Leave it to Michael Cortney and Dustin Bogue to strike the only homebuilder deal in the last several years priced below book value. But that’s the offer on the table from Century Communities, Inc., for UCP.
You know the details. Century offers UCP shareowners $5.32 in cash and .2309 shares of Century Communities for each UCP share owned. The deal is worth $11.42 per share as of Wednesday’s close. Tangible book value of UCP is about $12.13 per share; the discount is about 5%.
We don’t blame Century for offering a fixer-upper price for UCP. But as a shareowner, we are not thrilled with the offer. The SEC filings contain lots of minutiae, so let’s focus on the important points.
UCP Is In Play
Both the UCP and Century Boards have approved the deal. Both Boards will recommend it to their shareowners. PICO has entered into a Voting Agreement, whereby it will vote its roughly 57% stake in favor of the transaction.
Per the Agreement and Plan of Merger, UCP must terminate all conversations and interactions with other potential UCP purchasers. UCP may not actively solicit or seek an alternative transaction. While this may sound like a strict “No Shop” clause, one legally-versed member of our panel commented, “That just means UCP and its bankers can’t make outbound calls.”
If another bidder comes forward with a viable bid superior to the Century offer, UCP may pursue it. During that process, UCP must keep Century intimately informed. Century may match any alternative offer. Interestingly, if a superior transaction materializes and the UCP Board recommends it to owners, PICO still has to deliver at least 28% of UCP’s votes in support of the UCP-Century deal.
If the Century deal is called off in lieu of a superior transaction, Century will collect a $7 million termination fee.
Within 3 weeks, Century will file with the SEC its 2017 Proxy Statement combined with the transaction’s S-4. This document will contain the “Deal Narrative,” which will provide many clarifications. Stay tuned.
We view this transaction as an enormous positive for both UCP and PICO shareowners. If we had to guess, we’d say that UCP was probably talking to multiple potential purchasers. Century was the most aggressive and demanded certain protections and rights. UCP readily agreed. As a result, there’s now a floor on the UCP share price, the October debt maturity has a solution, and UCP is effectively in play. We view a forthcoming superior offer as likely, given that we estimate the fair market value of UCP’s assets to be greater than $11.75 – which is the deal price plus the termination fee.
We believe UCP will garner a higher price for several reasons. First, we believe that the fair market value for UCP’s assets is higher than Century’s offer. Second, UCP and Century enjoy almost no overlap; an in-market strategic buyer can offer a higher price expecting to realize efficiencies. Third, we believe that no real bidding has taken place, as potential acquirers were scared off by tumultuous change and uncertain leadership at UCP. Fourth, the UCP portfolio has scarcity value; it’s not every day that a large builder can write one check to snatch 6,638 owned and controlled lots in some of America’s best housing markets. Last, UCP’s poor corporate governance and management present an unusual cost saving opportunity; no UCP executive or director need be retained.
Want evidence for that last opinion? No UCP Director or Executive will join the Century Board of Directors. It is especially telling that Mr. Bogue, only 42 years old, was stiff-armed from the Century Board.
Other PICO’s Money
Matters are simple for UCP owners: wait for a higher offer and if none arrives, collect roughly $11.35 per share in cash and shares sometime in Q3. But what about PICO owners?
At current prices, PICO stands to receive roughly $118 million in value. Upon closing, PICO will receive roughly $55 million in cash and 2.4 million Century shares. PICO must hold its Century shares for 60 days after the merger. Between Day 61 and Day 210 following the merger, PICO may sell 5% of Century outstanding shares every 50 days. After 210 days have elapsed, PICO may sell its Century shares at will.
