UCP Files Merger Proposal. Tola Shareholder Suit Settled.

On July 3, 2017, UCP filed its DEFM14A, which is a definitive merger proposal. There isn’t a whole lot that is new. But we provide some highlights.

UCP Special Meeting

The UCP Special Meeting to vote on the acquisition by Century Communities will take place on August 1, 2017, in San Jose, California. Given that PICO Holdings has already agreed to vote its 57% UCP stake in favor of the acquisition, the meeting and vote are mere formalities (assuming nothing bizarre happens).

PICO and UCP Class A shareowners stand to receive $5.32 in cash and .2309 Century shares for each UCP equity interest. As of this writing, such consideration was worth $11.12 per share.

Century did not update its timeline. It still expects “the Merger to close by the during the third quarter of 2017.”

Tola Complaint Settled

An Amended Registration Statement filed by Century on June 21, revealed that the Class Action Complaint, filed by UCP shareholder Joseph Tola, has been settled. The case was filed in the US District Court for the Northern District of California. Mr. Tola, represented by Rosemary M. Rivas, Esq., of Levi & Korsinsky, LLP, sought to stop the Merger unless and until Century/UCP provided greater disclosure to the investing public.

Century/UCP have done that. Most importantly, Century/UCP reveal that they heard nothing from “Party F,” the mysterious foreign bidder who was poor on execution but high on price.

Recall that Party F submitted the highest nominal bid, but its potential to close the deal was questionable. The Amended S-4 reveals that UCP’s bankers at Citigroup Capital Markets spoke with Party F and its representatives to flush out a fuller bid. But since those talks, “UCP and its representatives have neither received nor had any further communication with Party F with respect to a potential transaction involving UCP.”


Apparently satisfied, Mr. Tola and Century/UCP entered into a memorandum of understanding pursuant to which Mr. Tola withdrew his claims and Century/UCP provided the enhanced disclosure contained in the Amended Registration Statement.

This legal tussle was so quick and superficial, we aren’t sure if even the lawyers won.

PICO – Acquisition Vehicle

A few RPN readers have voiced both in private and in public, concerns that this Board will eventually turn PICO into an acquisition vehicle, to utilize the Net Operating Losses and continue their Directorships and paychecks. The fear, we assume, is that value will still reside in PICO and by changing mandates halfway through the ballgame, this Board will deprive PICO owners of that final tranche of value.

We disagree with this fear for a few reasons.

First, the end game is likely very far away and we support the Board’s decision to maintain silence on outcomes so uncertain and so far into the future. There are so many question marks, this Board is not promising anything.

Second, the specifics of the end game are unknown. As PICO sells assets, the portfolio gets simpler and simpler, making a final portfolio acquisition by an outside buyer ever more likely. No one knows if this scenario will materialize, if this buyer will be public or private, or if this buyer will pay with cash or stock. The Board is unable to clarify end game financial scenarios because it has no idea. No one does.

Third, it is our hope that the NOL Acquisition Vehicle scenario is rendered moot (or almost moot) by asset sales. We hope that the NOLs will be utilized for the benefit of existing PICO shareowners when assets are sold for prices higher than tax bases.

Fourth, we believe most PICO shareowners will be long gone before any NOL Acquisition Vehicle scenario materializes. If your PICO NAV is $22 and your time horizon is two years, and PICO hits $19 soon, there is a strong argument to exit the position at $19. As PICO stock continues to climb, we believe that the existing shareholder base will dwindle and new shareholders, some of whom might support an NOL Acquisition Vehicle, will take their place.

Fifth, using the NOLs to make acquisitions may make sense at some date in the future. If PICO assets are sold and NOLs remain, they aren’t much good unless and until they can be offset by operating profits.

To conclude, RPN is not worried by this Board’s unwillingness to declare perpetual allegiance to a return of capital mandate. We have zero concern that this Board would go rogue and change the strategy halfway through the campaign. At this point, there are so many open questions and so many possibilities, one would need an infallible crystal ball to make any promises.

RPN Explains Support For PICO Board – Part 3. PICO Relocates To Delaware. UCP Shareowner Complaint Summary.

Today, in Part 3, we revisit our support for the PICO Holdings‘ Board.

RPN Explains Support For PICO Board – Part 3

Shareholders have voiced three complaints in relation to PICO employment. First, there is no need for a highly-paid CEO and CFO; PICO is in liquidation and any administrative overseer, earning far less, will do. Second, at almost $1 million collectively per year, executive compensation is too high. Third, the burn rate of $9.1 million going forward is exorbitant and amounts to corporate waste due to overstaffing.

We’ll tackle the first two complaints today and leave the third for our next post.


According to their Employment Agreements, Max Webb, PICO’s CEO, earns $496,000 in base salary and John “JP” Perri, CFO, earns $440,000. We agree that $936,000 is a lot to pay two executives of a microcap firm in liquidation.

