After several weeks of silence, PICO Holdings‘ news releases have lit up the news wires, one after another.
On October 2, PICO made several announcements. First, PICO has retained JMP Securities to shop the remaining Vidler Water portfolio. Second, compensation for PICO CEO Max Webb and CFO John Perri has been revised to reflect this potentiality. Third, PICO Director Andrew Cates has resigned effective immediately.
Just as the latest issue of RPN was poised to roll the printing presses, PICO made the surprise announcement that it sold its entire stake in Century Communities.
RPN breaks it down.
PICO Poker Player
The retention of JMP Securities “to explore strategic alternatives,” has sparked a debate among PICO-watchers. Is PICO playing a high hand to win or is PICO bluffing for appearance’s sake?
Does the retention of JMP as investment banker signal the end game in which the Vidler portfolio is sold and shareowners are cashed out? Or is JMP’s employment a distraction, designed to make PICO Executives and the Board look proactive, while diverting attention from the recent lack of asset sales and zero return of capital?
We don’t have an answer. Both scenarios are possible and, as we consulted our panel, we got mixed opinions all around.
One investor said, “I view this as highly significant. It’s possible PICO already received a bid and JMP’s employment is the effort to get the highest and best offer. It could be a matter of months now.”
Another said, “It’s all smoke and mirrors to draw your attention away from the fact that zero capital has been returned and no assets have been sold in months. I’ll bet someone at JMP is friends with one of your PICO Directors and that’s how they got the gig.”
A third said, “Wait. Haven’t all of PICO’s assets been for sale since John Hart was fired over a year ago? What’s changed?”
Who is right? Or is the truth somewhere in between? We don’t know.
JMP’s retention looks positive and investors have reacted favorably, pushing PICO’s stock price to its 52-week high of $18.35 as RPN went to press. But the true probability of a transaction is unknowable to outsiders. Stay tuned.
One Certainty – Zero Return of Capital
One thing RPN is certain about: PICO has returned zero capital to owners and PICO steadfastly refuses to provide transparency.
With the most recent announcements and the increase in PICO’s stock price, any repurchase of shares, whether systematic, opportunistic or pursuant to a tender, just got a lot more expensive. And less economically potent for PICO owners.
After the UCP sale was announced in April, PICO could have initiated a 10b5-1 plan and could have systematically bought back shares for the last six months. A buy in of over 2 million shares by now would have been possible (20 trading days per month x 6 months x 20,000 shares per day = 20 x 6 x 20,000 = 2,400,000).
When we mentioned this to our most optimistic PICO observer, he said, “I don’t have an answer for that. I don’t know why they didn’t do that.”
Another shareholder roughly calculated that PICO could have created over $1.50 per share in value by purchasing 2 million shares at around $17.
Remember, for PICO’s inaction and lack of transparency to make sense, it must somehow create an extra dollar of value for owners that could not have been created by earlier action and greater transparency. Given that PICO could have been buying shares back for 6 months at lower prices than today, surmounting this hurdle is now more improbable for PICO. And it is more likely now than ever that the PICO Board has not served owners through its inaction and lack of transparency.
A sarcastic PICO-watcher commented, “It looks like the Board botched it.”
In Oliver Stone‘s famous 1987 movie Wall Street, Budd Fox, as broker, advises Gordon Gekko to sell his entire stake in Blue Star Airlines before market close. After a series of expletives directed at Mr. Fox, Mr. Gekko accepts cold capitalistic reality and utters the famous phrase, “Dump it. Dump it all.”
Similarly, PICO has dumped its entire stake in Century Communities in one transaction, with the second half of the position sold 5 months earlier than mandated in the deal.
Recall that, pursuant to the UCP-CCS Plan of Merger, PICO could sell about 1.25 million CCS shares 60 days after the deal’s close. PICO could sell the remaining 1.15 million CCS shares in early 2018. However, according to the press release, PICO unloaded the entire 2.4 million share position on October 2, for $59.4 million, or roughly $24.67 per CCS share.
PICO now holds well over $100 million in cash on its balance sheet.
RPN was disappointed to read about the resignation of Mr. Cates. We have had our disagreements with PICO Executive Compensation over the last year. But Mr. Cates is significantly responsible for the value PICO has created for owners, and the value it is poised to create. Mr. Cates was one of two rough and tumble appointees that wrestled several Legacy Director alligators to clean up the PICO Boardroom and improve corporate governance.
Every milestone in the PICO battle for value – the firing of the corrupt and incompetent John Hart, the removal of dirtbag directors Kenneth Slepicka, Carlos Campbell and Michael Machado, the Palace Coup which tossed hapless Howie Brownstein and go-slow Chairman Raymond Marino, the piecemeal asset sales and the monetization of UCP – Mr. Cates played a significant role in all of them.
Mr. Cates and Daniel Silvers never took the easy way out. They were always willing to fight to improve PICO in the name of owners.
When Mr. Cates arrived at PICO, the stock price floated around $9 to $11 per share. As we admire our current fractional interests valued at over $18 per share, we should remember that Mr. Cates had an enormous role in this revaluation. From RPN’s desk, Mr. Cates gets a standing ovation as he walks off the PICO trading floor. We wish you all the best, Andy.
Hand-in-hand with the JMP engagement, PICO supplemented the Executive Bonus Plan so that Messrs. Webb and Perri will be paid under double trigger scenarios. If PICO is acquired and these Execs are terminated, under certain conditions, they will receive a bonus based on deal price less cash and some expenses.
We speculate that Messrs. Webb and Perri are motivated to sell PICO. Mr. Webb owns 79,083 PICO shares that would be worth almost $1.6 million at $20 per share. Mr. Perri owns 29,902 PICO shares that would be worth about $600,000 at $20 per share. Our sums do not include any remaining options and the most recently granted RSUs owned by these Execs.
Plus, we speculate that an acquirer of PICO will likely use the same calculus as the existing PICO Board and opt to keep Messrs. Webb and Perri to run or wind down Vidler. They are unlikely to be paid half a million dollars annually (or somewhat less now that both men have voluntarily reduced their own compensation), but they would remain gainfully employed.
As an aside, we expect a Christmas card from John “The Juicer” Hart. Juicer owns 341,566 PICO shares and at $20 per share, he would walk away with almost $7 million pretax. Given that PICO stock was headed nowhere but down while Juicer was CEO, he owes all PICO owners, including RPN, a big “Thanks” and a Christmas card. We expect it any day.
Speaking of Webb and Perri, if these men want to realize a Bonus for 2017, they better get on their respective horses. Recall that the Executive Bonus Plan is calendar year based. Capital must be firmly committed to be returned to owners before December 31 for it to count in the annual bonus calculation.
Less than 3 months left!!!!