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Sardar Biglari: I'm calling some of you out on this guy.


mpauls
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I don't think you are the first on this board. The fact remains if you have invested in his targets along with him, you would have done very well.

 

Having said that, I was invested in SNS and rode it to BH until selling out a long while ago.

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Sure and if you put your money in with Madoff and took it out at the right time you did well too. Same with the China frauds, timed perfectly some investors did well with those too. Just because some people have made money doesn't validate an approach.

 

I agree too many red flags, everything is fine until suddenly it isn't, and at that point it's too late.

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I too road the Biglari gravy train at SNS and later sold.

 

I however think that the real risk here isn't dilution or something like that; it is the huge consolidated bets that he seems to make and have made, which ironically, are what have made him do so well.

 

Take a look at WEST, he took it over, and it had a small market cap- what? Maybe $20 mm? Can't really remember. Friendlies would have been a bigger deal. SNS had a market cap of what? $350 mm? And now CBRL, which is a larger investment, with a market cap of what- around a billion? (these are about where he bought in at, but while total swags on my part, as I don't remember exact numbers, illustrate my point.) Regardless, the rise has been meteoric.

 

You think that the future targets can keep getting bigger at that rate so that they can keep some semblance of liquidity or not completely move the market? diversifying will potentially hurt their activism. It seems that he will have to change his tactic eventually- unless he plans on going after KO in the next decade... Hell, maybe it will eventually be BRK!? ;)

 

Don't get me wrong, there is probably a ton more room to grow the business, but it uses a TON of leverage. But I honestly don't see how his partners at the Lion Fund didn't bail on him when SNS went to $3 bucks a share... I mean, Berkowitz didn't do nearly that bad and had a ton of redemptions! THAT, to me, is by far the greatest risk- he starts having to sell shares at a loss for redemptions, the selling of a large block (that would be public) forces the price down more, then selling begets yet even more selling. Then, he's left with a burger chain that now has leverage it didn't originally, an ownership in ITEX, and a few others. Granted, he would eventually cash flow out of the problem, but, this is a real risk that I don't think is fully appreciated.

 

All this said, I he probably has thought all of this through- there was a part of Security Analysis called "pyramiding" that was pretty good at illustrating this. I am sure that he realizes that there is little room for error, which may be why he goes after targets the way he does- he wants to know them really well.

 

Nothing new though, Shalab pointed this out before: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/biglari-and-corporate-pyramiding/msg32326/#msg32326

 

I still won't buy shares unless there is a huge margin of safety. Which, at this point, I just don't see their being.

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Sure and if you put your money in with Madoff and took it out at the right time you did well too. Same with the China frauds, timed perfectly some investors did well with those too. Just because some people have made money doesn't validate an approach.

 

I agree too many red flags, everything is fine until suddenly it isn't, and at that point it's too late.

 

That is such a garbage comparison. The guy does not appear to be running any form of fraud. He may be/is using the system to his advantage.

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The approach is what it is.

 

He puts his chips down on red, each bet has to be bigger than the last, & he absorbs more of the cool aid with every win. The wheel WILL come up black at some point.

 

The approach is inherently risky, the rewards bias the short side, & the more times executed the better the odds on a win. Give the man some rope.

 

 

 

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I too road the Biglari gravy train at SNS and later sold.

 

I however think that the real risk here isn't dilution or something like that; it is the huge consolidated bets that he seems to make and have made, which ironically, are what have made him do so well.

 

Take a look at WEST, he took it over, and it had a small market cap- what? Maybe $20 mm? Can't really remember. Friendlies would have been a bigger deal. SNS had a market cap of what? $350 mm? And now CBRL, which is a larger investment, with a market cap of what- around a billion? (these are about where he bought in at, but while total swags on my part, as I don't remember exact numbers, illustrate my point.) Regardless, the rise has been meteoric.

