Recently, BH (Biglari Holdings) which was renamed from SNS announced a new incentive package for the CEO and Chairman, Sardar Biglari. In the new scheme, the company plans to pay Mr. Biglari an incentive bonus of 25% of book value above 5% increase in book value every year. The matter is subject to share holder approval. Given that the name change to Biglari Holdings got 90% approval, it is likely that the change in compensation scheme will also pass shareholder approval.
Let us take a quick look at the financials to see why this deal is a good one for Mr Biglari but a bad one for the shareholders.
Looking at value line, the book value increased at 25%/year clip from 1994-1999 and at an 8.9% clip from 1999 - 2007 well before Mr. Biglari took over the reins of the company. Even if Biglari didn't do anything, BH is likely grow the book value at 8-10% pace/year. Since Biglari's compensation is tied to book value growth, the growth would have been limited to 20%/year from 94-99 and 7.9%/year from 94-99. The shareholders compounding rate will be limited because of this change.
More importantly, Biglari generated quite a bit of good will among investors for turning around SNS and improving the share holder value. However, Mr Biglari's recent actions have lost him some of the goodwill. He effected a reverse split and also named the company after himself. He will be facing headwinds moving forward. His current approach to incent himself and not have anything for his employees is likely cause problems downstream to retain talented employees.
His attempts to buy out itex and fmmh have been spurned. It is likely that future acquisition targets will continue to site the SNS case, the name change and then the compensation scheme on why future acquisitions are a bad value.
The company's intrinsic value is lower than what it was before the new incentive scheme. The company is fairly valued to slightly overpriced at current book value and taking into account the 2010/2011 estimated EPS of $15 and $18/share respectively. The EPS still likely not hit the highs of 2004-2006 at $20+/share. The compensation scheme and the fate of SNS post acquisition will reduce value for shareholders in this company.
