Investors in Biglari Holdings Now Getting Core Steak ‘n Shake Business for Free

It has been a while since I last wrote about Biglari Holdings (BH) and their efforts to diversify into a holding company far bigger than just the core Steak ‘n Shake restaurant operations. BH has acquired a 20% stake in Cracker Barrel (CBRL), as well as purchased Maxim magazine, First Guard Insurance, and Western Sizzlin outright. Accounting for a recently completed rights offering that raised $86 million, BH has around $200 million of cash and no holding company debt (the Steak ‘n Shake subsidiary does have debt of $220 million). An update seems in order now that BH shares are trading for $330 each, for an equity market value of $680 million.

Why? Well, the valuation seems off, to put it mildly. At the current quote of $103 per share, BH’s Cracker Barrel stake is worth $488 million. Add in a net cash position of approximately $200 million and you quickly realize that buyers of BH today are getting Steak ‘n Shake (a business with more than $700 million of annual sales) for free, as well as all of the company’s other assets. To give you an idea of how ridiculous this is, consider that the Steak ‘n Shake generated annual free cash flow of $60 million in 2010 and 2011 (that figure has come down in recent years as CEO Sardar Biglari has invested a lot of capital into accelerating Steak ‘n Shake’s franchising business globally). As such, it is not a stretch to value Steak ‘n Shake equity at multiple hundreds of millions of dollars (accounting for its debt load). Getting that business for free is a big deal on a percentage basis considering that BH’s total equity capitalization is currently valued at less than $700 million by the market.

I am not the only investor who sees value in BH shares. Och-Ziff Capital Management (OZM) recently filed a 13G disclosing an 8% passive stake in the company, and that filing was made when the stock was trading over $400 per share. It will be interesting to see if they increase their stake at current prices. Accordingly, you may not be surprised to learn that BH is currently my largest equity holding.

Full Disclosure: Long shares of BH at the time of writing, but positions may change at any time.

9 thoughts on “Investors in Biglari Holdings Now Getting Core Steak ‘n Shake Business for Free”

  1. One question I had here is if would be appropriate to apply a discount to the Cracker Barrel Stake — a) for any tax leakage and b) for any liquidity discount (ie: if BH wanted to liquidate, they would likely need to take some discount if they would sell in the open market.). Also, if your investment thesis is purely based on the discount in BH’s stake in Cracker Barrel, have you considered setting up an arbitrage where you pair a long position in BH with a short position in Cracker Barrel?

  2. Depending on how you believe Sardar sees this investment, you certainly might want to adjust the value. For instance, if you assume he will sell the stake and pay 20% in capital gains taxes then a discount of ~10% on CBRL market price would be warranted. If you think he will hold it forever or eventually buy the entire company, then you might just fine leaving it undiscounted. Or somewhere in between based on a probabilistic model.

    As for shorting CBRL I would not be too excited to pay out the 4% dividend, but it would certainly be a way of singling out the non-CBRL assets. I’m simply content with a long BH at current prices.

  3. Chad how do you account for the treaury share issue, especially post-rights offering?

    Also, do you think some discount to what would otherwise be SOTP fair value is warranted given Biglari’s compensation agreement?

    1. I look at it by including every share in the count and then for valuation purposes I use the total market value of BH’s full stake in the LPs.

      As far as the compensation agreement goes, I don’t directly apply any sort of discount for it, although I am sure there are investors who won’t pay as high a multiple for BH because of it (and Sardar’s personality more generally). Since I care about free cash flow above all else, any compensation payments he gets will be reflected in the excess capital available for reinvestment. The allocation of that cash, and how free cash flow trends over time should largely dictate long-term share price performance.

  4. Chad,

    I am trying to follow your logic but am having trouble understanding how BH acquired the CBRL stake.

    It looks to me as if BH owns LP shares in Lion Fund I and Lion Fund II (Bilgari Capital) and that Bilgari Capital made the purchase of the CBRL position. Where I am lost is the ownership mechanics between BH and the Lion Funds as well as the Lion Funds and CBRL.

    Thanks for the great post and any help is appreciated!

    Jimmy

    1. Actually, I’ve gotten a little bit further into this. Maybe what I am struggling to understand is the mechanics between the Lion Funds and the Bilgari Holdings as well as the treasury issue.

      Thanks!

    2. I am getting different numbers for valuation…

      CBRL = 488 (we’ll use your number, I think it’s closer to 427)
      Cash = 121 (not sure where you are getting 200 for this figure)
      less Debt = (224) (I don’t understand why you don’t net this out)
      Total = 385

      That leaves ample room for $300m – $400m for SH to fit under BH’s $700m market cap. At best, the BH is slightly undervalued but it looks more like there is just a Sardar Biglari discount going on here.

    3. Here is the easiest way to understand it, I think. Currently, BH is the largest LP interest holder in the Lion Fund hedge funds (ignore the previous structures to simplify things). I would value BH in two parts: their fully owned operating businesses, plus the cash and investments held by the holding company (either held directly or through LP interests).

      After accounting for the rights offering capital raise, cash and investments are around $200 million (rights proceeds plus cash/investments from the last quarterly filing). Those are shown separately from the LP interests on the balance sheet. We’ll get much better clarity when BH reports their quarter soon, as we will have an update on the cash position (we don’t know how cash flow is tracking this quarter).

      Essentially, the goal was to use the hedge fund vehicles to manage/own most of the public market investments, with BH owning the fully owned businesses. It was not always like that, but that is how things are heading now, which will actually make it it easier for us to analyze.

      Also, the debt is Steak N Shake debt, so I include it when placing a value on that business. This results in reducing the equity value of SNS by the net debt it carries (it would be worth even more if it was debt free).

      If cash plus investments nearly equals the entire BH market cap, then the operating businesses (with SNS being the bulk of the value) are free.

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