Activist Alert: Biglari's 2 New Targets

Investing alongside successful activist investors offers the chance to piggyback on their efforts to unlock shareholder value. Find your favorites and invest when you think they're on to something. Here's what activist Sardar Biglari is up to now. 

Biglari Holdings (NYSE: BH  ) CEO Sardar Biglari has been a successful activist investor, boosting shareholder value at Friendly's, Western Sizzlin, and Steak 'n Shake. Now his company and its wholly owned Lion Fund have filed Schedule 13Ds disclosing positions and indicating activist intent for insurer Penn Millers Holding Co. (Nasdaq: PMIC  ) and consumer brand company CCA Industries (AMEX: CAW  ) . Why the switch from casual restaurants, and why these two?

When Biglari pushed the company's name change from Steak 'n Shake to Biglari Holdings in 2010, he signaled his intent to go beyond restaurants. His investments in Red Robin Gourmet Burgers (Nasdaq: RRGB  ) and Sonic (Nasdaq: SONC  ) looked like previous picks, but he sold those after holding them only briefly and hasn't disclosed new restaurant ownership since.

Why a holding company structure? Biglari wants businesses that throw off more cash than they can use. Then instead of throwing it away on unprofitable expansion, ill-advised acquisitions, or dividend payouts, he can invest it anywhere it will make more money -- in the businesses he already owns, new companies, or a checking account while waiting for a fat pitch. That's the benefit of a holding company when the investor at the top is good.  

Desperately seeking float
Biglari has targeted two small property and casualty insurers, first Fremont Michigan InsuraCorp and now Penn Millers, undoubtedly coveting the float. He wants to invest incoming premiums, pay out less in claims, and use the difference to make more money.

He first offered $24.50 a share for Fremont Michigan Insuracorp in 2009, and later boosted it to $29, raising eyebrows because it appraised the insurer at a not-cheap 1.1 times book value. After skirmishes, Fremont on April 18 announced a sale to a private company for $36.15, a 35% premium over the prior close and well in excess of Biglari's last bid. If the deal closes, Biglari will have earned his shareholders a 76% return. Not bad. (Biglari owns 9.7% of the stock of Fremont, according to the April 18 press release.)

Curiously, the very next day the company disclosed an 8.4% position in Penn Millers Holding. This suggests that Biglari was covering his bets while the Fremont situation dragged on and may not be done with the insurance hunt.   

He can beat 4.5%
Meanwhile, Biglari began pursuing CCA Industries, purveyor of worldwide megabrands (I jest) such as Bikini Zone, Nutra Nail, Hair Off, Pain Bust*R II, Scar Zone, and my personal favorite, Parfume de Vanille. But it's no joke that these brands support a 4.5% dividend.

Biglari Holdings and its wholly owned investment arm, the Lion Fund, first disclosed 6.3% ownership on Jan. 25, 2011, doubled it to 12.6% by March 1, and owned 12.8% as of May 26. Biglari clearly eyes the dividend, which he'd likely stop. If he can't make more than 4.5% on the cash, I'll eat my fedora.

It appears he'll get the chance to make the case. On May 25, CCA announced that it had "invited" Biglari and Biglari Holdings board member Phil Cooley as nominees for the board. Hey, when a company's press release says it "invited" two activists and calls them by their first names, Sardar and Phil, everybody's singing Kumbaya -- at least in public.

Should you piggyback?
Tiny companies such as Penn Millers and CCA, sporting $77 million and $33 million enterprise values, respectively, offer many advantages. Because institutions with megabucks can't make a meaningful return on small and microcaps, you have the field to yourself. Individual investors can buy significant holdings, usually at inefficient and value prices due to lack of media attention. Second, there's an activist investor on your side, already occupying CCA board seats from which to exert influence on your behalf.

But these won't be the last companies Biglari goes all activist on. So if you aren't sure whether Penn Millers or CCA is for you -- or whether Biglari might gain full control by paying a price that doesn't offer you much upside -- you can wait for others.

Or you could consider Biglari Holdings itself and let Biglari work for you wherever he goes. At eight times enterprise value to EBITDA, the company isn't expensive for current operations and the future of Biglari's investing. This activist jockey may court controversy, but he will be riding horses for some time to come.

Tom Jacobs is the advisor of Motley Fool Special Ops, a special situations and opportunistic value service, and he last sang Kumbaya at summer camp in the 1960s. You can email him and follow him on Twitter @TomJacobsInvest. Tom owns shares of Biglari Holdings. The Motley Fool owns shares of Biglari Holdings and Red Robin Gourmet Burgers. Motley Fool newsletter services have recommended creating a write covered strangle position in Red Robin Gourmet Burgers. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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