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The "CAWn" Game Continues - Biglari Holdings


Parsad
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I've been told that every time Sardar wants to initiate some new tactic to gain further control of the company, he puts out a ruse to distract shareholders.  He issued a demand letter a couple of days ago to CAW for documents, and then put out a filing today talking about the Class A & B shares at BH.

 

If I understand this correctly, he's incentivizing shareholders to accept the Class B shares, since they receive one-fifth of the dividend/liquidation value of the Class A shares.  For example, if a Class A share receives a $10 dividend, a class B share receives a $2 dividend.  But the conversion rate is actually 10 B shares for one A share.  Thus, if you convert your A share to a B share, you would receive double the A share dividend or value...but you would have 1/100th of the voting right per B share.

 

What this does, is in economic terms, it makes complete sense for the A shareholder to convert.  But you get a 10 times smaller voting right.  If he can get enough people to convert to the B shares, and it may not be by choice, he would increase his voting rights significantly.  I'm guessing Sardar is going to keep his A shares!   ;D  Cheers!

 

http://www.sec.gov/Archives/edgar/data/93859/000092189511000724/form8k07428_04062011.htm

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Maybe I'm mistaken, but I thought they were not convertible - i.e., unlike BRK you cannot convert BH class A into BH class B.  I know his reasons for the dual class voting are shady, but it doesn't sound horribly different from the voting rights disparity at BRK.

 

(I am not defending his actions, I really dislike this guy)

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I guess that the dividend distribution is a very unlikely event at BH.

But just to try to read Sardar move from a different perspective.

Cannot be that Sardar is trying to remunerate the "B" shareholders with increasing "money right" for the lower "voting power"?

Cannot that be a fair way to treat shareholders if we can give a money value to the voting right?

Just trying to see if there is a fair rationale to this move.

Best

 

 

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Cannot be that Sardar is trying to remunerate the "B" shareholders with increasing "money right" for the lower "voting power"?

Cannot that be a fair way to treat shareholders if we can give a money value to the voting right?

Just trying to see if there is a fair rationale to this move.

 

Hi Christopher, you are correct.  That is exactly what he is doing.  He is monetizing the voting rights...I'll give you more value, and you give me most of your voting rights.

 

I know his reasons for the dual class voting are shady, but it doesn't sound horribly different from the voting rights disparity at BRK.

 

Hi Global, you are correct.  It is not entirely different than Berkshire's or Fairfax's.  Except for the fact that the CEO's are on fixed salaries, own huge stakes in the company personally, and the economic value is the same per class of share.  They never tried to bribe someone to give up their voting rights. 

 

An argument can be made to support every move he's making.  He's not stupid...just shrewd!  But the nuances of each of these moves indicates the means behind the madness.  Cheers!

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Ahahaah dividend and liquidation value, right?

 

If so, it's just a smoke screen.

 

Do you really think this guy is about giving the shareholders cash? He's on it's way to try to get control of everything he can and that require cash.

 

Where is the board of directors? In it's pocket.

 

 

 

 

 

 

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Guest Bronco

At one point I switched to the viewpoint that this stock could only be traded.

 

I don't really feel that way now.  Can't be touched.

 

 

 

 

On a different note - I have been using the actions of one ahole (Sokol) to purchase shares of BRK. 

 

Can't take advantage of this ahole though.  Not for me.

 

 

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Even me, who has generally given Biglari the benefit of the doubt (but always decreased my intrinsic value of the company every time he does something like this) is getting a little sick of this stuff.

 

I used to say that shares would need to be cut in half for me to want to buy much. Now, I probably wouldn't buy the new A shares (all things equal) unless the company were trading under tangible book.

 

It really is a shame that I am not gonna be at the annual meeting this year to take and post notes... I am sure that it would have been a doosey.

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This recapitalization scheme is new to me -- so I think I'm confused because I read the 8k differently.

 

As I read the 8k, shareholders will vote on whether to approve the recapitalization -- i.e., the creation of B shares.

 

If the recapitalization is approved, ALL shareholders (including Biglari) will be distributed 10 B shares for each A share they own -- once the recapitalization is approved, shareholders will have NO choice on whether or not to accept the B shares.

 

Here is an example:  assume you own 100 shares and the market price on the day of recapitalization is $400.

 

After the recap, you will still own 100 A shares but now also own 1000 B shares.  To reflect the B share dividend, the stock price would adjust to approx $36.36.

