Shares of Biglari Holdings (BH) tanked Friday, falling as much as 20% a day after the company approved a new shareholder structure and days ahead of its replacement in the S&P 600 Small Cap Index by Washington Prime Group (WPG) on May 1.
The most important takeaway from yesterday's Biglari Holdings annual and special meetings was already a foregone conclusion: a yes vote for a recapitalization that includes the adoption of a dual share class structure. While that recap was going to be adopted no matter what, given that CEO Sardar Biglari controls nearly 55% of the company's shares, it is still a potentially monumental change, and yesterday made it official.
One of the many knocks on the stock over the years has been of lack of liquidity, and a price point often above $400/share that has made ownership by small investors difficult. While the liquidity may improve under the new structure, there likely won't be a great deal of relief in terms of price.
For every 10 current shares of BH, shareholders will receive 1 share of Class A (ticker BHA) voting stock, and 10 shares of Class B non-voting stock (ticker BH). Class B shares will have1/5 the "economic rights" of Class A shares. By my back of the envelope calculation, with BH currently trading at about $423, if trading commenced today, Class A shares should trade for around $1400 and Class B for around $280, but it is unclear how the market will react to either.
What will happen once trading of the dual structure commences, however, is anyone's guess. In my view, if you are going to be a Biglari shareholder, voting rights don't do you any good. Sardar Biglari is in control, calls the shots for better or worse (and I've seen both over the ten years or so I've been a shareholder), so owning Class A shares is of little benefit. One of the share classes will likely trade at a premium to the other and given the much lower liquidity of A shares, and the meaninglessness of voting rights in this case, I would not be surprised if the B shares were more highly prized.
The new dual share class structure further cements Sardar Biglari's control over the company, for better or worse. While he's had successes as a capital allocator, which has lined his pockets through a lucrative incentive agreement, shareholders have not been as fortunate, at least over the past several years. For the past ten years, from May 2009 until present, BH has performed about in-line with the S&P 500. However, 2009 was a huge year for BH with the stock up about 175% (and 152% from May through year end that year). Since 2010, however, BH shares are up just 50%, while the S&P 500 is up 139%. The only way you've made here money has been through buying on the dips.
Yesterday's annual meeting was a bit more combative than the other eight or nine I've attended, as shareholder frustration has increased. While the company has grown assets and book value significantly over the years, the share price has not followed, at least in recent years. Part of that, in my view is due to a complicated structure, distrust of management, and CEO compensation structure, the combination of which I call the "Biglari discount."
The dilemma here is that you've got a package of assets which includes 20% of Cracker Barrel, Steak n Shake, and other assets that should arguably have the stock at twice its current price. When (or if) that value will ultimately be reflected remains to be seen. But the new dual share class structure should shed some light here; take away one barrier, the liquidity issue, and the markets should weigh-in, one way or another.