SKARBECK: Biglari’s ambitious, but he’s no Buffett

Attempting to create “Warren Buffett: The Sequel” is Sardar Biglari, who wrested control of locally based Steak
n Shake in June 2008 and has been busy revamping the hamburger chain into an entity mimicking Buffett’s Berkshire Hathaway.

The imitation of Buffett is unmistakable, from Biglari’s folksy annual letter to shareholders, on down to his
anointed right-hand man, Philip Cooley, who plays the part of Buffett sidekick Charlie Munger.

The capital to finance
Biglari’s run at Steak n Shake came from The Lion Fund, a private investment partnership he manages from San Antonio.
In 2007, The Lion Fund publicly announced its holding in Steak n Shake, then embarked on an activist role opposing Steak n
Shake management. Biglari eventually won control of the Steak n Shake board by shareholder vote (via a proxy battle).

While the effort to duplicate Buffett is clear, some of Biglari’s moves have been superficial. For example, a unique
feature that stands out with Berkshire Hathaway investors is the high price of its shares. Its Class A stock trades for about
$112,000. To create a similar aura, Biglari recently enacted a 1-for-20 reverse split of Steak n Shake shares, which adjusted
the stock price up from about $15 to $300 each.

However, in contrast to the illusory effect of a reverse split,
Berkshire’s high stock price is the result of Buffett’s investing and acquisition skills, which drove the share
value up from $16 per share since 1965. Oddly, Buffett recently announced the first-ever stock split at Berskhire in 45 years.
He split the firm’s Class B stock 50-to-1 to facilitate his acquisition of Burlington Northern. The forward split adjusted
the Class B share price down from about $3,500 to about $70.

Another difference is seen in ownership percentages.
The Lion Fund owns only 6.8 percent of Steak n Shake, meaning Biglari’s personal ownership of Steak n Shake is some
fraction of that. Conversely, Buffett personally owns 32 percent of Berkshire.

Regarding compensation, while Biglari
made a point of not granting himself Steak n Shake stock options (an admired Buffett characteristic), he did set a lucrative
salary of $900,000, versus Buffett’s annual pay of $100,000.

Biglari is an activist, taking investment positions
and forcing change, while Buffett has historically made friendly deals with consensus among buyer and seller. Biglari recently
merged Western Sizzlin, a restaurant chain also controlled by The Lion Fund, into Steak n Shake and paid for the merger by
issuing $23 million of subordinated debt with an interest cost of 14 percent—expensive financing that is un-Buffett
like.

More recently, Biglari has set his sights on Fremont Michigan Insuracorp. Steak n Shake made a $43 million
bid to acquire the small property-casualty insurer—also straight out of the Buffett playbook, as P&C insurance is
the largest business segment under the Berkshire Hathaway umbrella.

A charming characteristic of Buffett is his
self-deprecating demeanor. In contrast, Steak n Shake recently said it is changing the company’s name to Biglari Holdings—no
lack of hubris there.

While Biglari bears watching, it is far too soon to anoint him the next Warren Buffett. The
secret behind Buffett’s success is that he is a genius at allocating capital into undervalued stocks and businesses
that have compounded returns in excess of 20 percent annually for 45 years. History is littered with CEOs who stumbled on
the business acquisition trail. For clues on Biglari’s investing skills, it would be interesting to see The Lion Fund’s
track record.•

__________

Skarbeck is managing partner of Indianapolis-based Aldebaran Capital
LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827
or [email protected]

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