 

You think that the future targets can keep getting bigger at that rate so that they can keep some semblance of liquidity or not completely move the market? diversifying will potentially hurt their activism. It seems that he will have to change his tactic eventually- unless he plans on going after KO in the next decade... Hell, maybe it will eventually be BRK!? ;)

 

Don't get me wrong, there is probably a ton more room to grow the business, but it uses a TON of leverage. But I honestly don't see how his partners at the Lion Fund didn't bail on him when SNS went to $3 bucks a share... I mean, Berkowitz didn't do nearly that bad and had a ton of redemptions! THAT, to me, is by far the greatest risk- he starts having to sell shares at a loss for redemptions, the selling of a large block (that would be public) forces the price down more, then selling begets yet even more selling. Then, he's left with a burger chain that now has leverage it didn't originally, an ownership in ITEX, and a few others. Granted, he would eventually cash flow out of the problem, but, this is a real risk that I don't think is fully appreciated.

 

All this said, I he probably has thought all of this through- there was a part of Security Analysis called "pyramiding" that was pretty good at illustrating this. I am sure that he realizes that there is little room for error, which may be why he goes after targets the way he does- he wants to know them really well.

 

Nothing new though, Shalab pointed this out before: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/biglari-and-corporate-pyramiding/msg32326/#msg32326

 

I still won't buy shares unless there is a huge margin of safety. Which, at this point, I just don't see their being.

 

 

Let’s make a comparison: KFC + TACO BELL + PIZZA HUT vs. STEAK N SHAKE + WESTERN SIZZLIN + CRACKER BARREL.

 

First of all, I like the franchising of fast-food brands business very much: YUM returned 445% since 2001. YUM operates on a global scale and increased EPS 13%-17% each year since 2001. BH won’t be able to achieve such outstanding results. But I like the business anyway.

 

Second: at the end of 2011 YUM had Total Debt of $3.317 billion, Cash of $1.198 billion, and Total Shareholders Equity of $1.823 billion. Net Debt / Total Shareholders Equity = 116%.

On July 4, 2012, BH had Total Debt of $104.179 million, Cash of $46.471 million, and Total Shareholders Equity of $332.186 million. Net Debt / Total Shareholders Equity = 17.37%.

Also, total debt of BH is decreasing: from $112.558 million on September 28, 2011, to $104.179 on July 4, 2012.

 

Third: of course, we must dig a little bit deeper, to understand if what Mr. Biglari is doing might be judged a sensible thing to do, or if it must be judged a foolish thing to do. During the 40 weeks ended July 4, 2012, BH generated $34.656 million in Cash from operating activities. If we subtract $4.516 million of Capital Expenditures, we get to $30.14 million. Mr. Biglari sold $38.108 million of investments, paid $7.013 million in Changes in due to/from broker, and bought $102.8 million of investment (the entirety of which probably in Cracker Barrel). So, BH generated $30.14 million in free cash, while Mr. Biglari increased investments by $71.705 million: he invested $71.705 - $30.14 = $41.565 million more than BH generated in free cash. But Cash and cash equivalents at the beginning of the 40 weeks period were $98.987 million. So, subtracting other minor changes in Cash (more or less $11 million), BH ended the 40 weeks period with $46.471 million in Cash.

So, the question is: is it too little cash? Can this level of Cash be somehow detrimental to Steak n Shake and Western Sizzlin operations? In fact, I myself, before investing, always want to maintain enough Cash to be sure the businesses I control and manage personally will never run into trouble.

Once again, let’s make the comparison with YUM: in 2011, YUM had Restaurant Expenses + General & Admistrative Expenses of $10.512 billion with Cash of $1.198 billion. It means that YUM kept enough Cash to cover more or less 1.37 months of cost of operations. Now, during the 40 weeks period BH had Restaurant Expenses + General & Admistrative Expenses of $306.214 million, which, on a 52 weeks basis, become $398.078 million. It means that BH is keeping enough Cash to cover more or less 1.4 months of cost of operations. It looks sensible to me, not reckless.

Just a further comparison with MCD: at the end of 2011 Net Debt / Total Shareholders Equity was 70.6%, and it was keeping enough Cash to cover more or less 1.6 months of cost of operations.

