Bloggers Calculate NPV of 2 CEO Scenarios


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 $664 million in assets and $434 million in shareholder equity. Central Square Management LLC and River Road Asset Management LLC collectively own more than 14% of PICO. Other activists at have taken to the Internet to advance the shareholder cause.

The activist bloggers get out their financial calculators and provide a net present value analysis of the John Hart Employment Agreement. The bloggers consider the financial implications if Mr. Hart remains a PICO employee or if the PICO Board takes action to remove him.

The activist bloggers support River Road’s proposal to move the PICO headquarters from La Jolla, California to Reno, Nevada. This proposal was first articulated in a 13-D filing by J. Justin Akin, River Road small cap portfolio manager. The bloggers assume that if such relocation is implemented, Mr. Hart would resign with “good cause.” Hence, now is an appropriate time to examine the numbers.

Scenario 1: NPV Relocation Proposal

“If the Three Profiteers Resign for “Good Reason” in Year 1:

Mr. Hart would receive a termination payment of $5 million, unused vacation of about $400,000 plus other catchups and healthcare for him and a dependent. We peg the NPV at $6 million.

Messrs. Webb and Perri would each receive 2 years of salary and one year of healthcare for them and dependents. Combined NPV $1.5 million.

PICO would incur expenses for closing the La Jolla office and opening the Reno office, for example, moving costs, severance payments, new furniture, new computers, lease initiation costs, etc . . . We estimate an NPV of $1 million.

PICO would have to hire a CEO and CFO. We assume candidates would accept a normal base salary, benefits package and parcel of equity compensation, which would total $1.5 million per year. We assume PICO could be wound down in 3 years. NPV of new executives is $4 million.”

The bloggers state that the negative NPV of Relocation Proposal is $13 million.

Scenario 2: Three Profiteers Stay

“If the Three Profiteers stay the next 5 years at PICO:

The Juicer will receive a $1 million base salary for 5 years. NPV: $3.5 million.

He will also receive $15 million in Bonus Payments for asset sales. Given Mr. Hart’s tendency to avoid shareholder value creation, we assume these asset sales occur in Years 3, 4 and 5. NPV of the $15 million Bonus Payments: $12 million.

Mr. Hart will receive vacation and healthcare over 5 years: NPV $1 million.

At the end of 5 years, Mr. Hart can either negotiate a similar contract for another 5 years or he can walk and receive a lump sum of $5 million. Former PICO employees tell us that Mr. Hart doesn’t like to work, so we assume he accepts the most undeserved payment in the history of mankind — $5 million in Year 5: NPV of $3.5 million.

Total NPV if Mr. Hart stays: $20 million.

Messrs. Webb and Perri will receive 5 years of base salary, which sums to $6 million, plus vacation and healthcare: NPV $4.5 million.

Assuming asset sales in years 3,4 and 5, their portion of the bonus plan will be $5 million, with an NPV $3.5 million.

Total NPV if Messrs. Webb and Perri stay: $8 million.”

The bloggers state that the negative NPV of Three Profiteers Stay Proposal is $28 million.

The bloggers have received correspondence inquiring about PICO’s ability to use the legal system to recover funds from Mr. Hart, due to his “criminal Hart Compensation Scheme.”

The bloggesr answer, “PICO shareholders can rest assured that this option will be adequately explored. A PICO Director is uniquely qualified to carry out this inquiry: Howard Brownstein.

Mr. Brownstein has a J.D. from Harvard. He works in restructuring. He has seen plenty of shady executives and shady employment contracts. Our research indicates that Mr. Brownstein is a fine man — excellent in character, astute in business, owner-oriented, and attuned to charlatans like Mr. Hart. He is the type of director that every shareholder wants on their board.”

The activists conclude, “A competent and honest management team creates value for shareholders in ways that cannot be anticipated. Plus, it is more fun to be an investor in an enterprise run by competent and honest executives — something current PICO shareholders know nothing about.”