Biglari Exchange Offer Signals Inflated Stock Price of Warren Buffet Follower

Biglari Holdings (BH), in the company’s first major move since changing its corporate name from Steak ‘n Shake (read my last post about Biglari and Steak ‘n Shake), has chosen an uncommon method for completing its next public market transaction. Rather than use the company’s cash to acquire a minority stake in Advance Auto Parts (AAP), Biglari has offered to exchange shares of his own stock for shares in AAP at a ratio of 0.1179. Such a move is rare, but more importantly, it signals to investors that Biglari feels that his stock is at least fully valued and at most overvalued. Otherwise, he would have preferred to use cash rather than stock to invest in AAP. Smart capital allocators such as Biglari only have a reason to dilute their ownership stake if they are using prime currency. In this case, BH shares at nearly $400 each were certainly on the expensive side, at nearly two times book value.

Unfortunately, the market has reacted appropriately to this move by shedding nearly 10% from Biglari Holdings’ market value. Trading down into the mid 350’s, the exchange offer to Advance Auto Parts shareholders went from being an attractive option (originally representing a premium of about $1 per share) to being very unattractive (about a $3 per share discount). The markets in general are quite smart and they appear to have sniffed out Biglari’s intention of swapping an expensive stock for a cheaper one.

Why he did not opt to make this offer privately to one or a handful of existing AAP shareholders is baffling. By going public with the offer, he essentially ensured that his stock would get hit hard and reduce any interest in his exchange offer. Of course, the more Biglari makes headlines the more investors might start to read up on him and decide to invest in his company. That exposure could result in a fairly quick rebound in the stock price of Biglari Holdings, prompting more offers like this one.

Full Disclosure: No position in AAP or BH at the time of writing, but positions may change at any time

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8 Thoughts on “Biglari Exchange Offer Signals Inflated Stock Price of Warren Buffet Follower

  1. Chad, I think the market is reacting to the new compensation scheme by Biglari.


  2. Chad Brand on May 3, 2010 at 12:03 PM said:

    I would probably respectfully disagree. The compensation formula looks a lot like that of a hedge fund (a percentage of the profits above a hurdle rate, with a high water mark). Given Biglari’s background as a hedge fund manager, I’m not sure investors would be all that surprised (or disappointed). He also must invest a large portion of that bonus back into the company’s stock.

  3. Chad,

    Actually, I do think it was a surprise to a large part of his shareholder base. (as evidenced below). He purported, in their eyes, to be something he’s just demonstrated he’s not and in the process burned some bridges. BH, it turns out, stands for big head.

    Hedge funds are different vehicles than operating companies. I’m not opposed to this type of compensation system, but i do think the devil is in the details and 5% is way too low of a watermark for an operating company.

    Check out these thoughts from his most loyal followers:

    I think, somewhat cynically, the AAP transaction was related to this for the very reason you pointed out: so when the share priced dropped today on abnormal selling he could say it was all intended 😉

  4. Chad, one other thought… If we assume you are right and the aap tender was to bring the shares back down to earth than you should take a close look at the sale of Biglari Capital to BH on 30-april. Biglari’s personal incentive compensation was calculated as of that day with “inflated” shares that he seems to have brought down to earth. Either way he wins at the expense of shareholders.

  5. Chad Brand on May 3, 2010 at 1:46 PM said:

    Interesting that many shareholders are upset. It appears they can vote on this however, so we’ll see if they reject the plan. I don’t think the AAP tender was supposed to bring down the stock price, I just think he used stock rather than cash because the stock was high. Such a move would be done in the interests of shareholders, not against them (use stock as currency when it is high, buy it back when it is low).

    As for the purchase of his management company, BH is only paying book value (about $4 million) for it, which seems more than reasonable to me. If he paid 5x book then it would be fishy. I believe he wanted merge BH and BC to avoid the appearance of a conflict of interest, given that he was managing BH and a hedge fund at the same time.

    Lastly, I am not convinced that the incentive deal actually incentivizes him to grow the company first, and not the stock price. The book value calculations will be adjusted for share issuances, so he is not motivated to dilute equity holders unless it makes sense, and 50% of the cash he gets from the annual bonuses must be invested in BH without 4 months. Maybe I am missing something but it does seem like he is forcing himself to own the stock heavily so he acts in the bests interests of everyone involved with the firm.

    Is the 5% hurdle rate too low? Perhaps, but I don’t know if 7-8% would really change his behavior, and 10% would be very high. Maybe he should have used the S&P 500 return as the hurdle rate…

    Anyway, we’ll see what happens at the shareholder vote.

  6. John on May 4, 2010 at 5:30 PM said:


    Of course the decrease in the stock price is due to the incentive package. You can’t tell shareholder’s that you won’t ask for more pay, and want to make money with them and not off them, etc. etc. (I could go on and on) and then try to steal a quarter of the profits of their company. Biglari own only a very small percentage of the company. This is not how public companies work. Hedge funds maybe, but not public companies. Investor in hedge fund know the fees, etc. going in, this was a complete surprise to the shareholders. From your comments I’m starting to get suspicious of your intentions.

    How about you mention the incentive bonus in you next article about Biglari and let the public decide for themselves.

    Thank you.

  7. Chad Brand on May 4, 2010 at 6:13 PM said:

    Well, perhaps it would be more accurate to say that the stock drop is due to both announcements. There is no way the announcement of a stock issuance would not hurt the stock price, but I understand people are upset about his proposed bonus. Like I said before, the shareholders will vote on this so Biglari can’t really decide for himself what he earns. His 12% ownership (personally and through the hedge fund) won’t be enough to override the rest of the shareholders.

    As for my suspicious “intentions” I am not really sure what you could be referring to. I wrote a lot about Eddie Lampert when it seemed like he was using the Buffett model and I have written a few posts about Biglari for the same reason. As a value investor, these stories are interesting to me and my readers, which is what this blog is intended for.

  8. dave on May 4, 2010 at 10:46 PM said:

    5% might seem low, but don’t forget that the clock is ticking every year that he doesnt pass 5% he has to make up for it the following year(s) before this incentive program kicks if we go through a severe recession and the book value drops tremendously he will not be getting a dime out of the incentive program for a good few years…

    now it might seem that growing a mid-cap company 5% annually is easy, might be, and some may comment that biglari’s paychecks once the company (if) reaches billion dollar status will be way too high, dont forget that large cap company are hard to grow…and if he really does grow the company to a multi-billion dollar company WHAT ARE YOU COMPLAING ABOUT. well unless you sold your shares.

    so i dont really see what all the anger is about…if he really is a terrible CEO he wont get paid (through the incentive program) and if he’s terrific ceo he’ll be rewarded greatly (as will his shareholders).

    someone explain to me why this isn’t aligned to shareholder interests…would you rather have him lavish himself with stock options instead?

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