BH - Biglari Holdings: Governance Concerns Outweigh Embedded Value

2024-07-02 23:31:14 ET

Summary

• Governance and capital allocation concerns underpin our Sell rating.
• In our view, BH's corporate governance issues outweigh any embedded value in its underlying assets.
• The company's share repurchase strategy, compensation structure, and capital allocation track record raise red flags for us.

We are initiating coverage of Biglari Holdings ( BH ) (BH.A) with a Sell rating. While the company owns some attractive businesses, we have concerns around corporate governance (especially CEO compensation) and capital allocation.

While Sardar Biglari’s annual cash compensation of $900k might not seem like much compared to other CEOs, we take issue with his incentive fee structure for Biglari Capital, Sardar’s investment vehicle which holds BH’s ownership stakes in companies like Cracker Barrel ( CBRL ), Ferrari ( RACE ), and Jack in the Box ( JACK ). Sardar, as the sole owner of Biglari Capital, earns a 25% incentive allocation equal to 25% of profits generated above a 6% hurdle, as outlined in the below excerpt from page 7 of the company's Q1 2024 10-Q:

On December 31 of each year, the general partner of the investment partnerships, Biglari Capital Corp., will earn an incentive reallocation fee for the Company’s investments equal to 25% of the net profits above an annual hurdle rate of 6% over the previous high-water mark. Our policy is to accrue an estimated incentive fee throughout the year. The total incentive reallocation from Biglari Holdings to Biglari Capital Corp. includes gains on the Company’s common stock. Gains and losses on the Company’s common stock and the related incentive reallocations are eliminated in our financial statements.

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