If their Employment Agreements had been negotiated in an arm’s length, independent fashion, it is unlikely either man would have commanded such compensation. But these Employment Agreements were not produced in a vacuum and the PICO Board did the best it could, given the circumstances and constraints. A little history is in order. This history answers both the question about why the need for a CEO and CFO and the compensation that many PICO shareowners claim is excessive.

The PICO situation started to get messy about 2.5 years ago. The corrupt and incompetent John “The Juicer” Hart was PICO’s dapper don, committing various crimes against shareholders. His underling perpetrators Kristina “Maleficent” Leslie and Carlos “NACD-Decorated Horse Thief” Campbell did his corrupt bidding. In March 2016, the corrupt PICO Compensation Committee, of which the above-mentioned Directors were members, plus Michael “Desperado” Machado and Robert Deuster, promulgated new Employment Agreements for Juicer, plus Messrs. Webb and Perri.

Mr. Webb’s 2016 Employment Agreement, which was 5 years in duration, provided assurance of a large bag of goodies in the event of an “involuntary termination,” in other words, termination without cause. In such an event, Mr. Webb stood to receive 2 years base salary ($992,000), unused vacation time, any unpaid bonus, accelerated vesting of equity awards and one year of healthcare including all dependents.

Mr. Perri’s 2016 Employment Agreement, was similar. If terminated without cause, Mr. Perri would have received 2 years base salary ($880,000), unused vacation time, any unpaid bonus, accelerated vesting of equity awards and one year of healthcare including all dependents.

Now fast forward to late 2016: the Board is comprised of Directors Daniel Silvers, Andrew Cates, Eric Speron, Mr. Hart, Mr. Machado, Howard Brownstein and Raymond Marino (Chairman).

The only decisive action during Delaymond’s tenure occurred when the PICO Board fired Juicer on October 12, 2016. This decision was part pleasure/part pain because while the sinner was excommunicated from the PICO sacred land, it cost about $11 million.

When the Board 86-ed Juicer, it had to find a replacement for CEO. Someone had to handle the liquidation, the financial, the daily decisions and the administrative. Who would it be?

It couldn’t be any of the Directors. None of them are water rights experts, none are homebuilder executives, none are professional liquidators. And none of them probably wanted the job.

The Board could hire someone from the outside, as some RPN readers have suggested, an administrator to oversee the liquidation and handle daily executive affairs. But that would require considerable time, effort and money. The Board would have to retain a search firm, interview candidates, choose one, negotiate compensation and employment terms, pay a signing bonus, get this person up to speed on the Vidler portfolio and UCP, and monitor them closely for at least a year. The whole process could take months and cost many thousands of dollars and dozens of man hours.

Or the Board could simply promote Messrs. Webb and Perri, whose employment terms were already somewhat quantifiable, who already knew the portfolio backwards and forwards, who knew all the people at Vidler and UCP, who accepted the liquidation mandate, who were already involved in any pending transactions, and who were known quantities to the PICO Directors.

Yeah, Messrs. Webb and Perri command higher compensation than an independent administrator would. But when you add up all the costs of finding this theoretical administrator, the time, the uncertainty, the slowdown to the asset sale process, would PICO shareholders have saved anything?

We don’t think so.

In addition, Messrs. Webb and Perri weren’t part of the problem. Yes, we all harbor suspicions as both men for decades turned a blind eye to Juicer’s incompetence and corruption. But to the best of our knowledge, they were not active participants in his corruption and they were not sodomizing corporate governance or inhibiting asset monetizations the way Juicer was.

So that is why PICO retains a well-compensated CEO and CFO to this day, despite the fact that perhaps a lesser-abled individual would do the same job for less base salary. When the PICO Board fired Juicer, it had to weigh the costs and benefits of seeking an outside candidate that would have been cheaper from a base salary perspective, or pay a little more in base and save thousands of dollars in professional fees, dozens of hours of time and the risk of onboarding a new executive and upsetting the monetization process. We believe the choice was easy and the Board selected well.

High Executive Compensation:

The high compensation of Messrs. Webb and Perri can be traced back to the same process. Recall that in early December 2016, Delaymond and Hapless Howie were appropriately thrown from the PICO Board. How did that happen? We have an idea.

When our shareholder oriented Directors, Messrs. Silvers, Cates and Speron, contemplated the Palace Coup, they were short one vote: there were 7 Directors on the PICO Board, but they were only three. To complete the Palace Coup, they needed 4 votes. What were these admirable boardroom rebels to do? (Recall that when Juicer was fired, Mr. Webb took his place on the PICO Board).

We don’t know this for a fact, but our bet is that Messrs. Silvers, Cates and Speron went to Mr. Webb and said, “This is our plan. We depose Marino now, and get rid of Marino, Brownstein and Machado pre-2017 Annual Meeting. After that, we cut the Board to 5. We need your vote to make the majority of 4. Are you in?” Mr. Webb predictably asked, “What’s in it for me?”

