Why I'm Holding on to Biglari Holdings

 | Feb 20, 2018 | 12:50 PM EST
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The plot is thickening with Biglari Holdings (BH) , a longer-term holding of mine that's been disappointing at best.

Biglari owns the Steak 'n Shake chain and a handful of other business interests, including about a 20% stake in Cracker Barrel (CBRL) . However, it's been a very controversial name over the years due to its corporate structure, plus CEO Sardar Biglari's compensation and the control he exerts over the company. The CEO has also executed some "unique" deals (to put it mildly), including the purchase of failing Maxim magazine.

All in all, BH is a name that should be selling for twice its current price but trades much lower due to what I call the "Biglari Discount." That's the hit that the stock takes due to the above-mentioned factors, which have created investor confusion and distrust. It also probably doesn't help matters that BH trades in the $400 range, putting the stock out of many investors' reach.

We recently got word that the issue of high share price might soon be "solved" -- but as often happens with Biglari, addressed in a rather controversial way. Management filed a registration statement In late December that proposes a reorganization, which would include the adoption of a new dual-share-class structure.

Now, this idea isn't a truly new idea for Biglari Holdings. In fact, it's been discussed on and off for several years and is one reason some people call Sardar Biglari a "Warren Buffet Wannabe." (Buffett's Berkshire Hathaway (BRK.A) , (BRK.B) adopted a dual-share-class structure years ago.)

However, it appears that BH is finally moving forward with this change and will hold a special shareholders' meeting soon to adopt the restructuring. Although the meeting date has yet to be announced, the restructuring plan's adoption is a foregone conclusion given that Sardar Biglari controls more than 50% of stock.

So Biglari Holdings will soon have two share classes, A and B. The A shares will have voting rights, while the B shares will only have "economic rights" equivalent to one-fifth of an A share's.

Shareholders would receive 10 Class B shares and one Class A share for each Biglari share that they currently own. Fractional shares will be paid out in Class B shares and cash.

Not surprisingly, this move is creating plenty of controversy. A handful of shareholder-rights law firms have announced investigations, while a lawsuit already filed claims that the reorganization merely aims to give Sardar Biglari permanent control over the company.

But in my view, the swashbuckling CEO already controls of the company -- and anyone contemplating taking a position in BH should be aware of that. Perhaps a dual-share-class structure would further solidify his control, but it might actually benefit shareholders by bringing more liquidity to trading and making owning the stock more affordable through the lower-priced B shares.

It's true that the B shares won't have voting rights, but to be honest, my current voting rights are meaningless anyway. Sardar Biglari calls all of the shots, plain and simple.

How to Play Biglari

OK, I know what you're saying: "Enough about the restructuring. Should I buy the stock or not?"

Well, the only money that anyone has made on Biglari Holdings over the past several years has been through buying the dips. For instance, BH fell below $300 a share last August, but rebounded to $424 in early January and then pulled back to about $392.

Other than buying on dips, BH has been a huge disappointment. Sardar Biglari is never shy about telling shareholders that if we don't buy into his philosophy, we can leave. That's a message that management has conveyed at nearly every BH shareholder meeting that I've ever attended.

So why do I hang on to the stock? Simple: It's the principle of the thing. I believe BH shares are greatly undervalued and not reflective of the company's intrinsic value. So, I'm hanging on -- perhaps foolishly.

In any case, the company's annual meeting (one of the more interesting shareholder meetings out there), is set for April 26. Stay tuned.

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