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Schafer: Little known Groveland Capital has a potential win on the table

Even people paid to know such things have never heard of Groveland Capital, a Minneapolis hedge fund manager that is running a spirited campaign to oust the board of a mini-conglomerate called Biglari Holdings.

Even people paid to know such things have never heard of Groveland Capital, a Minneapolis hedge fund manager that is running a spirited campaign to oust the board of a mini-conglomerate called Biglari Holdings.

Groveland is a money manager, but in talking with some folks in investment circles this week, it’s not clear there is much to manage aside from founder Nick Swenson’s own money.

So it’s no surprise that what Groveland called a “meaningful position” turned out to be all of 0.2 percent of Biglari’s stock, rounded up.

Contested board elections can be expensive affairs, but not the way Groveland is doing this one. Its proxy statement estimated costs of no more than $175,000. With the investment it has made in shares, call it a total commitment of less than $1.6 million.

It would seem the barrier to entry in the field of activist investing is close to disappearing altogether.

Don’t get the idea, however, that this is some sort of joke. Swenson declined to be interviewed, but his experience as an investor includes years with the far larger Whitebox Advisors. And in going after Biglari and CEO Sardar Biglari, Swenson has picked a very rich target.

Sardar Biglari is a very interesting case of a revolutionary who took over the palace and then made enough bad decisions once in power to spark another revolution. As an activist hedge fund manager himself, he got the job as CEO after ousting the incumbent directors of a company then called the Steak ’n Shake Co.

Biglari Holdings is now based in Texas, and in addition to restaurants, it owns an insurance company and a magazine publisher. It’s far from a giant, trading at a value in the market of about $860 million.

Biglari started his first hedge fund at age 22, and once in control of what’s now called Biglari Holdings he made it clear that it was no longer a restaurant company but a conglomerate that would own unrelated businesses. It would be his job to shrewdly invest that company’s capital in the best opportunities.

If that sounds familiar, and a little bit like the legendary Warren Buffett of Berkshire Hathaway, well, that’s entirely intentional. Biglari is clearly a devotee, and that helps explain the name change to Biglari Holdings, and the stock ticker symbol to BH.

Biglari doesn’t just decide how much to invest in which business, but also writes long annual letters to shareholders. They don’t have the same tone, but his letters are clearly made to look and feel like the missives of Warren Buffett.

The differences between the two remain stark.

Buffett, for example, doesn’t have an arrangement that gets his private hedge fund 25 percent of any profits on the public company’s investment portfolio that exceed a 6 percent return, as Sardar Biglari does.

This arrangement with his hedge fund “has given unnatural meaning to the phrase ‘virtuous circle,’ ” noted the proxy advisory service Institutional Shareholder Services. “The public company issues equity to raise capital, then invests that capital with the CEO’s privately held hedge fund, through which the CEO then purchases the shares of … the very same public company.”

And, of course, the CEO’s private hedge fund stands to collect a 25 percent incentive fee.

The board’s explanation for this — the returns sure seem to have been good — begs the imagination, according to ISS.

It’s also impossible to imagine Warren Buffett licensing his name to Berkshire Hathaway, as Biglari did to publicly held Biglari Holdings. In fact, it’s difficult to imagine just about any other CEO doing that.

Biglari’s deal with the company doesn’t call for fees to be paid now, but the company would pay a license fee equal to 2.5 percent of revenue for a minimum of five years if he loses his role as CEO.

How the board could have soberly considered and then approved this one is another head scratcher. As a personal brand, “Biglari” is obviously a far less valuable asset than, say, “Buffett.” In fact, the Berkshire CEO’s reputation as a genial investor who buys a business and then leaves its managers alone is a key advantage when competing with other potential buyers for good companies.

Biglari enjoys no such reputation for geniality. A shareholder in both Berkshire and the Biglari Holdings once observed to the Wall Street Journal that “Warren Buffett charms people. Sardar Biglari doesn’t seem to be charming anyone.”

The hedge fund relationship, the incentive fee, the license deal, all of it has been grist for Groveland’s mill as it makes a case to shareholders for a new board. And it’s a case the firm has been winning. Both of the big proxy advisory firms decided to recommend that no shareholder vote any shares for Biglari’s board nominees.

That doesn’t mean Groveland’s slate can coast to an easy win. Its problem is that, well, it’s a tiny hedge fund few have heard of. And it doesn’t just want one seat, it wants all of the them. That would be challenge even with a slate of all-stars, and Groveland’s lineup falls well short of that. The proxy adviser Glass, Lewis & Co. came out in support of two of them, but ISS said the contest for the board of Biglari Holdings has turned into a “none of the above” election.

Somebody actually does have to win the shareholder vote next week, though. And if Groveland somehow gets enough of its slate elected to control the board, then that’s quite a business achievement for this little firm.

It may even attract some paying clients.

