083 $313.06 16.67 Mustang Capital Management, LL 10% Owner 2010-06-11 Sell 4375 $309.9 17.86 BIGLARI, SARDAR , Director, 10% Owner 2010-06-09 Buy 20020 $299.35 22.01 BIGLARI, SARDAR Chairman and CEO 2010-06-07 Buy 21000 $289.47 26.18 BIGLARI, SARDAR Chairman and CEO 2010-06-01 Buy 16845 $302.12 20.9


Mario Galleli Takes a Stake in Biglari Holdings

GuruFocus data shows that Mario Gabelli bought 115,661 shares in the quarter that ended on 06/30/2010, which is 0.2% of the $16.22 billion portfolio of GAMCO Investors.

Gabelli’s holdings represent 8.09% of the company’s total shares outstanding.

Perhaps the heavy holdings of Mario Gabelli in the company have something to do with the change in the Incentive Bonus Plan that the company is extending to Sardar Biglari. If it is true, it is a gentle reminder that an activist investor like Sardar Biglari needs to be mindful of other activist investors.

Biglari Holdings’ Latest Acquisition Proposal

On October 11, 2009, Biglari Holdings proposed to buy out Fremont Michigan InsuraCorp Inc (FMMH) for $29 a share in cash. Biglari already owns 9.9% of FMMH’s common stocks.

This is the second time Biglari tried to put his hand around the insurance company. Back in December 2009, Biglari offered to buy FMMH for $24.5 a share and the offer was rejected by FMMH’s board.

FMMH not only rejected the previous buyout offer, it even lobbied the Michigan law-makers to pass a law that made it more difficult to acquire a Michigan-based insurance company.

But Sardar Biglari is persistent.

It remains to be seen whether Biglari will have his way with FMMH. From where he stands, the $60 million plus float is surely attractive to someone who prides himself as an asset allocator.

As Sardar Biglari must have learned, owning an insurance companies and investing the floats profitably is how Warren Buffett achieved his enormous wealth.

About the author:

guruek
Jae Jun is the author of Old School Value, a value investing blog dedicated to the Old School methodologies and teachings of the investment greats such as Graham, Buffett and Fisher. The blog deals with finding intrinsic value, fundamental stock analysis and special situations including spinoffs and merger arbitrage.

Visit guruek's Website


Rating: 3.7/5 (9 votes)

Comments

idang
Idang - 3 years ago


guruek,

Biglari's income above 6% increase in adjusted book value is capped at 25%, not 12.5%. The table they show simply contains the 12.5% as the highest compensation scenario, but it could be as high as 25% (pursuant to the $10M cap)

roke6362
Roke6362 - 3 years ago
He is offering $29/share for FMMH, which is REALLY low. No wonder the board turned down the offer. The PMV for insurance companies is 12 times normalized earnings, which would value FMMH at $47/share.

If he wants it, he's going to have to pay much more than $29/share.

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