Credit: Shutterstock photoBy Matt See :
Biglari Holdings ( BH ) recently hit its 52 week low of $340 after free-falling from around $520. The company is an increasingly-diversified holding company, controlled by an egotistical 37 year old named Sardar Biglari. It consists of the Steak 'n' Shake and Western Sizzlin' restaurant brands, as well as the recent acquisitions of the and First Guard Insurance operating businesses.
BH also controls a large equity stake in Cracker Barrel ( CBRL ) and much smaller stakes in Unico American ( UNAM ), CCA Industries ( CAW ), Berkshire Hathaway (BRK-A), and Daily Journal Corporation ( DJCO ). Biglari Holdings recently completed its second rights offering in nearly a year, diluting current shareholders in an attempt to raise more capital. The rights offering allowed shareholders to buy one share at $250 in exchange for 5 rights, where one right was granted for every share owned. On the day prior to the rights offering, BH closed at $448. On August 15, when the stock went ex-rights, the opening share price correctly fell nearly $40 to $408, but it continued to drop almost linearly to $340 over the next couple of weeks. Now that the rights offering has finished and BH has raised another $86 million in cash, it is an especially attractive time to enter BH when examining the sum of the parts, the limited downside, the large drop, and a few call options present in the company.
Operations:
Restaurants
Steak 'n' Shake is a restaurant chain located primarily in the Midwestern United States. It is a diner that serves burgers and milkshakes, and is famous for its meals under $4 and half-price milkshake happy hours.
Steak 'n' Shake locations
Western Sizzlin' is a group of buffet restaurants and steakhouses in the Southeast United States. It has multiple concepts, but has decreased in number of locations over the last several years. The remaining locations still operate profitably.
Western Sizzlin' locations
Steak 'n' Shake makes up 98% of the restaurant operating revenue and 95% of restaurant operating earnings. Of BH's 421 company owned-stores, 417 are Steak 'n' Shake. Of BH's 191 franchise locations, 118 are Steak 'n' Shake.
Recently, Biglari has announced plans to franchise Steak 'n' Shake aggressively. In fact, this was an idea I revisited because I saw the success of a new location in PA a few weeks ago. BH has the ability to open many new stores across the US and Sardar has also mentioned plans to become a "global brand" and soon. In the FY 2013 letter, he also mentions contracts to open 173 new units in the coming years. The first Steak 'n' Shake opened in Dubai last August, and a location in Ibiza opened in June. As a result of the aggressive franchising efforts and a large compensation package, G&A in 2013 increased by $35 million since 2010 and has contributed heavily to the decreased EBIT.
As franchising efforts become more successful and prevalent, G&A will decrease as a percentage of sales and per store, and EBITDA should return to a more normal figure. G&A will also become a smaller percentage due to the $10 million compensation package cap. For the sum of the parts, I will assume $45 million in EBITDA for Steak 'n' Shake and $2 million for Western Sizzlin' and place case multiples on those. For FY 2014, restaurant EBITDA will come in around $35-40 million, but in several years could return to nearly $80 million. $47 million combined seems to be a conservative number. In the sum of the parts, I applied a 9x multiple to SNS and a 6x multiple to WS. Depending on which types of companies and franchises you look at, the industry average EBITDA multiple is around 9-11x, with franchise multiples being a little higher. I give WS a lower multiple since it likely does not have much growth left.
In February 2014, BH acquired . The purchase price is estimated to be between $10-15 million, but my base case in the SOTP will be a negative value since is losing money. Biglari does have big plans, especially considering his recent high profile hires . represents a call for BH, but I will give it a base value of negative $15 million in the somewhat likely event that things don't turn around.
First Guard
In March 2014, BH acquired First Guard Insurance. Not much is known about this acquisition either, but it could provide valuable experience into future insurance operations to acquire float. I will assume the base case book value of First Guard is around $10 million, but its ultimate effect on this valuation is negligible.
Equity Positions:
BH holds many long-term equities.
CBRL (4,737,794 shares @ $103.09 = $488.4 million)
Although Biglari has failed on multiple activist attempts to acquire board seats and make changes to Cracker Barrel's operations, management at CBRL seems to be implementing some of Biglari's suggestions in the near future. They created the "Enhance, Expand, Extend" strategy in order to continue to generate long-term value for shareholders, which suggests that more positive changes will come about at CBRL.
