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Biglari Holdings Now Has a Sidekick in Gaining Control Over Fremont Michigan Insuracorp Inc.

January 17, 2011 | About:
guruek

guruek

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Some stories worth repeating, such as the one for Warren Buffett. It looks like Sardar Biglari is determined to repeat it. Of course, Biglari is not the first one who tried and succeeded. Before Biglari, there was Prem Watsa. The essence of story goes like this: 1) Learn to invest and become rich in the process, 2) buy an insurance company and invest the “float”, 3) becomes super rich. Warren Buffett has Berkshire Hathaway (BRK.B) with its GEICO and a host of other insurance companies; Prem Watsa has Fairfax Financial Holdings (FRFHF.PK) and its insurance subsidiaries; Sardar Biglari has Biglari Holdings, formerly ‘Steak ‘n Shake’. Now Biglari wants to buy an insurance subsidiary.

Not just an investment, but a controlled unit. For only through a controlled operating unit, Biglari can allocate the asset of the insurance floats.

His chose his acquisition target carefully – Fremont Michigan Insuracorp Inc. (FMMH.OB). A Michigan based P&C insurer that has 1.77 million shares floating. Shares are trading at around $27.58, giving the company a market share of about $49 million. Biglari Holdings has $48 million Cash and Equivalent and $33 million is Short Term Investments. So Biglari has chosen something he can chew easily.

Over time, he has accumulated a 9.9% stake in the company.

On October 11, 2010, Biglari wrote to the Board Director of FMMH with a proposal to buy the shares that he does not already own for $29 a share.

This is actually the second time that Biglari tried to wrestle the company away from the company’s management. Back on December 21, 2009, Biglari proposed to buy the rest of the company for $24.5 per share, and was rejected by the Board merely two days later. Not just that, management of FMMH did a couple of things in order to make Biglari’s mission difficult. This is quoted from the Biglari’s letter on Oct. 11, 2010 to the Board of FMMH:
As you are aware, on December 21, 2009, we proposed to acquire 100% of the issued and outstanding shares of common stock of Fremont at a price of $24.50 per share, which represented an 11.3% premium over the then $22.01 closing price of Fremont’s common stock, for a combination of stock and cash. We also filed for regulatory approval with the Michigan Office of Financial and Insurance Regulation to acquire those shares of Fremont we did not already own. Rather than accept our invitation to meet with members of the Board to discuss our proposal, Fremont responded by (1) announcing a mere two days later, on December 23, 2009, that it had rejected our proposal and (2) reducing the share ownership threshold required to trigger its poison pill from 15% to 9.999%.

In addition, Fremont’s senior officers and directors became intimately involved in promoting and lobbying extensively for Michigan Public Act 61 Section 1311(2), which became effective on April 30, 2010. Section 1311(2) of the Act applies solely to a Michigan domestic property and casualty insurer that has 200 or fewer employees and derived 100% of its premiums from sales in Michigan. It requires the approval of 66.67% of all outstanding shares for any proposal to merge with or otherwise acquire control of the insurance company, or any proposal to elect two or more members to its board of directors for purposes of obtaining control of the insurance company, unless these proposals are supported by a majority of the insurance company’s board of directors. We believe this Act runs directly contrary to the spirit of the proxy access rules recently adopted by the U.S. Securities and Exchange Commission and limits the rights of shareholders, the true owners of Fremont.


Sometimes, the job worth more than one’s fiduciary responsibilities to shareholders.

Since October 11, 2010, there have been a number of public communications between Biglari and FMMH, mostly initiated by Sardar Biglari. On December 30, 2010, Biglari raised his offer price to $31 per share from his previous offer of $29 per share.

Instead of rejecting the $29 and the consecutive $31 offer outright, like it did previously, FMMH Board seems to have adapted. Three months after it received its original offer, on Jan. 11, 2011, it issued a statement, and it reads:
Fremont, Mich. – Jan. 12, 2011 – Fremont Michigan InsuraCorp, Inc. (“Fremont”) (OTC BB: FMMH), a Michigan-exclusive property and casualty insurance carrier, today issued a statement regarding a revised unsolicited offer from Biglari Holdings Inc. Fremont confirmed that it has received the revised proposal from Biglari Holdings Inc. seeking to acquire the remaining shares of Fremont that it does not already own at a revised offer price of $31.00 per share. Fremont’s Board of Directors previously established a special committee to consider the prior offer and will include this new information as it continues to evaluate the offer.