 

Pre recap:

100 shares x $400 = $40,000

 

Post recap"

100 A shares x $36.364 = 3,636

1000 B shares x $36.364 = 36,364

 

 

Biglari has reserved the right to then do a 1/15 reverse stock split, which would seem likely.

 

What am I missing?????

 

 

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Should add that I'm not a fan of Biglari -- he obviously has an enormous ego.

 

However, to be fair -- if my understanding of the recap is correct, I don't see how the B share dividend advantages Biglari relative to the rest of his shareholders.

 

Additionally, while his other actions are somewhat offensive (renaming the company after himself, restructuring the comp plan), it still seems he has every incentive to maximize shareholder value.  I could be wrong but seems to me that this guy is not interested in simply collecting a $10m bonus every year. His ego is so big that he strikes me as someone trying to become one of the richest people in the world -- and the only way he would come close to that goal is if the stock price goes much, much higher.

 

I don't have an opinion on whether he will be successful with his plans.

 

On the stock price -- it does seem pretty cheap...Biglari seems in total control so the magnitude of the upside is largely dependent on whether Biglari is successful with his plans...and his bonus will be zero if fails.  He has every incentive to create shareholder value -- whether he does...who knows?

 

 

 

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Munger, that was my reading as well. Although, you have to adjust post-recap pricing to account for the reduction of the A share value by the value of the B shares less the value of the voting rights disparity. It is a wash for the equity holder immediately following the recap, but the dynamic described by Parsad should occur thereafter.

 

If the B class accepts 10% of the vote for 20x the economic rights of the A class, then is there any protection against a change in the terms in the future? Or is it like finding a magic lamp where you can wish for more wishes?

 

 

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Biglari is incentivised to make money with his shareholders, but he is also removing disincentives to make money off of them. You have to consider your partners before joining any business undertaking, so when you see that management has imposed economic penalties on maintaining a voice in the business, you have to think about the partners who are willing to accept the deal. Why does management want them?

 

That being said, Biglari may still prove trustworthy and recent actions may prove little more than noise. You just have little recourse aside from selling shares if you are wrong.

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Companies that divide shares into different classes with different voting rights almost always end up with the voting shares abusing the economic interests of the non-voting shares. The bonus paid to Frank Stronach for giving up his voting control of Magna is the most recent and egregious example THEY SHOULD NOT BE ALLOWED.

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Can someone explain in plan English what the point would be? How is it in the interest of shareholders to split, reverse split, and recap the shares / stock price. The only point in a  multi voting structure inmo is to retain power without economic interest.

 

Makes sense for Berkshire and FFH, due to trust. Doesnt in this case inmo.

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Companies that divide shares into different classes with different voting rights almost always end up with the voting shares abusing the economic interests of the non-voting shares. The bonus paid to Frank Stronach for giving up his voting control of Magna is the most recent and egregious example THEY SHOULD NOT BE ALLOWED.

For those who didn't know(like me)

http://www.thestar.com/business/companies/magna/article/966685--frank-stronach-resigns-and-hits-jackpot

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Companies that divide shares into different classes with different voting rights almost always end up with the voting shares abusing the economic interests of the non-voting shares. The bonus paid to Frank Stronach for giving up his voting control of Magna is the most recent and egregious example THEY SHOULD NOT BE ALLOWED.

 

Correct that they almost always end up with the voting shares abusing the economic interests of the non-voting shares.  Prem just recently discussed in his annual letter, that he would never do anything with his multiple-voting shares that would benefit him differently than the other voting shares.  So there is always the exception...and I'm very happy to be partnered with him!  Cheers!

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If the recapitalization is approved, ALL shareholders (including Biglari) will be distributed 10 B shares for each A share they own -- once the recapitalization is approved, shareholders will have NO choice on whether or not to accept the B shares.

 

I'm guessing Sardar is going to keep his A shares

 

If I had my choice I certainly would not exchange my current shares for B shares but would want only A shares.  But if the above is true and everyone, including Biglari, automatically gets exchanged into the B shares, how is this a particular advantage for Biglari over other shareholders??  Unless with his future required purchases of shares with his incentive money he only concentrates on buying the A shares as opposed to B shares. The problem with this tho' is that the float on the A shares will be a fraction of the B shares.

 

Any thoughts???

 

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I have heard from one founder of a large co. with a dual structure in Canada(I forget which one) that did it to protect the company +small shareholders from large players with economic power who will come in and "ruin" what he had created + founded.

 

As a personal policy I try to avoid these.

 

If investors don t buy, they will not exist in my opinion.

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