The Implosion Of A Warren Buffett Wannabe – A Profile of Sardar Biglari

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Mar 23, 2015

Sometimes, pretending to be the next Warren Buffett just doesn’t cut it. Investors eventually want to see actions and results befitting of comparison to the "Oracle of Omaha."

In the case of Biglari Holdings (BH, Financial), the holding company run by Buffett disciple Sardar Biglari, 37, there’s little evidence of the corporate stewardship, shareholder returns and investing prowess that’s made Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) a hallmark of American capitalism. Instead, shareholders in Biglari Holdings are beginning to tire with Biglari’s excessive compensation, self-dealing and unchecked power, in addition to his company’s murky and sharply declining financial results.

As Buffett prepares for his “Woodstock for capitalists,” which is expected to draw over 40,000 shareholders to Omaha this May, Biglari is bracing to meet a long line of angry investors at his Berkshire-styled meeting after taking $34 million in incentive-based pay in a year when his stock tumbled over 20%, adding to a trend of dramatic under-performance.

Biglari emerged as an up-and-coming investor after he successfully ran an activist campaign to take control of troubled burger chain Steak n Shake in 2008. Once in control, Biglari used the company to build the shell of what he pitched to investors would the next Berkshire Hathaway, a holding company run by a wizard “capital allocator” with a website and annual shareholder letter styled after Berkshire. Two years later, when changing the name of Steak n Shake to Biglari Holdings, he pounced on ticker (BH, Financial) thus cementing comparisons to Berkshire.

Then, Biglari ran a proxy campaign to take control of Cracker Barrel Old Country Store in 2011, a Southern chain that might have firmed up his greasy spoon empire. While he lost the campaign, Biglari acquired a near 20% stake in the Tennessee-based company, which has performed solidly in recent years. (Biglari continues to run – and lose – proxy wars against Cracker Barrel.)

But, since Biglari’s carefully tailored image first began to draw comparison to Buffett, his actions have strayed far enough that fledgling activist shareholder Groveland Capital is now calling for his ouster. Large institutional investors such as $46.9 billion asset manager Gabelli & Co. seem inclined to side with Groveland unless Biglari commits to reform. Otherwise, this Buffett wannabe may soon hit the road packing.

Groveland wants to get rid of Biglari and his board and the hedge fund’s findings of misdeeds, detailed in its proxy documents, include a laundry list of bad corporate governance. Meanwhile, for all of Biglari’s promises to be a savvy investor and builder of businesses, Groveland paints a picture of wasted investment and plunging performance.

George Maldonado, director of proxy voting services for Gabelli, told Forbes by telephone Groveland has “made very strong cases about the corporate governance issues at Biglari Holdings.”

Biglari’s problems begin with CEO compensation and are illustrative of the poor judgment and overreach that can ruin a business. Over the past six years, Biglari has been paid a total of $75.9 million, with his 2014 pay exceeding $34 million as annual operating income tumbled to a five-year low. How Biglari hoodwinked shareholders into such an arrangement is indicative of his company’s issues.

From the outset, Biglari wanted his Steak n Shake empire to evoke comparison to Berkshire; however, he didn’t want to be paid like Buffett, who takes a minuscule salary and derives virtually all of his net worth from the rising price of his Berkshire Hathaway shares. (Buffett dissolved his partnership when taking stockholder money in 1957.)

By contrast, Biglari created an incentive deal that would guarantee he’d be paid like a hedge fund manager for running a restaurant company with one large stock holding. In 2010, Biglari pitched shareholders on a deal where he would sell his investment company, Biglari Capital Corporation, to the holding company for $4.2 million and receive annual fees amounting to 25% of the company’s increase in book value above a 5% annual growth hurdle. An outcry greeted the deal, however, and Biglari eventually negotiated a pay package that capped incentive fees at $10 million annually with a 6% book value growth hurdle. But he was unsatisfied.

In 2013, Biglari bought BCC back from Biglari Holdings for $1.7 million and struck an arrangement where he’d be paid 25% of gains on BCC investments after they hit a 6% hurdle. Within months, he transferred $377.6 million of Biglari Holdings assets, mostly cash and its Cracker Barrel shares, to BCC. The move caused shareholders in Texas and Indiana to file lawsuits alleging gross mismanagement, abuse of control and unjust enrichment. The following year, Biglari transferred $174.4 million to BCC.

For Biglari, the BCC purchase has proven rewarding. His pay ballooned to over $25 million in 2013, mostly from the $15 million he received in BCC incentive fees on rising Cracker Barrel shares. In 2014, Biglari’s Cracker Barrel-based incentive pay surged to $34 million, even as tumbling earnings at Biglari Holdings meant he didn’t receive any book value growth bonus.

Biglari Holdings shares fell over 20% in 2014, and they’ve only gained 8% over the past five years, in contrast to a near 80% gain by the S&P 500, excluding dividends.

continue reading: http://www.forbes.com/sites/antoinegara/2015/03/20/the-implosion-of-a-warren-buffett-wannabe/