 

Fourth: so BH is not “leveraged”, it is just very much “concentrated”. BH right now has just three productive assets: Steak n Shake, Western Sizzlin, and (17% of) Cracker Barrel. Also YUM has just three productive assets, right? I have heard many things about YUM, but never that it is not diversified enough! Many of the businesses we invest in have just one or two significant productive assets (Apple’s iPhone + iPad = 72% of revenue in Q3 2012, and personally I feel I can predict the future of the fast-food industry much better than the future of the iPhone or the iPad!).

 

Fifth: nobody can compel Mr. Biglari to sell shares of Cracker Barrel. On July 4, 2012, BH had $246 million in Investments (the majority of which is Cracker Barrel), and it had $141 million in Paid-in capital + $249 million in Retained earnings + $69 million (at cost) in BH shares held by the consolidated affiliated partnerships. Permanent capital is far greater than Investments and BH can cover interest expenses while staying very well profitable. If you don’t like what BH is becoming, you can sell your shares, and the share price will decline, but you cannot force Mr. Biglari into selling Cracker Barrel shares.

 

To sum up: if you tell me that Mr. Biglari is a crook and cannot be trusted, well then you give me food for thought. If you tell me that BH is a bad business, well then I just don’t agree.

 

giofranchi

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To sum up: if you tell me that Mr. Biglari is a crook and cannot be trusted, well then you give me food for thought. If you tell me that BH is a bad business, well then I just don’t agree.

 

giofranchi

 

If anyone is convinced with "cannot be trusted" part then business being good or bad is irrelevant. I strongly put him in "cannot be trusted" category due to his record.

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5 big names, lots of stores - but he cant exit.

 

No-one is going to buy him out until restaurant ownership becomes fashionable again, & if he gets into trouble, the options are very limited. 1) Sell 1-2 of the names in a sad market & at a deep loss, 2) asset strip 2) close franchises, 3) take on more debt, 4) issue equity.

 

Reduce sales 10-15% for 9-12 months & he is in deep dung. All it needs is for somebody to serve a finger, a rat discovery in the kitchen, or a derogatory viral marketing attack. Suddenly all the names will be short cash, & suffering a stressed BS.

 

Most banks will lend no more than 50% of collateral, & in fair weather. When its raining it falls to 35%, & the full 15% immediately comes off what is left on the lending lines. And if the bank isn't comfortable - it will not hesitate to sell debt at a discount, in return for the buyer converting it into equity. Suddenly Biglari has 'new' partners, & he didn't choose them.   

 

Biglari got favorable financing from the capital markets, but it's clear he has poisoned at least some of the wells. This time if he has to came back, there may have to be partners & the terms may not be so friendly.

 

To date Biglari has been the guy in control & it's worked well. Same confidence if he's not fully in control, & being pushed?

 

Give the man some rope. 

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The most obvious thing that will happen with BH is shares of CBRL will decline by 30-50% forcing a margin call. I don't know why none of you have pointed that out.. He is knee deep in shares of CBRL at a very high valuation only because his ego wouldn't allow him to move on and let go. At this stage he cannot sell his shares without inducing panic as the market has bid up shares of CBRL to levels that reflect his involvement.

 

Biglari wants to take over CBRL but the guys on the other side are putting up a very good fight. Time does not work in his favor because if CBRL has a few bad quarters and the share price declines he will be margin called.

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The loan and the revolver agreed with fifth third bank and used for acquiring cbrl shares are collateralized by the assets of "stake and shake operations" subsidary and not the parent company BH. The vast majority of the cbrl shares have been acquired by the parent, so the possibility of a margin call is very remote.

 

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The loan and the revolver agreed with fifth third bank and used for acquiring cbrl shares are collateralized by the assets of "stake and shake operations" subsidary and not the parent company BH. The vast majority of the cbrl shares have been acquired by the parent, so the possibility of a margin call is very remote.

 

I fail to see how it changes the probability of a margin call, that sns operations are offered as a collateral rather than BH as I would think that what determines the margin call is the market price of CRBL. Could you elaborate?

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Biglari borrowed money through the subsidary "stake and shake operations" and then made a dividend to the parent company. So the loan is collateralized only by sns operations assets (inventory, real estate if they are non compliant with some covenant, etc.). Only 300k shares of the more than 4mil. shares of CBRL have been acquired through sns operations.

