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/ have taken to the Internet to advance the shareholder cause.
The bloggers celebrate PICO’s first asset sale. “On October 10, 2016 the New Directors on the PICO Holdings’ Board delivered for shareholders: PICO sold the majority of Mendell Energy LLC’s Colorado assets for $10.2 million.
As of December 31, 2015, Mendell owned over 780 acres of oil and gas leases in the Wattenberg Field in Colorado and 640 acres of oil and gas leases in Wyoming. Mendell has drilled four wells over the last three years. The press release indicates that PICO has sold the majority of the Mendell assets in Colorado. We assume that PICO/Mendell still retains certain assets in Colorado and the 640 acres in Wyoming.
PICO began investing in Mendell Energy in 2012, but it was first mentioned in SEC filings in 2013. In 2014, PICO wrote down the carrying value of Mendell by $4.4 million, from $6.1 million to $1.7 million. In 2015, PICO invested an additional $5.3 million in Mendell Energy. We calculate total investment in Mendell: $11.4 million ($6.1 million + $5.3 million).
The press release trumpets an $8.6 million gain — but don’t let that figure fool you. Total capital invested in Mendell Energy is $11.4 million. Given asset sale proceeds of $10 million (assuming $200,000 for transaction costs), PICO shareholders are still underwater on Mendell by $1.4 million. Other Mendell assets remain to be sold, but at this point, Mendell Energy is like any other John Hart trade: a loser for PICO shareholders.”
The bloggers are satisfied with the role PICO CEO John Hart is playing. “With the Mendell sale, Juicer is finally filling a role that he is capable of: executive carrier pigeon. It appears that Juicer was in charge of talking on the phone and relaying information to the Board for their approval of the Mendell asset sale. And that’s all he should be doing. He has proven himself inept at all other facets of executive management. While grossly overpaid, at least he can do little harm as a carrier pigeon of information.”
The bloggers also laud the transaction’s tax efficiency. “We believe that the Mendell sale will not consume deferred tax assets that belong to shareholders. We believe that the $4.4 million Mendell writedown was for financial statement purposes only, thereby creating a deferred tax asset on the PICO balance sheet. We believe that the tax basis of the Mendell assets was probably about equal to sales proceeds, producing in little to no tax effect.”