This is a follow up to my investment idea that I wrote in 2013. This article outlines some of the developments in the last 3 years. I think the opportunity is even more compelling today than in 2013.
Business:
Biglari Holdings Inc. is a diversified holding company engaged in a range of business activities. The Company, along with its subsidiaries, is engaged in investment management and the franchising/operating of restaurants. As a capital allocating vehicle, it is also in the business of owning other businesses in whole and in part. The company assets are:
For an example, Cracker Barrel Restaurant stake alone worth $700M in the market today compared to the Biglari Holdings market cap of $750M. You get everything else for almost free, adjusted for debt at Steak and Shake. Each Steak and Shake restaurant unit costs between $1.5M to $2.5M to build out. On average, each unit does $1.8M in revenue and $90K in profits per year.
Business:
Biglari Holdings Inc. is a diversified holding company engaged in a range of business activities. The Company, along with its subsidiaries, is engaged in investment management and the franchising/operating of restaurants. As a capital allocating vehicle, it is also in the business of owning other businesses in whole and in part. The company assets are:
Steak n Shake restaurants (417 owned, 144 franchised) (100%)
Western sizzlin restaurants (4 owned, 66 franchised) (100%)
Maxim Brands (100%)
First Guard Insurance (100%)
Biglari Holdings (42%) - $315M in worth
Cracker Barrel restaurants (621 owned, 0 franchised) (~20%) - $700M in worth
Insignia Systems (20%) - Board member - $6M in worth
Air T Inc(10%) - $5.8M in worth
Unico American Corporation (~10%) - $6M
CCA Industries (~10%) – Board member - $2.3M
ITEX Corporation (~8.4%) - $1M in worth
Situation & Valuation:
Currently the company is selling in the market for ~$750M ($370/share) (Enterprise value of $960M), which has a look through operating earnings/cash flow of more than $85M & likely growing at a reasonable clip for years. The company is in excellent financial condition by both ample cash on the balance sheet & credit facility. There is a lot of flexibility with the capital structure; they can issue cheap interest bonds, buyback stocks and they can issue stocks when they are priced high to acquire other companies wholly or in part. There is a huge opportunity of franchising SNS both domestically & abroad. Recently the company is working with partners in middle eastern countries on its franchising efforts as it has a potential of achieving high returns on invested capital. In the last 5 years, the company's franchised restaurants(SNS) grew from 71 to 144.
Market Cap – $750M
Net Debt – $210M
Enterprise Value - $960M
Investments/Marketable securities - $815M
Management:
Sardar Biglari is the Chairman & CEO of Biglari Holdings, solely responsible for capital allocation decisions. He was a hedge fund manager with over 20% annual return for 8 years just before he took a control position in Steak ‘n Shake. He is very smart and exhibited tremendous skills in operation and capital allocation. Phil Cooley (Vice Chairman) is a sounding board to the CEO and also was his business school professor at Trinity University. CEO is incentivized properly to increase the per share value/book value of the company. Sardar Biglari controls more than 50% of the company using his personal funds, shareholders equity and limited partners from his hedge fund.
Catalyst:
There is no catalyst/situation/timeline to unlock the value of this business. Current value is its own catalyst, and an efficient way of deploying capital in the right business will increase the value of the company immensely. When value gets higher due to the combination of retaining earnings, investment in right areas/subsidiaries will ultimately unlock the value in their shares over time.
Reasons Why Opportunity Exists:
Complicated holding company structure, no analyst coverage, no guidance from the management on the quarterly/annual results from the company, unconventional CEO pay structure, high share price & low liquidity.
Risks:
Aggressive/confident CEO can run into a situation where he bets the company on a single acquisition by taking on excess debt, although it is highly unlikely.
Public market participants late to realize or appreciate this opportunity.
Final Comment:
The company is a wonderful platform for owning companies in part or full to increase the net worth of any investor. CEO Sardar Biglari is being young (39 yrs) & unconventional is great asset to the company.
Disclosure: I/partnerships managed by me own shares of this company.
