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Insider Buying at Biglari Holdings


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I notice that Biglari Holdings has rebounded substantially from its recent low of $257 a share. Well, not we know why!

 

http://houston.citybizlist.com/YourCitybizNews/detail.aspx?id=80157

SAN ANTONIO -- Chairman and CEO Sardar Biglari has bought Biglari Holdings Inc. (NYSE: BH) shares worth $5.08 million, according to an SEC filing.

 

Biglari bought 16,845 shares in the San Antonio-based restaurant chain at an average price of $302.12 apiece. The shares were bought through Lion Fund LP, whose general partner, Biglari Capital Corp., is headed by Sardar Biglari.

 

Biglari Holdings shares closed trading Wednesday at $296.50.

 

The company runs Steak n Shake restaurants and the Western Sizzlin chain, which was founded in Augusta , Ga. , and is now headquartered in Roanoke, Va.

 

Last year, the company reported net income of $6 million, compared with a loss of $23 million in 2008.

Here's a link to the actual SEC filing - http://www.sec.gov/Archives/edgar/data/93859/000092189510000893/sc13da1807428lio_05272010.htm

 

Cooley has bought a few shares as well.

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By the way, are we even allowed talk about Biglari Holdings anymore?

 

As far as I know there is only one company for which all discussion is verboten.

The first letter is a pronoun referring to oneself and the last 3 letters are the first 3 letters of the state where the Alamo is located.

 

--Eric

 

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As with most things that Biglari does, I am a bit confused about what he is doing.  First of all, where did the ~$11M come from to buy these shaers?  Maybe the Lion Fund got a bunch of new clients, or maybe they are selling off their other holdings in order to buy more BH.  The Lion Fund is now an investment fund run by BH -- so BH chooses to use that cash to buy shares in itself?  Those shares are arguably not extremely undervalued despite the recent decline in share price.

 

If shares were undervalued, why wouldn't BH buy them back directly and cancel them?  One side effect of buying them through the Lion Fund is that BH (the manager of the fund) gets performance incentives, so if BH share price goes up, BH gets paid (and of course Biglari gets a piece of that).

 

I wonder if BH has become a client in its own fund?  i.e. BH runs the fund but also contributes cash to the LP side of it.  That would be an... interesting use of shareholder capital.

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Litigation risk here?  Who's the corporate counsel?  With the not-yet-approved comp agreement and the outstanding exchange offer, potential conflicts of interest are rife.

 

Say, e.g., the comp agreement isn't approved, Biglari buys back Biglari Capital at the sale price, BH stock price rises (because less $$ for exec comp going forward), and Biglari Capital now owns a lot more shares.

 

Looks reckless from my seat...

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There are lots of potential conflicts of interest between BH and the funds (there are at least 3 of them: Lion, Mustang, and Western Acquisitions), even after the recent buyouts of WEST and Biglari Capital.

 

Biglari gets ~25% of the upside at BH, but ~25% of ~25% of the upside from the Lion Fund, and he controls them both.  When choosing a new investment, he has more incentive to make it from BH instead of the Lion Fund.  The other funds may have the same compensation arrangement so the same would be true there.

 

He could do a transaction that delivered a loss in the Lion Fund but a gain at BH and get paid even though Lion Fund investors would take a loss.

 

Lion Fund investors have a majority of their funds invested in BH, but because they're invested through the fund, BH gets 25% of the upside, when they could just hold the shares directly.  The way to eliminate this conflict would be to distribute those shares to investors, as Buffett distributed shares of Berkshire to his partners when he took it over.

 

There are also problems with front-running trades.  He could buy a stock in BH either personally or through the company, and then buy it in the funds to run up the price.

 

etc etc...

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I'm a corporate and securities lawyer (transactional only, no courtroom work, so try not to hold it against me), and do mostly private company work, but I too see plenty of potential conflicts here.  Don't know Indiana or Texas law, but I presume those are typical in that director and officer conflicts of interest can be "blessed" by approval by disinterested director(s) and /or disinterested shareholders.  That would not remove all bases for potential challenge of these transactions, but would make it much harder to prove out a claim on corporate law / pure conflict of interest basis.

