Biglari hikes bid for Fremont Insurance

October 30, 2010
| By Pete Daly |
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Biglari Holdings Inc., the holding company for Steak ’n Shake, announced a new proposal Oct. 11 to buy out Fremont MI InsuraCorp at a price 41 percent higher than the closing price of the stock that day, with some of the stockholders now pressuring the insurance company board to consider the potential deal.

Fremont MI InsuraCorp is the holding company for Fremont Insurance Co., based in Fremont. The company, which has roots going back more than 130 years, went public in 2004.

“Biglari Holdings is presenting its proposal to the Fremont Board, expecting its Board to exercise its fiduciary duties and therefore meet with Biglari Holdings to reach a mutually satisfactory transaction,” said the Biglari announcement on Oct. 11.

Fremont President and CEO Richard E. Dunning issued a response Oct. 14, saying the company “takes its fiduciary duty seriously, and we will carefully review this matter in light of its impact on our shareholders, and all our stakeholders …”

On Oct. 26, Biglari Holdings delivered another letter to the Fremont board, nominating Sardar Biglari to be elected to the board at the 2011 annual meeting.

Fremont’s public relations firm in Grand Rapids told the Business Journal last week that the company had nothing further to say regarding Biglari’s latest proposal. However, Fremont stockholders in California, New York and Grand Rapids were trying to advise Fremont management to meet with Biglari Holdings.

Greg Dodgson, vice president of investment at Royal Securities in Grand Rapids, said last week he had called Fremont twice in the last two weeks and left messages on behalf of his customers that own stock. Another company that has reportedly tried to communicate with Fremont is Mitchell Partners Ltd. in Costa Mesa, Calif., which owns 10 percent of Fremont’s stock, according to Dodgson.

“Mitchell and I both want them to meet with Biglari Holdings, at least sit down with them. The last time, they just kind of turned their backs on the guy. There could be some problems — they just can’t walk away from this deal,” said Dodgson.

Dodgson was one of the underwriters of the Fremont stock when it went public in 2004.

Loeb Capital Management in New York provided the SEC with a copy of a letter it sent to the Fremont board Oct. 18, which states that the “recently revised offer from Bilgari Holdings Inc. … compels the Board to engage in a sincere process to maximize shareholder value; more to the point, Loeb thinks it is incumbent upon the Board, in keeping with its fiduciary duties to shareholders, to sell the company to the highest bidder.”

Gideon J. King, president and chief investment officer of Loeb Capital, said in his letter to Fremont that the stock was “illiquid” and has “scarcely traded at or above its tangible book value per share during its capital market history.”

Loeb owns approximately 9 percent of Fremont stock.

“As a significant shareholder of Fremont, Loeb is not in favor of further tactics that put off potential buyers of the company. It is time to put aside mechanisms and campaigns such as a poison pill with a low trigger, a staggered Board and a concerted effort to secure legislation limiting shareholder rights,” wrote King.

Biglari Holdings, which already owns almost 10 percent of Fremont stock, originally made a proposal Dec. 21, 2009 (when it was still legally known as Steak ’n Shake) to buy all other shares of Fremont stock at a price of $24.50 per share. It closed that day at $22.01. In his letter to the Fremont board, Sardar Biglari, the chairman of Steak ’n Shake, said “we want all members of the management team, other than the CEO, to remain in place.”

Biglari, 33, is virtually a legend on Wall Street.

Dunning issued a press release a few days later, stating that the “Board has unanimously concluded that the Steak ’n Shake proposal should be rejected and that execution of the Company’s current strategic plans represents a better long-term value for our shareholders.”

“We believe this hostile takeover attempt is not in the best interest of Fremont, our shareholders, our policyholders or the Fremont community,” added Dunning.

The Fremont company has a shareholder rights plan; one Grand Rapids legal expert on publicly held companies said it is “what people commonly refer to as a poison pill,” a complicated legal device to discourage hostile takeovers.

On April 30, legislation sponsored by Sen. Gerald Van Woerkoem, R-Muskegon, was signed into law, providing Fremont increased temporary protection against a hostile takeover. In effect only from May 1, 2010, to May 1, 2012, the new law requires a vote of at least 66.67 percent of shareholders in insurance companies like Fremont MI InsuraCorp to overrule its board of directors if they are blocking a hostile takeover attempt. Previously, the legal requirement was a simple majority. The new law also requires a two-thirds majority of shareholders to elect two or more members of the board.

The law specifically pertains to Michigan insurance companies with less than 200 employees; Fremont has less than 200 employees.

The same day the new law was signed, Biglari Holdings in San Antonio issued a press release, threatening legal action and criticizing the Fremont company for diluting the rights of shareholders, and “spending shareholders’ money to lobby the Michigan legislature to pass a law, Senate Bill 1174, that benefits top management and its directors.”

Dodgson said the latest Biglari proposal is “a real deal.” He described Fremont Insurance as “an A-rated insurance company” that is “just doing a wonderful job … in all categories.”

“It’s a little cash cow up there,” said Dodgson. “They’ve done very well, and my hat’s off to management, but when you get an offer that’s in excess of a 40 percent premium to the stock, they just obviously haven’t done enough” to keep the stock price higher.

“They should have been buying stock back on the market to help keep the price higher,” he said.

“I showed this company two years ago to Berkshire Hathaway (Warren Buffett’s investment company) because it’s just perfect for them, it was so undervalued,” said Dodgson, adding that he got a letter in response from Berkshire saying that it is everything they like in a company — except it’s just too small.

“It’s appropriate that (Fremont) certainly meet with Biglari Holdings, because there’s a possibility if BH met with them and saw what they have, they might even sweeten the offer,” he added.

Fremont’s management “should have an open mind and visit with the people” from Biglari, said Dodgson.

Fremont stock was selling late last week at around $27 a share.

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