Biglari Holdings: Severely Mispriced Yet Again

I have not written about Biglari Holdings (BH) on this site since late 2014, but that does not mean the company has fallen off of my radar. While BH was once a prime long-term buy and hold candidate, it has become obvious over the years that the controlling shareholder and CEO, Sardar Biglari, not only prefers running an unconventional public company, but often does so at the detriment to its shareholders.

For those unfamiliar, the bulk of BH’s assets (and value) come from a 100% ownership of Steak N Shake and a large stake in two hedge funds run by Mr. Biglari, which are mostly comprised of shares in BH and Cracker Barrel (CBRL). The stock is volatile, sometimes trading quite low and other times approximating fair value for an unfocused conglomerate with little investor recourse.

Given a few too many unconventional moves (buying BH shares on the open market via the hedge funds and holding them for investment, as opposed to buying them at the corporate level and retiring the shares), I have largely been interested in BH in recent years as a trading vehicle — not a long-term investment — buying when the stock is clearly mispriced and selling when it approaches a more reasonable level.

Such an opportunity has once again presented itself after a late April move that resulted in shares of BH being divided into dual classes of stock; A shares and B shares, the former allowing Mr. Biglari to maintain control of the company, with the latter having no voting rights and serving as potential M&A currency.

Prior to the dual class issuance, BH stock was trading around $420 per share. Upon issuance of the new class A shares, the B shares should have fallen in price by roughly one-third according to the exchange ratio, which would have put them in the $280 range. And for a few days that ratio seemed to hold, but then a free fall began. Today BH “class B” fetches around $200 per share (I am focused on the non voting stock because the voting rights are meaningless considering that the CEO controls more than 50% of the votes).

So just how mispriced is this $200 piece of paper? Well, the total equity value at current prices is roughly $630 million. If we ignore the operating businesses (more than $800 million of annual revenue and by my guess, maybe $25M-$30M of EBITDA this year), BH shareholders own (indirectly via ownership of hedge fund LP interests) nearly 4.4 million shares of Cracker Barrel and nearly 1.3 million class B equivalent shares of Biglari Holdings. Since both are publicly traded, we can quickly assign a value to each, which cumulatively comes out to more than $950 million, or $305 per BH class B share. And yet BH class B’s trade for just $200 apiece. As you can see, something is off here.

Now, there are reasons why BH will unlikely ever trade for “full price” based on its assets. After all, many investors would immediately balk at a public stock that owns some companies outright, minority stakes in others through hedge funds, and chooses to buy up but not retire its own shares in the open market. There are other issues too, such as a large unrealized gain on the Cracker Barrel shares, which were acquired for less than $50 each (current price $160), and over $200 million of Steak N Shake debt outstanding.

Still, even if the negatives surrounding BH would result in the operating businesses being valued closer to zero than a more typical $25-$50 per class B share (which I believe they would fetch with a different owner), BH remains mispriced. If we exclude the BH shares owned by the company itself, the equity is valued at about $370 million. To put that into perspective, the Cracker Barrel stake alone is worth $700 million at the current market price, so maybe $600 million net of tax.

At a certain price it is hard to argue against taking a long position in a company that often sees its share price get out of tune with reality due to its unusual composition and low float (due to being small to begin with and having a majority owner). Count me as one who does not think the B shares should trade materially below the $300 level. The recent dual class restructuring has given the small investor a profit-making opportunity.

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

6 thoughts on “Biglari Holdings: Severely Mispriced Yet Again”

    1. I would value the wholly owned restaurant business on an EV/EBITDA basis to account for the debt held at that subsidiary. Given the high leverage ratio currently, that part of the company garners a fairly low equity value in my view.

    1. The underlying investment market values have changed (CBRL is down about $10 per share since then, etc), but the facts have not. It is a tall task to come up with a valuation for BH that starts with a “1” from my perch.