The special committee also disclosed that it retained Philo Smith Capital Corporation as its financial advisor to explore a broad range of strategic alternatives to enhance shareholder value. These alternatives include, but are not limited to, a revised business plan, operating partnerships, joint ventures, strategic alliances, acquisitions, exchange listing applications, a recapitalization, and the sale or merger of Fremont.
Imagine the newly hired consultant takes the time and spend just one month on each of the alternatives…

Needless to say, such a tactic of delaying does not bode well in front of some other investors. Here is a letter from Gideon King, President of Loeb Capital Management to the Board of Directors of Fremont Michigan InsuraCorp, Inc. on Jan. 13:
Loeb Arbitrage Management LP and Loeb Offshore Management LP d/b/a Loeb Capital Management (“LCM”) are increasingly frustrated by the stewardship of Fremont Michigan InsuraCorp, Inc. (FMMH) . We believe the company’s response to the proposed offer of$31.00 per share by Biglari Holdings, Inc. (BH) (“Biglari”) was inappropriate and suggested a lack of respect for the owners of the company. The press release issued by FMMH on January 12, 2011 included the following language: “The special committee also disclosed that it retained Philo Smith Capital Corporation as its financial advisor to explore a broad range of strategic alternatives to enhance shareholder value. These alternatives include, but are not limited to, a revised business plan, operating partnerships, joint ventures, strategic alliances, acquisitions, exchange listing applications, a recapitalization, and the sale or merger of Fremont.” Also included is the following phrase: “Neither Fremont nor the special committee has set a definitive timetable for completion of its evaluation.”

What does all of this even mean? A “revised business plan?” Should this lead us to believe that the current business plan is flawed and that conjuring up a new business plan with all of the risks involved is better for owners than a sale to the highest bidder? Should we be further led to believe that your newfound interest in endeavors such as “joint ventures,” “operating partnerships,” “acquisitions” and other mechanisms of avoidance are superior for shareholders to a sale to the highest bidder? Should we take the opinion that your avoidance of dialogue with representatives from Biglari, as outlined in the October 11, 2010 letter fromSardar Biglari to the Board of Directors of FMMH, is good for shareholders? Is it good for shareholders that the management team and Board of FMMH have helped to disenfranchise shareholders by helping to cement the application of Michigan Public Act 61 Section 1311(2) to its shareholders? Your actions as they relate to Biglari’s offer indicate to us that the leadership at FMMH does not take its fiduciary duties seriously. What is perhaps most frightening to us is your depiction of the value-enhancement process (which we feel should be a value-maximization process and not a value-enhancement process) as a process without a timetable. We believe that any well-organized value-enhancement process should be governed by a strict timetable if possible; a sophisticated dealmaker should know that deals tend to ripen and then rot if not consummated in a timely and organized fashion. Frankly, we feel that the management and Board of FMMH, in light of the issued press release, wish for the one value-enhancing event that has occurred in recent history to simply vanish with time and attrition of buyer interest.

Being holders (along with affiliates over which LCM has management discretion) of 9% of the equity of the company, allow us to be clear: if it is possible here and now to sell the company to the highest bidder (which seems like a plausible scenario in light of Biglari’s actions), then we are overwhelmingly in favor of doing so. We feel this way because this management team has not demonstrated to us that it can create value. In fact, $31.00 per share is higher than any trading price in the history of the company; we refer readers of this letter to read our letter to the Board of Directors dated October 18, 2010 (enclosed with our 13D filing of the same date), which outlines FMMH’s precarious position in the capital markets.

Further, we do not wish for FMMH to enter into a transaction whereby stock is sold to new or existing shareholders in order to dilute the influence of existing shareholders.

Again, as 9% shareholders, we think it is superfluous if not damaging to engage in a ponderous exploration of a wide array of strategic alternatives when premium bids are at our feet. If the company does not realize at least $31.00 per share in solid and near-term value for shareholders from this process, then we will conclude that this Board and management team should be removed at the next opportunity. We would vote you out right now if we could; unfortunately, we gave you the benefit of the doubt.

We were surprised that the company refused to meet with us as we requested in our last letter; however, we would no longer be surprised by anything this management team and Board would do. While it may be in vain, we request that FMMH disclose the identities of the members of the “special committee” so that shareholders may contact such members and express their wishes directly.

It should be a simple matter to auction this company to the highest bidder and make money and create liquidity for shareholders.


It is not certain that Biglari will be successful in gaining control over FMMH. It is certain, however, in the fight to do so, Biglari now has got an sidekick.

Disclosure: I have a long position in FMMH and will vote “Yes” for the deal to consummate if given the opportunity.




Rating: 2.3/5 (14 votes)

Comments

rob.will
Rob.will - 3 years ago
Another greta article by a great writer and thinker!! As to the merits of Biglari becoming the next Buffett or Watsa.... lets wait a decade before making that assumption. Over that time, he'd have to acquire quite a few operating businesses and make substantial investments, so I'm cautiously optimistic. However, I think that as value guys, it may be interesting to look into the shares of FMMH, or even better.... BH.

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