The following is the full text of a letter I sent to Sardar Biglari, the CEO of Biglari Holdings (NYSE:BH), on Tuesday, February 8, 2011. That morning the company issued a press release announcing a 1-for-15 reverse split of the company's common stock, which at the time was already trading above $450 per share (thanks to a 1-for-20 reverse split in late 2009). Such an action would mean that the company plans to increase the share price again, this time to approximately $6,750 per share. Accordingly, any investor who owns fewer than 15 shares of BH today will be forced to sell its stock back to the company, which is paying cash in lieu of any fractional shares.
Dear Mr. Biglari,
I am writing to you on behalf of myself and many of my clients who are currently invested in your company, Biglari Holdings. I am the founder and President of Peridot Capital Management, a registered investment advisory firm based in Pittsburgh. In light of the press release issued on Tuesday February 8th, regarding the proposed 1-for-15 reverse stock split, I feel that I need to express my discontent as fiduciary for many individual investors across the country. As a result of the proposed reverse split of Biglari Holdings common stock, most of my clients who currently hold the stock will be forced to accept cash, in lieu of fractional shares, for their lots of less than 15 shares. This is despite the fact that my firm uses a long-term, value-oriented investment philosophy and wishes to hold the shares for many years to come.
I first discovered Steak ‘n Shake after moving to St. Louis, Missouri, in the late 1990s to attend college at Washington University. There are several locations in the surrounding campus neighborhoods and, not surprisingly, they became a common destination for many of us during the late night hours. Some of my friends even bought the stock (then called Consolidated Products, as you know) as a show of support for one of their favorite establishments. We were loyal customers and I would suspect this is exactly the kind of shareholder you, as CEO, would want.
I have long since graduated, but as an investment manager now I was intrigued when you took over Steak ‘n Shake and announced your intention to expand into many different businesses, based on expected returns on capital. Given that I run an investment firm focused on contrarian, value investing principles, the Biglari Holdings story seemed like an excellent fit for my clients. My clients and I have been investors in the company for a while now and while unconventional, I have generally supported the actions you have taken, even when they drew negative press in some media circles.
This morning, however, I was very disappointed to learn of your plan to implement another reverse split, this time increasing the price from over $450 to nearly $7,000 per share. This was a slap in the face, as you are essentially telling current shareholders that you do not want them as investors if they do not have $7,000 to invest in Biglari Holdings. As a result of this second reverse split, most of my clients and I will be forced to sell our Biglari Holdings stock (not to mention that you are triggering a taxable event for us as well). This simply is not fair to those of us who have been supportive and excited to invest alongside you for the long term.
I understand that you have proposed issuing a second class of tracking stock (the “B” shares) which will allow smaller investors to participate in any capital appreciation of the underlying stock, but by forcing us to give up our voting rights as shareholders, this hardly seems like an even trade. After being told by the company that a $3,000 or $5,000 investment is not large enough to warrant voting rights, small investors like us have fewer reasons to reinvest their after-tax proceeds into a Biglari Holdings tracking stock, or visit the company’s restaurants in the future.
Frankly, I completely understood the decision to implement the first 1-for-20 reverse split when you first took over the company. If an investor does not have $300 or $400 to invest in an individual stock, they probably should not be investing in individual securities to begin with. But what I am supposed to tell a client with a $100,000 portfolio invested across 25 different securities? This second split announcement means that you are telling me that Biglari Holdings cannot be in such a portfolio, unless the client pays taxes on the gains earned thus far and relinquishes all voting rights. Are long term, value-oriented investors with portfolios of $100,000 really the ones you are trying to weed out of the Biglari Holdings investor base? If so, I am not sure why.
A lot has been made in the financial press about the parallels between the steps you have taken at Biglari Holdings thus far and those of Warren Buffett at Berkshire Hathaway. It is true that Berkshire stock has never been split, even as its price grew into the thousands, and class “B” shares were eventually introduced to allow smaller investors to participate in the company, but to my knowledge Buffett never purposely enacted a reverse split to force current investors in his company to sell. In fact, the class “B” stock was recently split to allow holders of Burlington Northern to maintain ownership in Berkshire’s tracking stock after the railroad company was bought by Berkshire Hathaway. Buffett was willing to go against his nature and split the stock, to keep from having to force investors to accept cash in lieu of fractional shares. On the other hand, you appear to be directly taking an action that does exactly that, forcing small investors to liquidate their positions.
Berkshire Hathaway’s stock price rose to astronomical heights because Buffett was so successful building shareholder value over many decades. I have no doubt your current investors would welcome a similar trajectory for Biglari Holdings in the future, but you should at least give us a chance to be one of the early investors. People like me were too young to invest in Berkshire Hathaway Class “A” shares in the 1960s or 1970s (I was born in 1979) but those who did were able to do so without giving up their voting rights.
In closing, on behalf of myself and my clients, I would ask that you reconsider the terms of the recently announced 1-for-15 reverse stock split. We may be small investors who own fewer than 15 shares in your company, but we are long term investors who have been loyal to Biglari Holdings and wish to participate in its growth for years to come. It is unfair that you want to force out the very type of investor who you have stated in the past exemplify those you would want to join you as partners. We may only hold 5 or 10 shares of Biglari Holdings, but that is due to the fact that we are young (I am 31 years old), not because we are somehow not on-board with the long term vision you have for the company. As a young, 33-year-old investor yourself, I would hope that you can understand our perspective.
Peridot Capital Management LLC