JBGL Capital is a residential land developer with 4,300 lots spread pretty evenly between the Dallas-Fort Worth and Atlanta markets. They own a 50% interest in a few different home builders that operate in their communities, this appears to be a point of emphasis going forward as the home building margins are better than just straight land sales, but there is value in the hybrid model. JBGL was formed in 2008 during the financial crisis and as a result doesn't have the legacy issues of other home builders, also much of the land on the books is likely understated.
To reiterate, the $275MM price tag will be paid as follows:
- $150 million in debt financing provided by Greenlight, 10% fixed interest rate for a 5 year term with a 1% prepayment penalty during the first two years.
- A rights offering of at least $70 million at a $5 offering price. The rights trade under the ticker BIOFR, 2.2445 shares per right, expiring on 10/17/14.
- Equity issuance to Greenlight/Brickman, this will ensure that Greenlight owns 49.9% of the shares following the rights offering and James Brickman will own 8.4% of the shares.
- $8 million cash currently held by the company.
Proforma Income Statement
Eventually the market momentum traders will exit and fundamental investors will move in and value the company based on its assets and earnings stream. Below is the proforma income statement for the first six months of 2014, there are few items included in the proforma that are hiding the true earnings power of the new Green Bricks Partners (it will lose the BioFuel name after the transaction is finalized).
The SG&A at BioFuel Energy is overstated and double counted with JBGL this year as the company evaluates and goes through this reverse merger process, strip out $3MM there. Additionally, the proformas are including a 40% income tax expense even though taxable income will be shielded by the NOLs for the foreseeable future, add back another $1.6MM. Lastly, the interest rate on Greenlight's debt is above market and should be refinanced after Green Brick seasons a bit as a credit. At a 7.5% interest rate, Green Brick would save $1.73MM over the six month time period. Making those adjustments and the proforma Green Brick Partners would have net income of $0.28 per share, or $0.56 per share annualized. Even putting a 15x market multiple on Green Brick, and the shares could be worth ~$8.40. Keep in mind that management has projected 50.4% revenue growth in 2015 creating additional potential upside as BioFuel transitions to Green Brick Partners and becomes valued as an operating company versus an NOL shell.
Duff & Phelps Fairness Opinion
Another fun piece of this transaction is the Duff & Phelps fairness opinion of the $275MM price tag for JBGL Capital. Fairness opinions are used by boards as a CYA tool, almost always the adviser hired by the board will back into the price paid by cherry picking comps and adjusting the discount rates around to achieve the desired result.
As I write this, BIOF is trading for $6.21 and BIOFR is trading for $3.03 (implying a $6.34 share price (2.2445*5+3.03)/2.2445)) making BIOF the better bargain, but the relationship has been moving around a lot so double check before making any decisions. BIOFR also includes the possibility of an over-subscription allocation that could sweeten the pot a bit as well. I didn't anticipate Greenlight putting such a valuable asset inside of BIOF, but in hindsight it does make sense as it needs to generate a lot of taxable income to monetize the NOLs and make the transaction worthwhile.
Disclosure: I own BIOFR, plan to fully subscribe to the rights offering
The debt is actually just a revolver. So I'm not sure 100% of the money will be used. Depends on if they can get outside financing for their large master-planned communities.ReplyDelete
Also what are your thoughts on the master-planned communities? Build-out value is $720m for the two largest mpc. If they take less than 4 years to complete and make most of the sales this is going to double the net income/year for Green Brick (hate the name but voted for it in the proxy lol).
Some of the 100% owned luxury builders are pretty interesting as well. Southgate could bring in $26m-$33m in revenue itself over the next few years. Centre Living Homes should be somewhat interesting too as the master-planned communities come online.
There's tons of free options in this one. Sort of a heads I win tails I don't lose that much scenario.