From their April press release :
Because of this, I suspect that CBRL will continue to create value and not leave BH stuck holding onto a large, declining position. As a result, I only applied a 5% discount to BH's equity positions in the base case. In the bull case, I applied no discount and in the bear case, I applied a 10% discount. When it comes to other restaurants, CBRL actually trades cheaply especially considering its 4% dividend yield.
Smaller positions
UNAM (505,100 shares @ $12.54 = $6.3 million)
CAW (776,259 shares @ @3.455 = $2.7 million)
BRK-A (2 shares @ $207,745 = $.4 million)
DJCO (1,319 shares @ $179.98 = $.2 million)
Other notes:
- Negative operating working capital is FCF generative.
- Deferred income tax liabilities should usually be subtracted out of the EV, but since they result from likely long-term positions, they can be partially added back.
- On August 25, Och-Ziff filed for an 8% position in BH, purchased at a price somewhere above $365.
- All of the insiders exercised their rights fully to acquire more shares.
- Small float generated from First Guard operations?
SOTP:
Risks:
Many have complained about Biglari's compensation structure, and rightly so. However, an additional $10 million in G&A that comes out of the operating businesses' multiple has already been taken into account. Unfortunately this will be something that will nag the company for a very long time. If such a compensation structure didn't exist, G&A would be $10 million lower and therefore this base case value could be around $90 million (and 50 points) higher.
Lawsuits related to Steak 'n' Shake franchises could be occurring soon. This could lead to trouble franchising, changing prices, decreased brand unity, fines, or closing locations. Not sure how to assess this, but could be a slight threat to future performance. Franchises currently make up very little of BH's operating earnings, however.
Calculating Shares Outstanding
Shares outstanding is a difficult calculation due to the rights offering and the fact that some BH shares are owned by an investment partnership in which BH has partial interests. This represents a form of treasury shares since BH will get cash if the shares are sold. The shares will also probably not be sold because the current structure allows Sardar to have a larger control of the company since he controls the investment partnership.
There were 1,721,305 shares outstanding before the rights offering. This includes shares issued net of 77,061 retired treasury shares. BH also owns 154,151 treasury shares as its pro-rata interest in The Lion Fund (the investment partnership). In total, The Lion Fund had 250,187 BH shares prior to the rights offering. I suspect these shares will not be sold, and even if the pro-rata interest is sold, it will increase the holding company's equity in the investment partnership. As a result, I will deduct 154,151 from the 1,721,305 to get approximately 1,567,154 shares outstanding at the time of the rights offering. This number is lower than the number you will find anywhere else, but I am confident using it, if only there wasn't the rights issue.
In a recent filing, The Lion Fund exercised rights to acquire an additional 50,037 shares of BH. I will assume that BH will keep its pro-rata interest of BH in TLF, and as a result the shares purchased will just be a transfer of $7,707,500 cash ($250 * 154,151/5) from TLF to BH, decreasing BH's equity interest in the IP. Cash will go up by the full $86 million equity raise, but ownership interest in TLF on the balance sheet will go down by $7.7 million. Additional paid-in capital will go up by the full $86 million raise, and treasury stock at cost will go down by the $7.7 million.
To calculate a new shares outstanding, start with 1,721,305 and add 344,261 new shares to get 2,065,566. Then, subtract the 154,151 treasury shares held in TLF and the new 30,830 pro-rata treasury shares to get approximately 1,880,585 shares outstanding. Again, I am confident using this number since it is unlikely that the shares will be sold due to the control they provide Mr. Biglari. BH's current $345.53 share price suggests a $650 million market cap . With this market cap, BH trades at approximately 1.02x book value after the rights offering.
Conclusion
- BH trades cheaply when examining book value (1.02x), sum of the parts (26.9% upside in base case)
- High margin of safety present with stable operating business
- Growth in SNS, turnaround in , deployment of $200 million in cash, positive CBRL changes could lead to significant upside
- Shares outstanding actually 185k lower than what is typically reported (13% difference)
Disclosure: The author is long BH. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
