Betting against Biglari

I think most of my readers will be familiar with Biglari Holdings, the company run by Sardar Biglari. He likes to present himself as a young Warren Buffett and to complete the picture he has even gone as far as copying the general design of berkshirehathaway.com. But while he talks to talk, he doesn’t walk the walk. The company is quickly becoming an interesting case study in creative ways to screw shareholders. The license agreement that would entitle him to receive royalties for the use of his name if a change of control occurs is especially ridiculous.

As a result Biglari Holdings is trading at a depressed valuation and, despite Sardar’s tight control, it has attracted the attention of the activist investors at Groveland Capital. They announced a small stake in the company in November together with the intention to acquire a board seat. Biglari Holdings is a target that is bigger than usual for them since they are mostly active in the micro cap space. They did for example briefly own Solitron.

Pretty ironic to see an activist investor taking aim at the firm of a fellow activist investor, but what we have so far is just an interesting story (that’s mainly why I follow Biglari, it’s fascinating). But this all changed when Biglari decided to respond. He was apparently “op z’n pik getrapt” and decided to retaliate against Groveland by taking a large stake in a couple of of small companies that they own: Air T and Insignia Systems. I have no idea what his thought process exactly was behind this move, but Biglari’s buying has fueled both stocks to new highs.

Based on the poison pill that Air T quickly adapted I think Groveland is worried that Biglari will try to gain control over the company without paying all shareholders an appropriate premium. That makes sense because he obviously doesn’t want this to be beneficial to Groveland, but it has been pretty great so far for shareholders that have flexibility in selling shares.

Since 21 November, the date Groveland made their intentions known, Air T has advanced from $16.50/share to a high of $27.20/share: a gain of almost 65% while Insignia Systems gained almost 50% when it went from $3.00/share to a high of $4.45/share. Both stocks have dropped from the recent highs because it seems that Biglari has stopped buying:

Price development AIRT and ISIG

This massive increase in share price is unrelated to the fundamental development at both companies. Biglari has been very aggressive in acquiring a position. He now owns 338,500 shares (representing a 15% stake) of Air T and he probably bought the majority of this stake in just a couple of days based on the trading volume. That’s in my opinion pretty retarded since that would normally be a complete month of volume. His buying spree in Insignia Systems has been equally ridiculous. He now owns 2.3 million shares (close to a 20% stake) while the daily trading volume in the month before December was usually around 20,000 shares. When someone is buying so fast a big price impact shouldn’t be a surprise.

Because of this I thought that shorting some Air T was a good idea. I didn’t go for Insignia Systems because it had a more expensive borrow, and Air T was at that moment still trading near its highs. That proved to be excellent timing since the stock dropped almost 15% in a few minutes after I tweeted this:

I’m guessing that both stocks will soon go back to the original price level, although Biglari remains an unpredictable factor. So far he already overpaid a couple of million dollars just to make a point, and it is of course easy to waste some more money if it isn’t your money. One thing is certain: entertainment value is almost guaranteed!

Disclosure

Short AIRT, no position in ISIG or BH

11 thoughts on “Betting against Biglari

  1. Ross

    I admit how tempting it is to get involved. I paid 3.74 for a modest amount of ISIG. Quick thesis is that Biglari will revenge acquire Insignia using his AIRT stake as leverage.

    I am stunned by these purchases and how wantonly he acquired them and reason that he intends a more prolonged action.

    Or,maybe he is in cahoots with Groveland, whose Schedule can only be inferred as a stunt with little leverage and, Biglari intends to pay handsomely for both companies deploying his subscription war chest.

    Reply
    1. Alpha Vulture Post author

      How exactly do you envision the mechanics of a “revenge” acquisition that doesn’t benefit Groveland Capital? (Not saying that it can’t be done, but curious)

      Reply
      1. Ross

        Excuse me, I replied into the wrong thread. One not so nice way for ISIG to be “revenge” acquired would be for Biglari to insist on a swap of his AIRT stake for AIRT’s ISIG stake.

        Reply
        1. Alpha Vulture Post author

          The question is: how problematic is it for Groveland to have Biglari has a major shareholder in Air T? What can they really do? How much leverage does it provide Biglari?

          Reply
          1. Ross

            I’m wondering that myself, too. He can cost them money by triggering the poison pill and/or initiating a proxy slate they have to defend. He could tender for shares seeking 50.1% and consolidate AIRT into BH or make a complete takeover offer.

            He could also use the Cracker Barrel playbook and insist they split off the air cargo business from the ground equipment sales, reasoning that the ground sales are growing rapidly and not being properly valued as part of the whole.

            Biglari is rarely a passive investor. The best you can get out of him is a standstill and even that usually comes with a pound of flesh. See the agreement he just made with CAW.

  2. Alpha Vulture Post author

    I guess my familiarity with Air T was another reason for shorting that one, and not ISIG. I guess you know this, but Air T does own a decent chunk of ISIG. They own 1.3 million shares and Groveland itself owns just 0.4 million shares for a combined stake of ~14%: less than what Biglari now owns. Their control over Air T seems to be a lot better since they own a 28% stake in that company.

    I have to admit that I don’t know a whole lot about ISIG, but a quick glance at the historical track record doesn’t inspire confidence. And the latest press release is also not very optimistic. The balance sheet is pretty solid though. What’s exactly the thesis?

    Reply
  3. Ross

    It has to benefit Groveland but it may be like making chicken soup after the fox killed one of your young layer hens. Cheesy analogy but it came quick.

    Reply
  4. Matt Joness

    I owned AIRT for a while and would never have expected to see it selling where it is, at least not until the business had improved substantially.

    Same thing happened to me with alpha pro tech. I bought them a little under NCAV and sold a few years later for a small profit IIRC. Then they went to some ridiculous valuation during the ebola craze and I missed it. I should have mentioned it to you when that happened. I don’t short but it looks like it may have been a good one. Anyway you can keep it in mind the next time people freak out because it seems to spike up during those times. Did the same thing during the swine flu hysteria in ’09.

    Reply
    1. Alpha Vulture Post author

      Same thing happened with Lakeland Industries ( a company I once considered owning), didn’t short that one though during the Ebola madness. Don’t remember why, but probably simply not possible due to no shares available to borrow or an insane high borrow rate.

      Reply
  5. Anon

    You are hilarious and you have some great posts. No thoughts on this from a trading standpoint. I was shocked to see AIRT trading so high (I looked at this long-ago in my early days) and I like the philosophy. BH is abusing shareholders from my point of view.

    Reply

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