Source: Star Tribune | Click Link

Groveland Calls for Improved Corporate Governance at Biglari Holdings

MINNEAPOLIS, Jan. 22, 2015 /PRNewswire/ — Groveland Capital LLC announced today that it has sent a letter to the Board of Directors of Biglari Holdings Inc. (NYSE: BH) proposing corporate governance reform. Groveland Capital believes that good corporate governance practices can drive significant value to all shareholders. The body of the letter is as follows:

Dear Members of the Board of Directors:

We believe that good corporate governance practices can drive significant value to all shareholders, as well as accrue to the benefit of management over the long-term. In this regard, we are concerned that board practices of Biglari Holdings Inc. (the “Company”) have ranked at the bottom of the possible range of the ISS Governance QuickScore, and that ISS has commented repeatedly on the outsized Chief Executive Officer (CEO) compensation not being in alignment with company performance. So, we are proposing a corporate governance reform plan to the Board of Directors.  Specifically, we believe the Board should implement the following actions as soon as possible:

  • Redeem the Company’s limited partner interests in The Lion Fund, L.P. and The Lion Fund II, L.P. (collectively, the “investment partnerships”), with the redemption being effected in-kind.
  • After the in-kind redemption of the Company’s limited partner interests in the investment partnerships, retire or treat as treasury shares all of the Company’s shares formerly held by the investment partnerships, and implement a binding Company policy that all shares of the Company that are held by affiliates of the Company, where the Company funded, directly or indirectly, the purchase of such shares, are either not voted on matters brought before shareholders of the Company, or are mirror voted based on the votes cast by shareholders unaffiliated with such affiliates.
  • Eliminate the licensing agreement between the Company and its CEO.
  • Establish a binding Company policy that all direct and indirect compensation of Mr. Sardar Biglari, including compensation and fees received from investment partnerships in which the Company (or any of its subsidiaries) is a limited partner, and Mr. Biglari or his affiliate is the general partner, be approved by a Committee of the Board of Directors that is comprised of (1) members who have no long-time association with Mr. Biglari or any members of management of the Company, and (2) members who are independent in accordance with the director independence standards of the New York Stock Exchange.
  • Restructure the composition of the Company’s Board of Directors by appointing to the Board (a) two members elected by the Company’s current management; (b) two members elected by Groveland Master Fund Ltd., formerly known as Groveland Hedged Credit Master Fund Ltd. (“Groveland“), with both such members being independent in accordance with the director independence standards of the New York Stock Exchange; and (c) two members elected jointly by the Company’s current management and Groveland, with both such members being independent in accordance with the director independence standards of the New York Stock Exchange and both being selected from a list of 10 candidates prepared by a nationally recognized director search firm.

We request that the Board of Directors adopt the governance reform plan outlined above, in advance of the 2015 Annual Meeting. This will save the Company the time and expense of a proxy contest and allow management to focus on the day to day management of the Company.

Please feel free to call me at anytime at 612-843-4302.  Please distribute a copy of this letter to every member of the Board of Directors. We look forward to a prompt response from the Board.

Important Information

This press release is not a solicitation of a proxy from any security holder of Biglari Holdings Inc. (the “Company“). The Groveland Group (whose members are identified below) has nominated Nicholas J. Swenson, Seth G. Barkett, Thomas R. Lujan, James W. Stryker, Stephen J. Lombardo III, and Ryan P. Buckley as nominees to the Company’s board of directors and presently intends to solicit votes for the election of Nicholas J. Swenson, Seth G. Barkett, Thomas R. Lujan, James W. Stryker, Stephen J. Lombardo III, and Ryan P. Buckley as members of the Company’s board of directors (the “Groveland Nominees“). The Groveland Group will send a definitive proxy statement, WHITE proxy card and related proxy materials to shareholders of the Company seeking their support of the Groveland Nominees at the Company’s 2015 Annual Meeting of Shareholders. Shareholders are urged to read the definitive proxy statement and WHITE proxy card when they become available, because they will contain important information about the Groveland Group, the Groveland Nominees, the Company and related matters.  Shareholders may obtain a free copy of the definitive proxy statement and WHITE proxy card (when available) and other documents filed by the Groveland Group with the Securities and Exchange Commission (“SEC“) at the SEC’s web site at www.sec.gov. The definitive proxy statement (when available) and other related SEC documents filed by the Groveland Group with the SEC may also be obtained free of charge from the Groveland Group.

Participants in Solicitation

The “Groveland Group” currently consists of the following persons who will be participants in the solicitation from the Company’s shareholders of proxies in favor of the Groveland Nominees: Groveland Master Fund Ltd. (formerly known as Groveland Hedged Credit Master Fund Ltd.), Groveland Hedged Credit Fund LLC, Groveland Capital LLC, Nicholas J. Swenson, and Seth G. Barkett.  Along with the Groveland Group, the following are also participants in the solicitation: Thomas R. Lujan, James W. Stryker, Stephen J. Lombardo III, and Ryan P. Buckley. The participants may have interests in the solicitation, including as a result of holding shares of the Company’s common stock. Information regarding the participants and their interests may be found in the Notice of Intent to Nominate Directors and Submit Nominees for Election that the Groveland Group sent to the Company on November 21, 2014, as filed with the SEC on that same date. These materials may be accessed from the SEC’s website free of charge.

Source: Groveland Capital LLC