Buffett Copycat Again Delays Meeting on Berkshiresque Structure

Date : 12/14/2012 @ 4:54PM
Source : Dow Jones News

Buffett Copycat Again Delays Meeting on Berkshiresque Structure

Biglari Holdings Inc. (NYSE:BH)
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--Buffett devotee Biglari again delays shareholder meeting on dual-class structure

--Delay may signal lack of support for proposal

--Activist investor also ratchets up pressure on longtime target Cracker Barrel

   By Mia Lamar and Annie Gasparro 

A bid by activist investor Sardar Biglari to further shape his holding company on the model of Warren Buffett's Berkshire Hathaway Inc. (BRKA, BRKB) may have hit a snag.

Mr. Biglari, who runs the Steak 'n Shake restaurant chain alongside other investments, is seeking shareholder approval to offer two classes of shares of Biglari Holdings Inc. (BH), as Berkshire shares have been set up for years. Yet a meeting to vote on the proposal has been delayed twice, most recently for a meeting set for Friday.

A dual-class structure concentrates voting power in one class of shares. Mr. Biglari has proposed setting up Class B shares that would be equal to one-fifth of the existing shares but with just 1/100th of a vote.

While dual-class share structures have attracted criticism of late, Mr. Biglari said the creation of a second class of shares was "absolutely essential," and would make it easier for his company to use the stock to fund acquisitions.

The shareholder meeting to conduct the vote was originally set for Nov. 2, but that meeting was pushed back at the last minute to Dec. 14, with an encouragement from the company for "all shareholders who have not yet voted to do so now."

The latest delay was announced in a press release late Thursday, with no future date mentioned.

Chris Davis, an attorney at Kleinberg, Kaplan, Wolff & Cohen, P.C., who advises activist investors, said "postponing a special meeting is the classic reaction to not getting enough votes," though he added that he couldn't speak to the Biglari Holdings situation specifically.

Representatives for Mr. Biglari didn't respond to requests for comment Friday.

With a sparse website evocative of Berkshire's and a stock worth hundreds of dollars after he arranged for a 1-for-20 reverse split in 2009, Mr. Biglari has taken a number of steps that mimic the investing icon. He holds lengthy annual meetings and fields investor questions for hours, similar to Berkshire's meetings, and, like Mr. Buffett, writes annual letters that refer to his vice chairman by his first name.

Mr. Buffett built Berkshire in part by using premiums from insurance companies to make profitable investments in other sectors. Mr. Biglari made an effort in 2010 to take over Fremont Michigan InsuraCorp Inc. and more recently took a roughly 10% stake in tiny insurance firm Unico American Corp. (UNAM).

Biglari Holdings shares are down about 7% this year. The stock rose 0.8% to $345.22 Friday.

Berkshire's Class A shares, meanwhile, are up roughly 17% this year. Berkshire's Class A shares fell 0.3% to $133,795 on Friday.

Mr. Buffett first sold Class B Berkshire shares in the mid-1990's as a jab at copycat mutual funds that sprouted up to mimic Berkshire's holdings as the company's stock price soared, although he famously said he wouldn't recommend such an investment to friends or family.

Such structures have come under new criticism recently. The Council of Institutional Investors, whose members manage about $3 trillion of assets, in October asked Nasdaq OMX Group (NDAQ) and Big Board owner NYSE Euronext (NYX) to stop listing companies that offer dual-share classes.

In its proposal, Biglari Holdings said it requires a structure "that enables a long-term perspective" and said it could put Class B shares to use in acquisition arrangements. It added that it is aware of the criticisms of the dual-class model.

"What separates our dual-class structure from many others is that we are treating current shareholders akin to founding partners in the business," the company said. "By issuing a second class of stock, we are guarding against our current shareholders suffering from significant voting power dilution when we issue stock in business transactions."

Indeed, Berkshire further modified its Class B shares in 2010 to help fund the acquisition of railroad Burlington Northern Santa Fe. Each of Berkshire's Class B shares are now worth 1/1,500th of the Class A stock and have the voting rights of 1/10,000th of the Class A's.

"I think a lot of the shareholders are skeptical of some of these proposals that don't necessarily have anything to do with the operations of the business," said Steven Kiel, president of Arquitos Capital Management and an investor in both Biglari and Berkshire.

"I am a longtime passive shareholder and fine to ride his coattails, but I don't think that's how most shareholders feel," Mr. Kiel added.

Of the 1,000 largest U.S. companies, about 10% offer stock that gives some holders more votes than others, according to a study from Governance Metrics International, which models corporate governance for public companies. Shareholder votes help determine the membership of the board of directors, approval of mergers, and often, recommendations on executive compensation.

Mr. Biglari has proved tenacious in his investments. After losing his second battle with restaurant chain Cracker Barrel Old Country Store Inc. (CBRL) last month, he upped his stake in the company once again this week.

The investor now sits just six shares shy of a 20% "poison pill" trigger that would give other shareholders the right to purchase $400 worth of shares for $200, according to a regulatory filing Thursday.

As Cracker Barrel's largest shareholder, Mr. Biglari has been battling the country-style restaurant and gift-shop chain for the past year-and-a-half, criticizing its performance, pushing for changes in its leadership and taking issue with the way it reports profits.

Since September 2011, Cracker Barrel's stock has risen nearly 70%, indicating that Mr. Biglari has made a hefty profit on paper.

Write to Mia Lamar at mia.lamar@dowjones.com and Annie Gasparro at annie.gasparro@dowjones.com

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