Could you point me to where you see the debt being a revolver? I see the revolver at the JBGL level, but the $150MM looks like straight debt financing back to Greenlight. I don't really have an informed opinion about the MPCs or the local markets, but I like the overall business model. Hope your estimates turn out accurate and I agree there seems to be a few ways to win here.Delete
Thinking about this some more and you're right in a sense, while I don't think it's a revolver, the wording is "up to $150MM", so if the Equity Issuance to Greenlight and Brickman is made at more than $4.95 a share (average of the 5 days leading up to the acquisition), then not all of the $150MM debt will be needed. That said, if the price is for some reason less than $4.95, BIOF will need to dip into its cash. Provides some additional upside, because if the Equity Issuance is made at today's price of $6.51, only $132MM of the $150MM will be needed, that drops the annual interest expense by ~$1.7MM a year.Delete
Are you at all concerned that about the pricing of equity component of the purchase of JBGL? This will happen once the rights offering expires (IIRC, they will take the average of the five trading days after the offering expires). The problem is that the lower the stock price, the greater the cash component of the transaction becomes. This lowers the cash available to the merged entity and could even increase its indebtedness. The CFO has said that if BIOF doesn't have enough cash after the rights offering, the company will issue more debt to Greenlight to cover the cost of the acquisition.ReplyDelete
Once the offering is complete, you may see the stock price move materially lower, as people seek to get out in front of the equity issuance.
I agree with your point, could have some near term pressure on the stock price after the rights offering but I think the longer term story is the driving factor now. Greenlight and Brickman are going to be aligned with shareholders to drive long term value here, what happens in the next month is less of concern to me.Delete
Sort of along the same lines as above, I think the magic number is $4.95 a share on the Equity Issuance component, if the shares are above that level then less than $150MM in debt will be issued to Greenlight, if shares are lower than that BIOF will need to dip into its cash and then some potentially. But given all the parties lined up in the backstop agreement willing to purchase shares at $5, seems to some comfort that shares shouldn't trade that low? Thanks for the comment, made me dig a little further into it.Delete
Why invest in the rights offering instead of BIOF?ReplyDelete
I bought the rights on Tuesday, there was some confusion about whether BIOF was trading ex-rights or not, so I incorrectly thought the rights were drastically mispriced compared to the common. But since then the spread has closed and it doesn't really matter which you buy, other than an extreme situation where the transaction gets canceled and the rights end up worthless.Delete
Stock market is a wonderful thing. Take BIOF for instance. Over the past few weeks, what has changed in this story except price of the stock? Same thesis, same company, same value unlocking event but now being valued at a fraction of where it was a few weeks ago. As i get older and more experienced, the stupidity of market participants keeps getting clearer to me (though i must confess I am not wholly immune to it myself, on rare occasions..). I think this one will play out just fine.ReplyDelete
Does anyone know the closing date. I have been accumulating the shares and my advisory service has recommended the shares to our subscribers. H.S. The Focused Stock TraderReplyDelete
Sorry, was traveling, but in case you missed the announcement of the deal closing on Monday (10/27/14): http://www.bfenergy.com/news/Green_Brick_Closing_Press_Release_108416712.pdfDelete
I received my shares from the rights offering on Tuesday (10/28/14).
New ticker symbol GRBK but no presence of website yet.ReplyDelete
True, but I'll give them the benefit of the doubt on the website, I'd expect to see more transparent communication with shareholders about the prospects of the home building business now that the deal has officially closed.Delete
Thanks for your blog and perspective. Curious what your thoughts are on today's news release. Thanks again.ReplyDelete
I think we should expect results to be fairly lumpy quarter to quarter so I'm not going to read too much into the 3rd quarter JBGL results. I am curious how the call shapes up on Thursday. One fun fact, James Brickman was a central character in Einhorn's book "Fooling Some People All of the Time", did a lot digging through Allied Capital's bad loans and that sparked a longer term business relationship with Greenlight. Thanks for the comment.Delete
Brickman's role in Fooling Some People All of the Time was classic. The fact these two are now partnering together is a good example of karma after fighting Allied Capital. Thought the strategy laid out on the conference call was encouraging. If you have a moment, what were your thoughts. Thanks gain for this blog. Becoming one of my favorites.ReplyDelete