Earlier this year, Nick Swenson dared to threaten Sardar Biglari’s reign at Biglari Holdings(BH) by launching a proxy fight. Due, in part, to Biglari voting company owned shares in his own favor, Biglari was successful in fending off the attack. He followed up by using company funds to tender for enough shares at $420(and not retiring them) to gain full control. The stock is trading this morning at $340.03.
In the heat of the proxy fight, Biglari retaliated by using company funds to purchase large stakes in Air T(AIRT) and Insignia Systems(ISIG) at indiscriminate prices. Nick Swenson’s Groveland Capital owned large stakes in both companies, Swenson serves as CEO of Air T, and is a Board member of Insignia. One might have thought that with the proxy fight won and his control cemented, Biglari would have been done with these companies. One would have been wrong, however.
Last week, Insignia appointed Mr. Biglari and his crony, Phil Cooley to its Board. In connection with this, Mr. Biglari, Mr. Swenson and their related parties signed a standstill agreement. Once again, Mr. Biglari has chosen to spend his time and the company’s money on his personal vendetta and personal wealth rather than increasing value for shareholders. Of course, if you are still a shareholder through all of his shenanigans, you probably don’t care, and you probably deserve the underperformance you have been getting and will likely continue to get.
Disclosure: The author holds no shares in any stock mentioned
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Hmmm, the two positions totaled $16m and are in the Lion Fund I, so $10m net is from BH. BH has $600m in investments and cash. Sure, it’s a waste of time… but hardly shareholders’ money. The positions were even green for a while, but now are down slightly or break-even…
Nonetheless, the behavior is irresponsible. Thank you for bring attention to this.
It’s the pattern of behavior that is most disturbing. Most of the company’s “investments” are in its own stock.
Nope, on the balance sheet, the $600m refers to cash and investments in Cracker Barrel, Transdigm, and a few other smaller companies like ISIG and AIRT. Mainly CBRL though.
The “investments” in BH shares itself are not included. They are essentially treasury shares. If they are sold at The Lion Fund II, then BH will own that cash (even if captive at the investment partnership). It’s tricky, but it would add another $300m that BH could have in cash if the BH stock was liquidated. It won’t be however, due to control. Currently, common stock shareholders receive the same economic interest as if these shares were treasury, so it hardly matters, as long as you are willing to hand over control.
The company is deeply undervalued on any metric (1.26m adj. shares * $332 = $420m market cap, with $400m in investments net of DTLs and a restaurant business that could be worth $500m standalone. Maxim and First Guard essentially net each other out). At this point, its nearly time to load up the truck. Sardar has done little that could be considered value destructive (Maxim has shown efforts of turnaround and ISIG and AIRT both were up for several months after his purchase). Even if the share price doesn’t reflect it, current shares hold more economic value than they’ve ever before. It just so happens that people have placed a massive and continuously growing discount on the company.
It is likely the discount will remain, as you note.
Good point. I was being lazy and didn’t do the math. The point remains that of $900m in cash and investments, one third is in the company’s own stock, most bought at higher prices. There is no benefit to anyone other than Sardar Biglari in not retiring the shares.
The stock certainly appears undervalued, but that assumes that shareholders will participate in an increase in intrinsic value. The market is voting that they won’t. Over the past few years, intrinsic value increases have gone towards compensating Mr. Biglari and cementing his control. His reputation will make it difficult for him to acquire any company which is not distressed in a friendly transaction. Though distractions like Maxim, ISIG and AIRT are small in the aggregate so far, there are enough warning signs that a blowup may be lurking around the corner.
This represents a value trap, I’m afraid. It will look cheap, and then cheaper, until it suddenly looks very expensive. It’s a shame, because I think Mr. Biglari is a talented and intelligent person. Unfortunately his ego seems to outweigh his talent.
It doesn’t matter how much of the $900m in cash and investments is BH stock. What it comes down to is that Sardar has bought back 1/3 of the shares outstanding, effectively giving each share 50% more ownership, while taking little to no intrinsic value away from the company as a hole (he used cash flow for SNS, borrowed against CBRL cheaply, and had a rights offering).
If the $1b in assets can return 10%, you are looking at a ~25% annual return on the $400m market cap.
Where we differ is that you think the assets can’t return 10%. Steak n Shake can easily make $40-50m, leaving just CBRL to increase 10% to make up the difference. First Guard will add favorably to this and Maxim will soon stop detracting.
I would really love to hear how you think it would look expensive after appearing cheap. I would think it would either be 1) SNS deteriorates in OP, or 2) CBRL stock falls heavily. The first case is very realistic, but the second case is limited by the DTL on the balance sheet, and also the fact that there is a swap agreement with JPM that is a put on these CBRL shares. But not once have you referred to SNS.
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