 

The bigger risk in my mind is securities law / 10b-5 liability risk.  Those cannot be avoided.  The way the comp plan was rolled out, with incomplete information (not to mention NOT being rolled out at the shareholder meeting despite direct questions on that point and obviously they'd been negotiating that already given the timeline), and then acting opportunistically on the reduced share price, smacks of possible manipulation and/or selective disclosure at a minimum.  I would be surprised if at least a Wells letter did not result from this.  And I agree with Parsad's earlier post at the beginning of all this -- the parasitic securities law plaintiff firms would be all over this if they saw enough shareholder base to make it worthwhile.  That may be the only reason they have not struck yet. 

 

He's playing two or three dangerous games.  To be fair, there are arguments in his defense.  I just know that the SEC is itching to prove itself a good watchdog again, and he's given them and plaintiffs' attorneys plenty of action to sniff around. 

 

Regardless of his intentions (and I suspect he's ultimately not a bad person, but a bit of hubris, and three notches too greedy), his recklessness is the fundamental reason I sold out my BH interest, despite having high hopes until the comp plan was rolled out.  If he's that reckless, what are the chances he will be able to fulfill the long-term promise of creating a capital compounding machine without running into serious self-inflicted injuries that will cause years of delay?  Insurance is a game that takes a decade for even careful people like Buffett and Watsa to get good at.  With this guy at the helm always going off half-cocked, you're likely to have a time bomb in the insurance portfolio once he gets one that you won't even know about for years.  Then you won't even see the truck that hit you.  I like to sleep better than that. 

 

I'll pass.

 

 

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Thanks for your comments, I was/am very interested to get a lawyer's take on the situation. I am not a lawyer, though I do know something of the securities laws, and as an investor always watch out for things that might be shady.

 

The mixed private/public structure of BH is rife with conflicts and provides many opportunities at self-enrichment at the expense of shareholders.  I don't think like a criminal or a greedy insider so I can't really think of all of the possibilities, but I've thought of a few, and there are probably several that I haven't thought of.

 

I think that orchestrating a sale of Biglari Capital to BH with a value that was based on the then-current value of BH, and then making announcements that were sure to put pressure on the stock (the tender offer for AAP and the compensation arrangement) is at a minimum very fortuitous timing, and at worst enriching himself though selective disclosure.  I think all of these things were announced on the same day (April 30).

 

I agree with your general assessment that the general recklessness and penchant for constantly playing games with the capital markets and equity raises a bunch of red flags for me.  The comp scheme is outrageous but I was already extremely skeptical of what I was seeing before that bomb was dropped. Meanwhile, I don't see much in the way of good old fashioned investing -- buying something cheap and selling it dear.  It is possible to play games with the stock to boost book value regardless of actual investing, which as far as I can see appears to be his main focus.

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Gabelli is voting AGAINST the new comp plan.

 

http://www.sec.gov/Archives/edgar/data/93859/000080724910000199/bh_04.htm

 

GAMCO has announced that, to the extent it has voting authority over its investment advisory accounts, GAMCO intends to vote AGAINST approval of the Incentive Bonus Agreement between the Issuer and Sardar Biglari, dated April 30, 2010 (the “Agreement”) at a special meeting of shareholders of the Issuer at which the Agreement will be submitted for approval by the shareholders of the Issuer.  Consistent with applicable laws and regulations, GAMCO may discuss its plans to so vote with a limited number of institutional shareholders and others.

 

I wonder if the reason that the Lion Fund is buying up shares of BH is so that they'll have more influence over the vote on the comp plan?  Hmm is that even legal?

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They would have to buy up a hell of a lot more shares than they currently own.  I think you will now see other people come out to vote against the compensation package.  The class-action risk is also pretty significant now with Sardar buying back shares at a lower price than when Biglari Capital was sold to BH.  Cheers!

