In our last post, we detailed some PICO history and explained how it figures into our support for the PICO Board. Today, we address several concerns that RPN readers have shared about the PICO Board. These communications were posted on the RPN Comment Board and sent in private email.
Readers’ concerns can be broken down into a few categories. We address them one by one.
Pace Of Asset Sales:
Several readers have expressed dissatisfaction with the pace of PICO asset sales. They note that the Vidler portfolio still retains several assets and the economic window for fair prices is finite.
While we agree that high bids will not remain open forever, we find the crux of this grievance perplexing. The PICO Board, as currently configured, had its coming out party on December 2, 2016. Contemporaneous with this announcement, the Board announced the sale of a tranche of Arizona water credits. Granted, this transaction was in the works under the old Board, but in subsequent months, this Board announced another Arizona water credit sale and the sale of UCP.
When the oil and gas property transaction is included, there have been four asset sales in six months. We find this performance to be more than acceptable. If PICO sells another four assets in the next six months, RPN will be bowing and chanting “We’re not worthy.”
Corporate transactions take time. We suggest PICO/UCP owners read the “Background of the Merger” in the Century Communities S-4 Registration Statement. (You can also read our synopsis at “Century Files Registration Statement. UCP – The Girl No One Wants To Dance With).” This narrative details arduous and prolonged process required to bring Century, UCP and PICO to a mutually acceptable bid and ask. Extended negotiation is typical in 9-figure deals. In addition, when multiple attorneys are involved, the only thing that moves fast is the issuance of invoices.
RPN believes that this Board has done an excellent job selling assets. As we said, four deals in six months arouses applause from us.
Return of Capital Transparency:
Many readers want the PICO Board to articulate exactly how it intends to return our capital. We would like this too. But the commitment and transparency some of our readers demand is not optimal.
First, let’s eliminate one possibility: The PICO Board is unlikely to pay a special dividend. All PICO holders will be taxed on a special dividend at their marginal tax rate, probably about 30% on average. Those of us in high tax locations, like California and New York, will pay more. Contrarily, a share repurchase affects only selling shareholders at a rate of 15% of gain, assuming long term holding status. As most institutional investors have been in PICO stock longer than a year, and several plan to continue holding, we’re pretty sure the PICO Board intends to return capital by repurchasing shares.
Second, our research indicates that PICO does not qualify for “return of capital” status. This complicated and esoteric designation allows owners to receive capital from an enterprise and record it for tax purposes as a reduction in their basis, not a dividend. This pushes out the taxable event into the future. The criteria to qualify for “return of capital” status is beyond the scope of RPN – and beyond our pay grade. Suffice it to say, it does not apply to PICO.
Third, as we have written, the PICO Board has already begun the repurchase process. The Q1 10-Q indicates that PICO bought in 13,000 shares for $184,000. While micro, recall that PICO was blacked out for most of the quarter, first by the water credits sale and then by the UCP negotiations. We are not sure why, but it seems to have slipped by some owners that PICO has begun the return of capital process.
We are thankful the PICO Board has played possum on return of capital. Any announcement would likely be counterproductive as it would raise the stock price, decreasing economic efficacy, dollar-for-dollar. If PICO announced a return of $100 million within five months, the market would know that PICO intends to dump its Century shares. UCP owners don’t want that. PICO owners don’t want that. Century owners don’t want that.
We will not be surprised to learn that the PICO Board has established a 10b5-1 plan. Such a program is tailor made for PICO’s situation. Given that all PICO assets are for sale, the Board could come into material non-public information at any moment. Indeed, it expects to! Therefore, a buyback program that is not affected by PICO news is ideal.
Asset Sale Transparency:
Several readers want more details related to asset sales.
Again, we are puzzled by this complaint. PICO has sold four assets in six months. PICO has indicated that everything is for sale. It is common knowledge that there is no broad, deep, liquid market for water assets. They are one-of-a-kind, bespoke so to speak. One astute PICO observer told us a while ago, “Everything in the water business takes longer than you think it should.” This prophecy is being borne out.
The low hung fruit has been sold. The fruit higher up remains to be sold. Two major shareowners occupy Board seats. We don’t think the Board is stalling. We think asset monetization is progressing nicely.