  1. Thank you very much for your great article and your valid points. I think your thoughts on viewing this as a shorter term position due gross undervaluation and waiting for a period for the stock to move closer to intrinsic value are excellent(akin to Tobias Carlisle philosophy). I would appreciate your thoughts on a number of reservations I have regarding BH.
    I would be interested to know your interpretation of the current fee structure and in addition where you calculate the current “highwater” mark for Book value to be.
    My concern is if the underlying assets perform well a vast majority of the value will go back to Mr Biglari via compensation agreements where he will then repurchase back his undervalued stock via his entities that were compensated.
    1. On his compensation. It appears to me that he has entered the shareholder in an agreement that pays him an ‘management fee’ of 8,400,000 per year regardless of performance. Do you interpret note 12 on filings this way?
    2. In addition, he has an incentive fee 25% of Book Value increase over high water mark. It appears to has changed the structure of the incentive fees several times over the last few years in order to insure that he gets paid well regardless of the companies outcome. I do interpret that he requires himself to then to purchase shares on the open market with much of that fee(essentially increasing his ownership % to the detriment of others).
    3. It appears Mr Biglari as well as Biglari Capital and now Biglari Entities as all receiving or have received different incentive fees and/or management fees.
    Currently with a base for Biglari Entities 8,400,000 see note from filing(Biglari Entities will assume the responsibility to provide the services and the Company will pay a fixed fee to the Biglari Entities. The services agreement has a five-year term, effective on October 1, 2017. The fixed fee is $700 per month for the first year with adjustments in years two through five. The services agreement does not alter the hurdle rate connected with the incentive reallocation paid to Biglari Capital by the Company.)

    Per Filings all numbers in (000s)
    Note 12. Related Party Transactions On September 15, 2017, the Company entered into a services agreement with Biglari Enterprises LLC and Biglari Capital (collectively, the “Biglari Entities”). The Biglari Entities are owned by Mr. Biglari. The services agreement replaces the shared services agreement between the Company and Biglari Capital dated July 1, 2013. The services agreement was executed in connection with a review of the relationships and transactions between the Company and Biglari Capital. After careful consideration, including an assessment by a public accounting firm of administrative-related costs incurred by the Company in connection with its investments, the Company’s Governance, Compensation and Nominating Committee, comprised solely of independent board members, approved the services agreement. Under the terms of the services agreement, the Company will no longer provide business and administrative-related services to Biglari Capital. Instead, the Biglari Entities will assume the responsibility to provide the services and the Company will pay a fixed fee to the Biglari Entities. The services agreement has a five-year term, effective on October 1, 2017. The fixed fee is $700 per month for the first year with adjustments in years two through five. The services agreement does not alter the hurdle rate connected with the incentive reallocation paid to Biglari Capital by the Company.

    As the general partner of the investment partnerships, Biglari Capital on December 31 of each year will earn an incentive reallocation fee for the Company’s investments equal to 25% of the net profits above a hurdle rate of 6% over the previous highwater
    mark. Our policy is to accrue an estimated incentive fee throughout the year. In 2017, no incentive reallocation was earned.
    Based on Biglari Holdings’ $280,563 of earnings from the investment partnerships for 2016, the total incentive reallocation from
    Biglari Holdings to Biglari Capital was $31,628, including $11,514 associated with gains on the Company’s common stock. For
    2015, the incentive reallocation from Biglari Holdings to Biglari Capital was $23, all of which was associated with gains on the
    Company’s common stock.
    Incentive Agreement Amendment
    During 2013, Biglari Holdings and Mr. Biglari entered into an amendment to the Incentive Agreement to exclude earnings by the
    investment partnerships from the calculation of Mr. Biglari’s incentive fee. In 2017, Mr. Biglari earned an incentive fee of $7,353. No incentive fees were paid for 2016 or 2015. Under the Amended and Restated Incentive Agreement Mr. Biglari would
    receive a payment of approximately $13,000 if an event occurred entitling him to a severance payment.

    1. The compensation structure is why I would not want to buy and hold this stock for a decade. The odds are low that the company’s per-share intrinsic value growth, net of fees, would be impressive, even in a scenario where the business does okay and the investments perform in-line with the market more generally. It also would explain why the stock is unlikely to ever trade at intrinsic in the public markets, unless underlying business and investment performance gets so good that investors pile in accordingly. All of that said, one can still take all of this into account and decide that at a certain price, the stock is too cheap and is unlikely to stay there permanently. The fact that Sardar’s comp is so tied to the book value and stock price of BH means that it would be nearly impossible for him to get rich while the other shareholders do poorly.

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