As originally appeared in the Troubled Company Reporter.
PICO Holdings, Inc. (Nasdaq:PICO), based in La Jolla, Calif., is a diversified holding company reporting recurring losses since 2008. PICO owns 57% of UCP, Inc. (NYSE:UCP), 100% of Vidler Water Company, Inc., a securities portfolio and various interests in small businesses. PICO has $662 million in assets and $426 million in shareholder equity. Central Square Management LLC and River Road Asset Management LLC collectively own more than 14% of PICO. Other activists at http://ReformPICONow.com/ (RPN) have taken to the Internet to advance the shareholder cause.
The bloggers ask the PICO Board to consider a share repurchase. According to the bloggers, “John ‘The Juicer’ Hart, ousted ex-PICO CEO, revealed the Revised Business Plan in November 2015, pledging to sell assets and return capital to shareholders. One year later, since Mendell Energy was effectively given as severance to Juicer, shareholders have seen zero asset sales and zero return of capital.
“If new CEO Max Webb’s words are taken at face value, PICO shareholders can expect that to change — hopefully soon. RPN stops short of demanding a share repurchase, but we believe the Board should weigh this option carefully. There are several reasons for our opinion.
“Most PICO owners would argue that at $14 per share, fractional interests in PICO are selling below intrinsic value. Share repurchases at this level present a once-in-a-PICO opportunity to create value for remaining shareholders.
“Mr. Webb has said that asset sales are now in motion. With every asset sale announcement, PICO’s stock price is expected to increase. As the stock price increases, a share repurchase creates less value for remaining owners.
“The market is taking notice of the changes at PICO. RPN readership is at an all-time high. RPN Twitter followers are at an all-time high. Our struggle for value creation was recently profiled by Tony Chapelle in the Financial Times’ Agenda two weeks ago. Greater attention means PICO shares are likely poised for an increase on any favorable news.
“Blackout rules make PICO’s window to repurchase shares extraordinarily small, according to a corporate governance expert on our panel. In PICO’s case, assuming 2015′s schedule applies, blackout rules will prohibit PICO from share repurchases from December 15, 2016 until May 12, 2017 — the next 6 months!
“PICO will have the money. John Perri, CFO, stated on the latest earnings call that PICO will receive $32.2 million in the next 12 months. About $11 million goes to the Juicer Termination, but not until April 2017. Overhead and operations will consume $10.5 million annually, or about $900,000 per month. If PICO has asset sales in progress, as Mr. Webb indicated, then PICO has sufficient financial breathing room for a buyback.”
“The bloggers note that UCP was recently pegged as an acquisition target by a prominent homebuilder analyst. “Will Randow, homebuilder analyst at Citigroup, issued a report on M&A activity among homebuilders. According to a summary of the report, Mr. Randow cited three benefits acquirers gain through M&A:
1) reduction of the valuation gap between small and large builders;
2) generation of synergies; and
3) increase of local market share.
According to the summary, Mr. Randow wrote, “Aside from the normal benefits of M&A, we believe larger public builders may be more inclined to acquire the young (i.e., smaller publics) given the slower paced recovery environment that exhibits lower pricing power.”
Mr. Randow included UCP on the list of likely targets.”
“The bloggers note that, due to certain debt covenants, UCP’s options for taking down its maturing debt are limited. “UCP stated, both in SEC filings and on its latest earnings call, that it was pursuing three financing options: (a) maturity extension of the existing Senior Notes; (b) mortgaging more real estate inventory to procure a higher limit on Construction & Development Loans; and (c) cash paydown.
“A combination of all three options is possible.
“UCP’s ability to paydown debt with cash is limited. Under the Indenture governing those same 8.5% Senior Notes due 2017, the Consolidated Tangible Asset Covenant at Section 3.18 prevents UCP from reducing its tangible assets by more than $25 million in any calendar year or more than $50 million in absolute.
“Only $8.3 million in debt comes due in the remainder of 2016. Without a waiver or amendment from PIMCO, the sole holder of the 2017 Senior Notes, the maximum debt that UCP can pay down in 2017 with cash is $25 million. UCP must come up with another way to repay the other $98.5 million that comes due in 2017.”