We speculate that PICO will unload its Century stake at the first opportunity, which would be a sale of roughly 1.25 million Century shares on Day 61 and a sale of the remaining roughly 1.15 million shares on Day 111. There are a few reasons for this prediction. First, we believe that Daniel Silvers and his Board are aware that homebuilding is a tough business, characterized by low profitability, low barriers to entry, substantial operating risk and volatile industry conditions. Second, we believe that our large shareowner Directors Eric Speron and Greg Bylinsky will demand a return of capital. Third, no PICO representative will join the Century Board, which would be unusual for a 9% owner with long term intentions. Last, monetization and return of capital are the only mandates PICO has today.
If the UCP-Century transaction closes in the middle of Q3, PICO owners could see the capital related to the shares returned in early 2018. If the deal closes early in Q3, a late 2017 return of capital has an outside probability.
Dustin Bogue – Rogue Pays
We are no fans of Mr. Bogue. We have listed his corporate governance improprieties, track record of value destruction and abuses of shareholders in previous posts. There are many examples of each.
Much like John “The Juicer” Hart, Mr. Bogue surrounded himself with lackeys of low ethical profile who fortified his economic future at the expense of owners. As a result of the UCP-Century deal, Mr. Bogue will emerge far wealthier than his performance at UCP merits. The only manifestation of just rewards is that Mr. Bogue takes a serious demotion from CEO of UCP to Regional President – West, of Century. Mr. Bogue will not be an influential executive and will have no direct channel to the Century Board. We feel Century has read the situation correctly and such a position is more coherent with Mr. Bogue’s abilities and ethical profile. Only at the behest of the corrupt and incompetent Juicer would someone like Mr. Bogue get an unmerited shot at CEO.
Vesting of Mr. Bogue’s restricted stock units will accelerate over two years after the deal closes. Century will pay him a one-time deal bonus of three times the sum of base salary and average annual bonus for the past three fiscal years, which totals to $1,972,639. If our math is correct, Mr. Cortney and Peter Lori, members of the dubiously configured UCP Compensation Committee, awarded Mr. Bogue a bonus of $226,639 for 2016. Given that UCP’s annual metrics were below industry averages and UCP destroyed over $20 million in economic value, we find a bonus payment inappropriate and irrational. Messrs. Cortney and Lori continue to prove to UCP owners why they are unfit to steward a public corporation. We will wait for the UCP 2017 Proxy Statement to verify.
Mr. Bogue’s stock options will be canceled. This concession is meaningless given that the average strike price of UCP’s 116,652 outstanding options was $16.20.
The deal is an ignominious conclusion to Mr. Bogue’s unmerited run as CEO. UCP went public at $15 per share almost 4 years ago. Mr. Bogue’s UCP has underperformed all industry metrics and its share price has underperformed broader indices and builder industry averages. This chart compares UCP’s share price performance with the SPDR Homebuilders ETF (XHB):
UCP Incentive Compensation Unjustified
PICO has indicated that it will pay CEO Max Webb incentive compensation to monetize UCP. Details have not been revealed, we believe for both strategic and legal reasons. We, and an overwhelming majority of PICO owners and observers, felt that such incentive compensation was ridiculous and irrational.
Now that a UCP transaction is out in the open, and it was managed by UCP, we call on Andrew Cates and the PICO Compensation Committee to clarify the proposed incentive compensation for the monetization of UCP. Transparency is the hallmark of dignified and just corporate governance; secrecy is manifest of darker goings on. If Mr. Cates and the PICO Comp Committee are confident in the Solomonism of the UCP incentive compensation, they should reveal it to the owners of the business. Anything less is suspect.
Given that UCP sold itself, with Mr. Webb as only one of 6 Directors (and soon to be one of 7), and given that the price is sub-book value, which is far lower than other homebuilders have transacted recently, RPN sees no reason to pay a bonus to anyone. The price is not high and Mr. Webb did not accelerate the process; $121 million in 2017 debt maturities took care of the motivation for a sale.
If Mr. Cates and the Comp Committee do not clarify the UCP monetization bonus before the Annual Meeting, we will grow very suspicious. Transparency is the linchpin of equitable corporate governance and any money paid to Mr. Webb will come from PICO owner’s pockets. We have been suspicious on this matter from the start and we gain no confidence from the April 11 SEC filings: the PICO Comp Committee suspiciously missed the opportunity to clarify this matter within the deluge of documents filed in relation to the UCP/Century transaction.