Additionally, the Board is not providing more asset sale detail probably because it does not know. The Board does not know the precise order of asset sales and prices at which they will transact. The Board does not know if a buyer will purchase one water asset, a bundle of assets or perhaps the whole Vidler portfolio. Given such uncertainty, the Board is on far safer ground if it makes no comment.
We recently caught up with our favorite CEO. Our conversation turned to the topic of public relations and press releases. Our favorite CEO had this to say:
“Look, around here, until we have something to say, we don’t say anything. You have all sorts of constituencies. All of them are listening and poised to take action. You have your shareholders, both retail and institutional. You have your customers. You have your suppliers. You have your employees. You have your regulators. All of them are looking out for their own interests and if you say something that spooks them, you can have an enormous problem. We don’t say anything until we have something to say.”
We sympathize with this approach fully.
Plan Of Liquidation:
A few readers have suggested that PICO wind down under a Plan of Liquidation. We were unfamiliar with this process, so we did a little homework. A basic Internet search reveals little; there ain’t much out there about this animal. But we share what little we learned.
A Plan of Liquidation is governed by Section 331 of the Internal Revenue Code. This designation is exactly as it sounds: the firm files a formal plan to liquidate and distribute its assets to equity holders.
The PICO Board has investigated this option, but for many reasons, has decided against it. We spoke with a PICO owner with a strong legal background. He explained that a Plan of Liquidation is very technical and “massively restrictive.” There is a three-year time horizon (which would not be ideal for the sale of illiquid water assets) and once the Plan is in place, share buybacks are prohibited. Proceeds are returned to equity owners, each of which reduces the owners’ tax basis. Taxes are roughly the same in amount, but the day of reckoning is delayed.
According to our legally-minded PICO owner, the strict compliance requirements and lack of capital return flexibility, i.e. share repurchase prohibition, make a Plan of Liquidation unsuitable for PICO.
There are a few more reader grievances we have not addressed. In Part 3 of this series, we will pick those issues up. Stay tuned.
Joseph Tola Files Rep & Warranty Suit Against UCP Directors
From yesterday’s edition of Class Actions Reporter:
UCP INC: Faces “Tola” Lawsuit Over Century Communities Merger
JOSEPH TOLA, On Behalf of Himself and All Others Similarly Situated, Plaintiff, v. UCP, INC., MICHAEL C. CORTNEY, DUSTIN L. BOGUE, ERIC H. SPERON, PETER H. LORI, KATHLEEN R. WADE, MAXIM C.W. WEBB, CENTURY COMMUNITIES, INC., and CASA ACQUISITION CORP., Defendants, Case No. 3:17-cv-02713-WHA (N.D. Cal., May 10, 2017), seeks to enjoin a proposed transaction announced on April 11, 2017, pursuant to which UCP will be acquired by Century Communities, Inc. through its wholly-owned subsidiary, Casa Acquisition Corp.
Pursuant to the terms of the Merger Agreement, stockholders of UCP
will receive $5.32 in cash and 0.2309 of a share in the newly
combined company for each share they own.
Plaintiff alleges that defendants filed a Form S-4 Registration
Statement that omits material information with respect to the
Proposed Transaction, which renders the Registration Statement
false and misleading.
Specifically, says the complaint, the Registration Statement omits
material information regarding the Company’s financial
projections, Century’s financial projections, and the analyses
performed by the Company’s financial advisor, Citigroup Global
Markets Inc.; material information regarding potential conflicts
of interest of the Company’s officers and directors and Citi; and
material information regarding the background of the Proposed
UCP, Inc., is a homebuilder and land developer with expertise in
residential land acquisition, entitlement, and development, as
well as home design, construction, and sales. [BN]
The Plaintiff is represented by:
Rosemary M. Rivas, Esq.
LEVI & KORSINSKY LLP
44 Montgomery Street, Suite 650
San Francisco, CA 94104
Phone: (415) 291-2420
Fax: (415) 484-1294
– and –
Brian D. Long, Esq.
Gina M. Serra, Esq.
RIGRODSKY & LONG, P.A.
2 Righter Parkway, Suite 120
Wilmington, DE 19803
Phone: (302) 295-5310
Fax: (302) 654-7530