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I think Biglari controls around 8% after the recent buys.  The other insiders are probably just a few percent.  No way in heck he could force it through.

 

I bet he wishes that he created 2 classes of stock, one with super voting privileges.  I thought he was going to convert the WEST debentures into super-voting stock... maybe he still will.

 

If he starts to get scrutiny into the insider deals and conflicts of interest, there could be lots of problems for him on the near horizon.

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The class-action risk is also pretty significant now with Sardar buying back shares at a lower price than when Biglari Capital was sold to BH.  Cheers!

Remember Warren Buffett was hauled infront of the SEC for buying Wesco stock after he and Munger nixed the merger with Financial Corp. of Santa Barbara. When Buffett and Munger bought stock, at least they were decent enough to pay the original merger price and not screw shareholders.

 

It's actually getting more and more sickening to see Biglari trying to portray himself as the next Warren Buffett.

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IMHO it is a lose-lose situation at this point - if Sardar gets the comp package passed then he skims the cream for himself, if the comp pakage doesn't pass does he even stay or do his best efforts go to the Lion Fund once more?

 

cheers

Zorro

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IMHO - this doesnt look like it is going to end well for Biglari.

 

It is amazing what can happen when one has the talent, the energy but no integrity. As Buffett said, a person with these traits will kill you as opposed to helping you. It seems some people tendered their AAP shares to Biglari as the press statement said the tendered shares will be returned to shareholders at no extra cost - I continue to be amazed the kind of people that invest in stocks.

 

It reminds me of a certain Al Capone - who had the talent, the energy and some integrity (by his own measures but not society's).

 

cheers!

 

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If the comp plan is voted down, he has a few options.  He can try to negotiate a lower comp package, maybe with Gabelli directly.

 

I think he also has the option of buying back Biglari Capital.  He might do that using the current price of BH for the valuation.  So he sold it when the stock was over $400 and could buy it back when it is at $280.  Nice work if you can get it.

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You are insulting Al Capone. He ran a true meritocracy. A different set of rules, certainly, but Bigliar doesn't even come close to comparison.

At least with Capone you knew the rules. Bigliar is like the little kid playing a game who changes the rules during the game to ensure that he wins.

Capone stayed true to his agenda. You simply can't say the same thing for Sardar.

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I figure that the publication of their intent to vote against the comp package was a direct move by Gabelli's fund to completely turf Bigliar.  That was a shot across the bow.  To me it says you had better resign in a hurry before we launch a proxy fight and turf you with no settlement and no say in getting control of the Lion Fund back.  Gabelli's fund wrote that note for one purpose and one purpose which is to solicit votes to get rid of SB. 

 

I bet SB has resigned within a couple of weeks.

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I bet SB has resigned within a couple of weeks.

 

No way in hell he resigns!  He will fight it to the end...and it would take an expensive proxy fight to remove him.  There is a very valuable franchise there that is in fantastic shape now...in no small part to Sardar's work.  But someone with deep pockets could come in and run against him, which is where I think this thing is headed.  The irony of that should not be lost on anyone.  Executives need to make good choices for shareholders, not themselves!  Cheers!

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I just read the statement.  Great News!!

 

Biglari is toast.  There is no way this thing is going to pass now.  This whole thing just didn't make sense from the beginning. 

 

The irony!  Bigliar talks a good talk then does exactly what he says not to do.  Then his shareholders turn against him.  All of this after he took the poison pill out after he got control of SNS.  Amazing. 

 

This whole thing is a study in human psychology.  What would cause a person to pull a stunt like this.