UCP has disclosed all relevant details. Century has disclosed all relevant details. It only makes sense that PICO should disclose all relevant details.
UCP’s fate is now sealed with a 99% probability. The chances of this deal coming unbuckled are almost nil. There is no longer a legal nor strategic justification for keeping PICO owners uninformed. Now is the time to disclose.
Lawyers, Lawyers Everywhere
There have been many lawyers involved in the UCP/PICO saga over the last few years. The UCP-Century deal has its cadre already lining up. No fewer than four law firms are preparing to challenge the UCP Board’s business judgment and failure to maximize value for shareholders. The salivating law firms (and links to their overtures) are:
These attorneys will allege that the UCP Board failed to maximize value for UCP owners. They will also investigate self-dealing, conflict of interest and the like. Perhaps. But we don’t think a lawyer is needed to remedy the situation. We believe everyone and their poodle in homebuilding knows about the UCP-Century deal and those economically inclined to submit bids will do so.
If you contact any of these firms, please email us with pertinent details of your conversation. We will be curious to hear.
Given the low price of the UCP-Century deal — especially compared with other recent builder transactions — if no superior proposal materializes, UCP investors may want to consider exercising their appraisal rights. This proposition is a little complicated and will require that most investors engage the services of an attorney. More on this possibility later.
Our Crack Strategist made an interesting observation. He said: “These guys know how to keep a secret. UCP was trading in the low $9s in the days before the deal was announced. Clearly no word was leaked.”
Compliments to all involved for maintaining the integrity of capital markets.
RPN Likes UCP
About a year ago, we told you we loved UCP at $5.50 and $6.00 per share. About 7 months ago, we told you we liked UCP at $8.50 per share. Now, we like UCP at $11.20 per share – yesterday’s closing price. Here is our logic.
This deal will go through; the probability of collapse is infinitesimal. On the UCP side, we have a very motivated seller. PICO has already agreed to vote its 57% controlling stake. The UCP Board has already approved the deal and will recommend it to owners. UCP is staring at a $121 million wall of debt maturity.
On Century’s side, they are getting UCP at a bargain price. Analysts and investors have voiced positive noises about the deal. S&P proposes to raise Century’s outlook based on the transaction. Century’s Board has also approved the deal and will recommend it to its owners.
We believe that investors have a firm floor on UCP shares in the $11 range. We believe that a superior proposal is likely. Therefore, we believe investors have small probability of a downside scenario and decent probability of making a few points to the upside within a short time. We are not normally fans of the naked long arb when it comes to mergers, but every case must be evaluated on its merits and we feel this is the rare exception.
Builder acquisitions close quickly, sometimes within 2 months. We are not talking about banks or companies that must get regulatory approval to combine. Any naked long arb position is likely to be outstanding for a relatively short time.
This play is not without risks. As our Crack Strategist noted, Century’s share price could decline, builder industry conditions could unexpectedly collapse or due diligence could produce a smelly fish, compelling Century to back out of deal.
RPN has many self-appointed responsibilities. One such duty is to apportion credit and blame where it is due. We don’t see a whole lot of room to complete that charge here. UCP was a motivated seller due to its bleak operational and financial future. Absent a change of control, we believe that $9 per share was about as good as it was going to get for UCP.
Century recognized a good deal when it saw one. So it pounced.
PICO has efficiently resolved what could have been an enormous headache. If UCP had gone corporate governance rogue, it could have been 2 years to monetization. Now, PICO gets a floor for its UCP stake, liquidity to monetize and a de facto auction to sell UCP to the highest and best bidder.
In this situation, there is not much blame or credit to distribute. Fate simply smiled upon UCP and PICO shareowners — something that has rarely happened in the last 5 years.