Why Steak 'n Shake's Fremont Michigan Buyout Is Good

Includes: BH-OLD, FMMH
by: Jeffrey Moore

Here are some quick thoughts:

Sardar Biglari and Steak 'n Shake (SNS) just announced that SNS is attempting to buy all remaining shares of Fremont Michigan Insuracorp (OTC:FMMH). To sum this up, with some estimates that I have quite literally jotted down on he back of an envelope and have thought about for only a few minutes... this is a good deal for share holders of BOTH companies.

If the buyout goes through, SNS will be spending UNDER $13 million in cash; it already owns about 10% of Fremont Michigan, is only paying 1/2 the remaining $38.59 million in cash (or $19.3 million), AND will get the $6.75 million in cash that Fremont has on the books... Leaving the cash out of pocket expense for ~$12.5 million.

In the past 4 quarters, FMMH earned about 2.56 million, so SNS would be getting a great deal on the company at ~5x earnings (if ONLY the cash of the deal is taken into account). Add back in the company's depreciation of $1.489 million and the multiple gets even better. Add in the dilution of SNS shares and the deal still seems to make a great deal of sense.

Keep in mind, that there will be cost cutting, as there will be synergies of the 2 companies. Who knows- if franchising picks up with SNS stores, maybe Fremont will underwrite some of the P&C on the locations? Fremont will also lose it's CEO in the deal, so, there would be addition savings of about $.25 million in addition, contracts and pay may come down with the other executives; though, it wouldn't be a surprise if they actually get a slight raise.

Fremont shareholders will be getting precious liquidity, cash, and part ownership in a great/growing/profitable company.

Ultimately, I feel quite comfortable with the deal; and will be interested to see what Fremont does. Certainly, the market, which is presently valuing the stock at $.15 cents ABOVE the offer, seems to think that SNS will beef up it's offer.

This deal will leave SNS with just under $40 million in cash and a credit line to deploy into other companies or assets. Again, this is good for everyone, especially the shareholders of FMMH, as the growth prospects of SNS are incredible.

Disclosure: Long SNS. This is not advice. DO YOUR OWN RESEARCH!