Tuesday, October 6, 2020

BBX Capital: New BBXIA, Form 10 Notes

BBX Capital is a familiar name, I wrote it up about three years ago when they were floating a 10% piece of timeshare operator Bluegreen Vacations (BXG) with the idea that the rest of the enterprise was trading at a negative value due to the HoldCo discount and shady management team.  That strategy was largely unsuccessful, (not one of my better pitches in hindsight), next BBX tried to take Bluegreen private again but then the timeshare operator got into a dispute with their largest marketing partner, Bass Pro Shops, and BBX pulled the offer.  And now just recently, BBX is at it again, this time engineering a spin where they've separated their 90% BXG stake as Bluegreen Vacations Holdings (BVH) - mind you, BXG still trades separately - and then spun out the rest of their assets as "new" BBX Capital (here's the form 10).  New BBX Capital (BBXIA) trades for a significant discount to its net assets, even when considering a significant discount for the grifter management team (Levan's son is now set to run new BBX).

New BBX Capital has a few attributes that make it a potentially cheap spinoff, although due to management, I do not want to be caught holding this for the long term:
  1. Taxable spin - some investors might treat it as a dividend, already getting taxed on it, sell
  2. Trades OTC - some investors might not be able to hold over the counter securities, or might worry that a few weeks after the spin it might be too illiquid to hold, sell now when there is some liquidity
  3. Grab bag of assets without GAAP earnings - new BBX is largely cash and a promissory note from BVH, but the other asset include real estate in Florida and a door manufacture, Renin, that both could benefit from covid-induced tailwinds
For every share of old BBX Capital, investors got 1 share of new BBX (there is a dual share structure here, again, grifter management with a history of run ins with the SEC) for a total of approximately 19.3 million shares outstanding.  Shares have been volatile since the spin, but I'm going to use ~$4.00 as the current price for the write-up, which gives us a market capitalization of approximately $77MM, here are the proforma assets of new BBX Capital:
  • $96.5MM of cash
  • $75MM promissory note from BVH, as part of the spinoff and to provide some cash flow to BBX, BVH will be paying 6% on the note put in place between the two entities, BVH is essentially a levered bet now on BXG (I assume the longer term play is for the two Bluegreen entities to merge, but I'll leave that aside for now).
  • $162MM book value of real estate assets, much of which are new construction developments in Florida, the historical BankAtlantic real estate assets have largely runoff, but there's still some upside in the book value.  Post financial crisis, BBX has been reasonably good real estate investors, some of that was helped by marking the assets at extreme lows following the financial crisis, but there could be some acumen here.
  • Additionally there some other assets including a bankrupt IT'SUGAR chain of candy stores (appears they're using Chapter 11 to get out of some unprofitable leases, BBX is providing the DIP financing), Renin the maker of doors which should benefit from a housing boom and did a little more than $2 million of EBIT in 2019, and a restaurant in Florida, for the purposes of this simple math, we'll throw these assets in for free.
  • On the minus side of the equation, there is $42MM of debt and then however you want to capitalized the oversized corporate G&A, which was a proforma ~$21MM in 2019, maybe 5x that?  So call it -$150MM in debt and overhead in the sum of the parts.
So on a very basic back of envelope math, I come up with a value of roughly $9.50 per share, more than double the current price, feels crazy but book value is around $15.50 per share (I'm backing out the carrying value of IT'SUGAR), ~60% of book value seems reasonably discounted for the all the hair involved here considering it's not a melting ice cube.  I assume the end game with new BBX is to eventually do a take under by management, making it a taxable spin and OTC listed, seems intentionally designed to sell cheap.  I don't intend to stick around that long, but I bought a few puked out shares, unfortunately didn't get them late last week when they traded much cheaper -- pays to be on top of these small spins.

Disclosure: I own shares of BBXIA

9 comments:

  1. I agree with your assessment. The only thing I would add is that much of the debt is non-recourse/asset specific. That should provide upside to downside liquidation value scenarios, as the debt would only have recourse to the underlying real estate liens (not the corporate entity).

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  2. If you can get past management’s history of blatant abuse of public shareholders, it’s cheap. They find ways of destroying capital at every turn.

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  3. BBX is more favorable overall. But I'm definitely going to put on a small position on the Bluegreen Holding company. Because the leveraged upside is out of this world. If BXG gets back to pre-covid levels you're looking at ~300% upside at the holding company level.

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    1. Thanks, I might steal this thought as a reopening trade. BXG probably recovers first of the timeshares due to their more drive-to locations, mostly in the southeast where people seem to care less about covid.

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  4. Based on my math BVH is trading at a 52% discount to BXG based on the 90% ownership of BXG minus the 75 million promissory note. If you think merger is highly likely probably worth shorting shares of BXG and buying BVH and locking in 50%.

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    1. I don't think I would do a paired trade, part of the thesis would be that travel returns, timeshares generally have a kitchen, leisure travel, not relying on business convention, maybe another round of stimulus acts as a downpayment. I can construct a scenario where Bluegreen does pretty well despite the Levans.

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  5. Any opinion of the stock repurchase plan? Feels like this was the plan to begin with

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    1. Yeah - I think part of the playbook here is to intentionally make the company cheap, buyback some shares without paying a premium to the market, then some day in the distant future opportunistically take it private.

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    2. Good point and if so kudos to Mgmt for the plan, also possible they are reducing shares outstanding and then going to sell off assets to potentially juice EPS and hit some bonus/comp #s.

      The below that I found in the spin off filings supports both our points; from Page 44 https://www.sec.gov/Archives/edgar/data/1814974/000119312520171471/d918088dex991.htm:

      Utilizing the reduced disclosure requirements applicable to New BBX Capital may make New BBX Capital’s common stock less attractive to investors.

      New BBX Capital qualifies as an “emerging growth company” and is therefore eligible to utilize certain reduced reporting and other requirements that are otherwise applicable generally to public companies. Pursuant to these reduced disclosure requirements, New BBX Capital is not required to, among other things, provide certain disclosures regarding executive compensation, hold shareholder advisory votes on executive compensation or obtain shareholder approval of any golden parachute payments, and New BBX Capital has reduced financial disclosure obligations.

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