Sardar Biglari’s Biglari Holdings Inc annual letter for the ended December 31, 2015.
Dear Shareholders of Biglari Holdings Inc.:
Biglari Holdings is unlike most public corporations in structure, scope, and style. I believe we are duty bound to communicate clearly our operations, economic objectives, and managerial philosophy in an effort to cement an alignment of expectations with all owners of our business. In doing so, the ownership will comprehend our policies and methods of operation.
We have been building Biglari Holdings to be a mosaic of businesses, devoted to acquisitions, thereby adding to a fine collection, an amalgam intended to produce a stream of significant, strong, and secure cash flows. We fashioned a structure enabling maximum flexibility concerning capital allocation — moving capital for efficacy — that has accounted for much of our economic gain. We hold a significant structural advantage as a permanently capitalized vehicle with cash-generating, controlled businesses distributing surplus cash to the parent company for reallocation. The genesis of the current construction was inaugurated seven and one-half years ago, when we took on a business at the edge of bankruptcy — Steak n Shake — which soon became the launching pad for Biglari Holdings.
From 1934 through 2008 the cumulative pre-tax earnings of Steak n Shake were around $480 million. However, when we took over in August 2008, the company was in serious turmoil — financially, operationally, and culturally — nearing extinction. The turnaround was exceedingly difficult because of the company’s dire financial position and the country’s severe credit crisis. Steak n Shake had been in violation of its debt covenants with lenders. However, we were able to obtain waivers on the credit agreements. Yet ominously, the lenders reduced the amount of credit available to the company, heightened interest rates, and tightened financial covenants. Against this backdrop, Steak n Shake was experiencing double digit declines in customer traffic as well as suffering cash losses of about $100,000 per day! In August 2008, to assess the amount of time we had left to turn the business around, we stress tested what projected pre-tax losses would become if declines of 10% in same-store sales continued in fiscal 2009. We braced ourselves…$57 million!
We started from an inauspicious base of $1.6 million in cash along with a business in extremis, operating at significant losses. We repositioned, resuscitated, and rescued Steak n Shake in very short order. The chain shifted from losing 11% in customer traffic in September 2008 to gaining 10% in December 2008, a remarkable 21 percentage point reversal. In contrast, during the same period, most other restaurant chains in the industry were experiencing precipitous declines in customer traffic. After turning our struggling company into a profitable enterprise, it formed the base from which we have been constructing a dynamic, value-building enterprise, Biglari Holdings. We began reallocating excess capital into superior but unrelated businesses and investments. In creating Biglari Holdings from scratch, we formulated no master plan concerning businesses or industries we would enter, but instead we pursued unusual, golden opportunities wherever and whenever they arose. Over the last seven years Biglari Holdings’ cumulative pre-tax earnings (including profits from investments) have totaled approximately $485 million. In other words, more money has been earned in the last seven years by Biglari Holdings than during the preceding 75 years by Steak n Shake.
The compression of 75 years of profits into one-tenth of the time represents a testament to the virtues of creating a multifaceted holding company. It should be noted that I designed Biglari Holdings to fit my skill set as an entrepreneur and investor. Each building block of the Biglari Holdings’ architecture was guided by the economic objective of maximizing per-share intrinsic value.1 Despite its advantages, we can further assert that our highly unusual system would not necessarily make sense for other entrepreneurs.
Our structure provides us with a far more flexible instrument than do most other forms of public corporations. By way of illustration, most corporations reinvest earnings within their industry, whereas we postulate that just because we generate profits, for example, in our restaurant business, it does not mean we are required to reinvest the money there. We send cash unneeded at the subsidiary level to the parent company in order to increase our ownership in other businesses. Furthermore, we are not limited to business ownership in its entirety. We venture into wider channels. Whereas our preference is total business ownership, the stock market offers a wider selection of fractional business ownership, in which we usually obtain more value than the price paid. The latitude in surveying a wide investment universe, comparing one opportunity against another, has proven to be an enormous advantage for Biglari Holdings. We transformed from nearly zero into an enterprise with $815 million in cash and investments. Here is the evolution of cash and investments since the end of fiscal 2008:
Do not extrapolate from historical trends, for their continuation should be regarded as highly unpredictable.
Biglari Holdings can scale an agglomeration of operating companies because of its structure. We are able to fuse disparate businesses under the command of an efficient holding company because we centralize financial decision making but preferably seek to delegate operating authority at the business unit level. Centralized control in capital allocation lies within the extreme, with my being the sole capital deployer. We employ neither analysts nor advisors. Although Biglari Holdings employs 22,958, we function with a minuscule corporate headquarters utilizing a staff of only 5. We relinquish such departments as acquisitions, public relations, legal, human resources, strategic planning, investor relations, and the like. We avoid layers of expenses by waving legions of corporate decision makers, who otherwise would stifle decision-making acuity and agility, limiting progress and performance.
Henry Ford reportedly said, “You can’t build a reputation on what you are going to do.” Evidence of our increasing reputational capital is our acquisition of First Guard Insurance Company, which has demonstrated that we are a distinct type of buyer, one who values non-integration and permanency. In stark contrast, strategic buyers will usually integrate the acquiree’s operations into their own, and private equity firms, exit driven, will very likely weaken the acquiree’s balance sheet. When sellers deeply care about their business and not exclusively about the price, we offer a superior alternative. We view Biglari Holdings as a museum of businesses housing a collection of excellent enterprises.
One extraordinary entrepreneur who favored our idiosyncrasies was Edmund B. Campbell, III, founder of First Guard. Over the years Ed had been approached but had refused a number of strategic and financial buyers because of his concern that such acquirors would be disruptive for the business and its employees. But, alternatively, our concept had great appeal. After all, we are not transient holders of businesses; rather, we offer a permanent residence for highly prized creations, thereby allowing and desiring the seller to continue running their business with great autonomy. First Guard is an ideal purchase — exceptionally well managed with uncommonly strong economics and appropriately priced — representing the blueprint for future additions into our collection of businesses.
When we purchased First Guard in March 2014, Ed received all cash for his 100% interest. Still, he has continued to run his