There was a time when Steak ‘n Shake and Maxim magazine would have first brought to mind my college days, but oh my how things have changed. Now one of my largest investments, Biglari Holdings ($BH), owns both companies. Activist investor Sardar Biglari recently announced that the holding company he runs has acquired Maxim magazine from Alpha Media Holdings in a distressed sale. The purchase price was not disclosed, but media reports suggest a cost between $10 and $15 million. That is a far cry from the near-$30 million deal with another buyer that fell through late last year. Always a seeker of a bargain, Biglari appears to have picked up a solid brand on the cheap. The magazine, despite millions of readers and tens of millions in advertising revenue, has been losing several million dollars annually in recent years, so there is work to be done for this investment to pay off.
At first glance it may seem quite odd that the owner of Steak ‘n Shake, as well as a 20% stake in publicly traded Cracker Barrel (CBRL), would venture into the media business, but Biglari has made it known for years now that he aims to build a diversified holding company and will not shy away from entering any industry that offers the potential for significant profits. While he had hinted that an insurance company was on his shopping list, this deal should not surprise (or worry) close watchers of Biglari Holdings.
While success with Maxim under the Biglari umbrella is hardly assured, when you pay such a low price for an asset with a large readership and a strong brand among its core young man demographic, there are multiple levers you can pull to create value from the transaction. Biglari has shown he prefers strong brands (something both Steak ‘n Shake and Cracker Barrel possess) and there is no doubt that the Maxim name could find itself attached to far more than just a magazine cover over the next several years. Licensing opportunities could very well be a core part of Biglari’s future plans for Maxim. The recently launched Esquire Network cable television station is a good example of how media brands can be extended in order to broaden their reach and appeal.
If we assume Biglari paid approximately $12 million for Maxim, it is not hard to see how reasonable it is to expect that it could pay off in spades. If the company five years from now earned free cash flow of just $5 million per year, it would be a hugely successful investment that could be sold for many multiples of original purchase price, or Biglari could hold onto it long term and use the cash flow to fund additional acquisitions. As part of a larger comapny with more financial backing, it is likely that meaningful investments will be made into the Maxim brand, which could make that scenario a reality far easier than would have been possible within a struggling media company.
While some may be scratching their heads as to why Biglari made this deal, I believe it fits the exact mold that Sardar has been describing since he became CEO. As a result, I think the odds of success are likely far greater than casual onlookers may believe, and for that reason I remain as bullish on the company’s long-term prospects (and the stock) as I was before the acquisition was announced.
Full Disclosure: Long shares of Biglari Holdings at the time of writing, but positions may change at any time