The financial covenant about maximum total leverage ratio and a minimum consolidated fixed charge coverage ratio are applicable only to the subsidary and the loan is non recourse to the parent.

Hope it helps.

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I admit I have not read yet the collateral agreement of the loan that BH contracted with Fifth Third Bank. So, mea culpa! Anyway, I don’t understand where the problem is. As long as restaurant operations stay cash flow positive, how Mr. Biglari decides to use the funds he borrowed shouldn’t matter: Cracker Barrel stock price shouldn’t matter. During the 40 weeks ended July 4, 2012, net revenue from restaurant operations was $561,127,000. Total costs and expenses were $531,098,000. Interest on obligations under leases was $7,748,000 and interest expense was $6,200,000. Principal payment on long term debt was $8,379,000 and principal payment on direct financing lease obligations was $4,356,000. So, after paying all BH debt obligations, restaurant operations were still $3,346,000 cash flow positive.

I will read the collateral agreement, but I doubt Mr. Biglari is so naïve to be margin called, if he knows he can cover all BH debt obligations solely through the cash provided by restaurant operations.

 

giofranchi

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I thought this was interesting:

 

On the stock split:

 

What is said today (2012)

 

Because of the lower expected trading price and the greater volume of shares available for trading (as a result of the initial dividend of the new BH shares), we expect that a more liquid market will develop for the new class of shares than presently exists for the current class.

http://www.sec.gov/Archives/edgar/data/93859/000092189512002061/defa14a07428_10192012.htm

 

What was said in 2009 (from the chairman's letter)

 

Daily our emphasis is on the value of the company, not on its stock price. Our view is

that if we assiduously tend to the former, the latter will fall in place. We are seeking to assemble

and align ourselves with long-term investors whose purpose is to prosper in concert with the

company. Because of our communications, these well-informed investors, we expect, would set

prices for our stock that are reasonable. 

 

To attract knowledgeable long-term owners, we will initiate a  reverse stock split. A

reverse stock split of 1-for-20, effective on December 18, 2009, will reduce the number of

outstanding common shares of Steak n Shake from the present figure of roughly 28.8 million to

1.4 million. Thus, for every twenty shares you now own, you will end up with one. In no way

does your wealth alter nor does that of the company’s intrinsic business value. The economic pie

is the same; it just will be sliced into bigger pieces. This change, we hope, will dissuade

speculators from participating in our stock. We are attempting to eliminate those who

erroneously think that it is easier for a $10 stock to go to $20 than a $200 one to go to $400.

 

If anyone can dig up the proxy that talks about the reverse split, I'd be interested in what that said.

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  • 5 months later...

There are so many red flags with him (e.g. extent of his self dealing at the expense of "his" investors) [...]

 

mpauls,

 

Couple of things that should provide some food for thought to you (and the other detractors):

 

1. Which set of investors have been with Sardar the longest?

2. How have they responded to the incentive agreement and Sardar's subsequent actions?

 

Best,

Ragu

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  • 4 weeks later...

There are so many red flags with him (e.g. extent of his self dealing at the expense of "his" investors) [...]

 

mpauls,

 

Couple of things that should provide some food for thought to you (and the other detractors):

 

1. Which set of investors have been with Sardar the longest?

2. How have they responded to the incentive agreement and Sardar's subsequent actions?

 

Best,

Ragu

 

1. Lion fund investors

2. they don't care since they always paid him the pound of flesh he's requiring of all SNS and BH holders now.

 

A few of questions for you.  You have 70%+ of your portfolio according to another post.  Why?

Also, there are several members on this board who have interacted with and done direct business dealings with Sardar, have you?

Those members have left Sardar and concluded he's arrogant, has an enormous ego, will not listen to anyone else's opinion, the board has no governance, he's not to be trusted by shareholders, among other things. What makes you discount those opinions of direct contact by very smart and high integrity individuals enough that you would risk most of your portfolio capital with this man?

 

Disclosure:  I own BH, but very low single digit percentages.  I would put giofranchi's 5% as the upper limit of any portfolio amount to go into BH given his history.

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