Ready to trade some horses, they likely responded: “You get to be Chairman until the Annual Meeting. At the Annual Meeting, we take an advisory vote to improve the optics; its yours for good if shareholders pass it. You get to run the earnings calls, the Annual Meeting, set the agenda for the Board Meetings.

We put on the kid gloves for your Employment Agreement. Your base will stay the same. Your bonus will be achievable and lucrative, but with some lipstick so shareholders can live with it. We wrap up the negotiations quick, so you can get back to running PICO and sleep at night.

All we need is your vote to throw Marino and Brownstein.”

It was an offer Mr. Webb could not refuse.

This was good strategy by Messrs. Silvers, Cates and Speron. When it came to terms of employment, Messrs. Webb and Perri had PICO by the juevos already. Recall that, thanks to the corrupt Comp Committee of 2016, both men had iron-clad Employment Agreements. They were slated to receive half a million dollars per year each already.

In other words, Messrs. Webb’s and Perri’s compensation was legally obligated to be high already. Messrs. Silvers, Cates and Speron simply affirmed that fact, made the revision to compensation more friendly, traded Messrs. Webb and Perri a few horses, and in the process, took control of the Board – the latter of which has been to the enormous, humungous, overwhelming benefit to shareowners.


Given the history and the circumstances, the PICO Board has done right by shareholders in its retention of Messrs. Webb and Perri at their current compensation levels. The alternatives would have left us economically worse off and would have slowed down the monetization process.

So far, the tenures of Messrs. Webb and Perri have been productive for shareowners. Four assets have been sold, the capital return process has begun, corporate governance has been improved, the share price is way up. As we have been saying for months, we continue to be optimistic.

PICO Relocates To Delaware

On May 31, 2017, PICO Holdings formally changed its state of incorporation from California to Delaware. An 8-K filing with the SEC indicates that not much changes as a result of this event. For a summary of the details, refer to PICO’s 2017 Proxy Statement.

In the days following the announcement, PICO stock has risen 8%, from $16.40 to $17.50 – although we don’t see any justification for correlation.

The last time PICO stock traded at $18 per share was over 2 years ago, in May 2015. And since RPN is on the theme of cheeleading the PICO Board, we note that since the Palace Coup in early December 2016, PICO stock has risen 17%, from roughly $15 to $17.50. During this time, the S&P 500 has risen 10%.

UCP Shareowner Files Class Action Against UCP Directors

UCP Shareowner Joseph Tola has filed a Class Action Complaint against the UCP Board of Directors, in the US District Court for the Northern District of California. Represented by Rosemary M. Rivas, Esq., of Levi & Korsinsky, LLP, plaintiff Mr. Tola seeks to stop the acquisition of UCP by Century Communities.

According to Mrs. Rivas, “To the detriment of the Company’s stockholders, the terms of the Merger Agreement substantially favor Century and are calculated to unreasonably dissuade potential suitors from making competing offers.”

Mrs. Rivas cites several justifications for her client’s opposition. First, the deal’s “no solicitation” provision prevents UCP from outreach to other parties potentially interested in a deal. Second, both the UCP and PICO Boards are restricted in their ability to recommend against the acquisition. Third, Century is granted a “matching right” to offer equal gold galleons in the event of a higher offer. Fourth, the termination fee disabuses a fair auction. Fifth, PICO has already irrevocably blessed the marriage with its vote lockup agreement.

Along the lines of what RPN likes to hear, Mrs. Rivas asserts that the dowry of $11.37 is too low. She reminds readers that Citigroup Global Markets‘ own deal analysis indicates UCP is worth as much as $14.40 per share.

As if she billed by the hour, Mrs. Rivas argues that the Registration Statement omitted several salient financial metrics that if included, would reveal UCP’s more than skin deep inner beauty.

Finally, Mrs. Rivas notes that, “Additionally, while the Registration Statement provides that, on April 7, 2017, ‘Party F’ submitted a proposal to acquire UCP in an all-cash transaction for $14.29 to $16.67 per share of UCP Class A common stock—materially higher than the merger consideration—the Registration Statement fails to disclose the nature and timing of Citi’s subsequent discussion with Party F regarding the proposal and whether there were any subsequent communications between Party F and UCP or its representatives. The omission of this material information renders the Registration Statement false and misleading…”

In case you were wondering, Mr. Tola is the proud owner of 100 UCP shares, purchased on November 11, 2013, for $13.75 per share.

See a copy of the Complaint here..

RPN Explains Support For PICO Board – Part 2. M&A Suit Filed Against UCP.

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.
44 Montgomery Street, Suite 650
San Francisco, CA 94104
Phone: (415) 291-2420
Fax: (415) 484-1294
E-mail: rrivas@zlk.com

– and –

Brian D. Long, Esq.
Gina M. Serra, Esq.
2 Righter Parkway, Suite 120
Wilmington, DE 19803
Phone: (302) 295-5310
Fax: (302) 654-7530