Monday, December 21, 2009

Steak 'n Shake: Attempting to enter the insurance industry.

Here are some quick thoughts:

Sardar Biglari and Steak 'n Shake just announced that they are attempting to buy all remaining shares of Fremont Michigan Insuracorp. To sum this up, with some estimates that I have quite literally jotted down on he back of an envelope and have thought about for only a few minutes... this is a good deal for share holders of BOTH companies.

If the buyout goes through, SNS will be spending UNDER $13 million in cash; they already own about 10% of the company, are only paying 1/2 the remaining $38.59 million in cash (or $19.3 million), AND will get the $6.75 million in cash that Fremont has on the books... Leaving the cash out of pocket expense for ~$12.5 million.

In the past 4 quarters, FMMH earned about 2.56 million, so SNS would be getting a great deal on the company at ~5x earnings (if ONLY the cash of the deal is taken into account). Add back in the company's depreciation of $1.489 million and the multiple gets even better. Add in the dilution of SNS shares and the deal still seems to make a great deal of sense.

Keep in mind, that there will be cost cutting, as there will be synergies of the 2 companies. Who knows- if franchising picks up with SNS stores, maybe Fremont will underwrite some of the P&C on the locations? Fremont will also lose it's CEO in the deal, so, there would be addition savings of about $.25 million in addition, contracts and pay may come down with the other executives; though, it wouldn't be a surprise if they actually get a slight raise.

Fremont shareholders will be getting precious liquidity, cash, and part ownership in a great/growing/profitable company.

Ultimately, I feel quite comfortable with the deal; and will be interested to see what Fremont does. Certainly, the market, which is presently valuing the stock at $.15 cents ABOVE the offer, seems to think that SNS will beef up it's offer.

This deal will leave SNS with just under $40 million in cash and a credit line to deploy into other companies or assets. Again, this is good for everyone, especially the shareholders of FMMH, as the growth prospects of SNS are incredible.

Disclosure: Long SNS. This is not advice. DO YOUR OWN RESEARCH!

BTW: For all of you last minute Christmas shoppers (or people that need that 'little something extra'), SNS is giving out a $5 dollar gift card, with the purchase of $20 dollars in gift cards; which is what I am getting for quite a few of the people on my shopping list... I certainly suggest that you do the same! :D


Ameet said...

Sadly, I don't live in an area where a Steak n Shake is, so no SNS gift cards for myself or any friends! :)

As for your actual post, I look forward to seeing if Biglari thinks that Fremont overall is a disciplined underwriter that is cheap right now, or if there are matters to be corrected. If the latter, I hope he can - I vaguely remember something Buffett wrote once about how hard it can be to change the culture in an insurance company (and also about how he doesn't like to do it) to emphasize profitability and conservatism over market share growth.

Anonymous said...

This is most definitely not a good deal for Fremont shareholders. A profitable, conservative, well-run, over-reserved insurance company has no business being priced below book value. Especially when the book value is understated. What makes the deal even worse for Fremont shareholders is that Sardar is trying to purchase Fremont below book and well below intrinsic value with inflated SNS shares. The very fact that Sardar is using shares indicates he believes his stock is fully to overvalued.

Now I am an SNS shareholder and not a Fremont shareholder (although I've followed the company for years) so I hope he succeeds. I just think it's silly how SNS shareholders are saying what a great deal this is for Fremont shareholders when Sardar is trying to steal the company.

Jeff Moore said...

Issuing stock to fund a deal doesn't mean, in any way that SNS is fully or overvalued. What it means, (if Biglari is a good capital allocator- which I believe he is) is that SNS stock is being priced more richly than Freemont. Nothing more.

To illustrate: lets hypothetically say that SNS is a 75 cent dollar, and FMMH is a 50 cent dollar- it would be probably be wise to issue SNS stock to buy the company.

Certainly, I think that SNS is getting a better deal than the shareholders of Freemont. That doesn't mean that the deal is BAD for them though.