 

If you think about it though, he may have seen this as a win-win situation.  If the comp package went through.. obviously a win for Biglari.  If it doesn't go through, he has driven the price down in the mean time and bought back shares at a lower price, the price might rebound and he's better off for it.. also a win.  The clencher is the stock price.  The price was trading at a high level based on his previous shareholder friendly talk and hope for future greatness and that has now been quashed.  It is doubtful that the price will ever trade at such a multiple with Biglari at the helm.  However, Gabelli has a longer and maybe a better track record than Bigliar (I'm not sure) and has the cash to be the majority shareholder if that is what he wants.  He could make this his investment vehicle if he desires. 

 

Unbelievable.

 

 

 

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Gabelli's pockets are very, very deep.  He's already paid more for the shares than what they are trading at, so if he wants to buy more, he could certainly do so with little problem.  I think he will just take a wait and see approach to the vote.  If it gets voted down, fine then Sardar gets his $900K salary and continues to run the business...no headache in finding a replacement, nor a proxy fight.  If the compensation plan goes through, then I'm pretty sure you will see a proxy fight...be it with Gabelli or someone else.  Cheers!

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I'm a corporate and securities lawyer (transactional only, no courtroom work, so try not to hold it against me), and do mostly private company work, but I too see plenty of potential conflicts here.  Don't know Indiana or Texas law, but I presume those are typical in that director and officer conflicts of interest can be "blessed" by approval by disinterested director(s) and /or disinterested shareholders.  That would not remove all bases for potential challenge of these transactions, but would make it much harder to prove out a claim on corporate law / pure conflict of interest basis.

 

The bigger risk in my mind is securities law / 10b-5 liability risk.  Those cannot be avoided.  The way the comp plan was rolled out, with incomplete information (not to mention NOT being rolled out at the shareholder meeting despite direct questions on that point and obviously they'd been negotiating that already given the timeline), and then acting opportunistically on the reduced share price, smacks of possible manipulation and/or selective disclosure at a minimum.  I would be surprised if at least a Wells letter did not result from this.  And I agree with Parsad's earlier post at the beginning of all this -- the parasitic securities law plaintiff firms would be all over this if they saw enough shareholder base to make it worthwhile.  That may be the only reason they have not struck yet.  

 

He's playing two or three dangerous games.  To be fair, there are arguments in his defense.  I just know that the SEC is itching to prove itself a good watchdog again, and he's given them and plaintiffs' attorneys plenty of action to sniff around.  

 

Regardless of his intentions (and I suspect he's ultimately not a bad person, but a bit of hubris, and three notches too greedy), his recklessness is the fundamental reason I sold out my BH interest, despite having high hopes until the comp plan was rolled out.  If he's that reckless, what are the chances he will be able to fulfill the long-term promise of creating a capital compounding machine without running into serious self-inflicted injuries that will cause years of delay?  Insurance is a game that takes a decade for even careful people like Buffett and Watsa to get good at.  With this guy at the helm always going off half-cocked, you're likely to have a time bomb in the insurance portfolio once he gets one that you won't even know about for years.  Then you won't even see the truck that hit you.  I like to sleep better than that.  

 

I'll pass.

 

 

 

 

 

Hypothetically speaking:

 

A person makes public statements about taking a low salary and not receiving other forms of compensation such as options.  He attracts a following of shareholders after making other statements about emulating Buffett's philosophy of modest pay and prospering with other shareholders in the success of the enterprise.

 

A measure of success is achieved, and the successful takeover artist, now CEO, influences changes in the board of directors.  He cements his position with various golden parachutes, authorized by his board.

 

 

The entrenched CEO plans with his board to gain an unprecedented lucrative pay contract contrary to past statements.

 

 

Might such actions be grounds for a RICO lawsuit or other RICO charges?  Please comment RRJ or others with experience.

 

 

( this scenario is imaginary and is not intended to be a fair description of any real situation.  It is not meant to be an allegation of what may have occurred with any individual or board of directors. )

 

 

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You are insulting Al Capone. He ran a true meritocracy. A different set of rules, certainly, but Bigliar doesn't even come close to comparison.

At least with Capone you knew the rules.

 

You are right about this; if this ends now, Biglari looks more like a conman rather than a leader.

 

 

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