BioFuel Energy was founded in 2006 in the middle of the ethanol craze. The company operated two ethanol plants, one in Nebraska and one in Minnesota, which produced ethanol and related products for the company until this past November when they turned their assets over to the lender in a foreclosure. After the foreclosure, BioFuel Energy is now a shell company with two assets, $10.8 million in net cash and the aforementioned $178.2 million in NOLs.
At year end 2013, hedge funds Greenlight Capital and Third Point owned 35.4% and 17.4% respectively of the company, one that's a rare investing black eye for each. The NOLs are clearly valuable, otherwise the company would be liquidated and the $10.8 million would be distributed to shareholders, but the NOLs are only valuable if they can construct a transaction where there isn't a change of control in the mind of the IRS. In comes the home builder transaction where Greenlight is already the lead investor. There isn't much available about JBGL Capital on their website, but Greenlight would only choose an asset that would throw off taxable income to utilize the NOLs, so its reasonable to assume its fairly profitable. I tend to like the residential real estate sector right now and think home builders will have the wind at their back for some time as we're still far below historical new home starts in the US. The millennials generation will one day move out of their parents basement and start buying homes, just might take longer than most expect due to the financial crisis hangover and student loan debt.
Transaction Details, $275 million for JBGL Capital, compensated by the follow ways:
- $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, with each holder able to purchase shares at 80% of the 10 day average closing price following the official registration statement. Maximum price is $5.00, minimum is $1.50.
- 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.
- Cash of $10.8 million currently held by the company
However everything else sets up pretty nicely, post transaction, David Einhorn will become the Chairman of the Board and James Brickman will be the CEO and join the board as well. So Greenlight will remain the sponsor and presumably a long term shareholder of BioFuel in order to retain the NOLs, any "change of ownership" would disqualify the NOLs in the eyes of the IRS.
At the current price of about $5.30, you get around $2 per share in cash and the market is valuing the NOLs at $3.30 per share or only ~$17 million. That's a reasonable valuation without any specific details of JBGL Capital which should come with the rights offering and subsequent filings. BioFuel Energy, probably due to its name, former industry and low float, seems to now be on the radar of unsophisticated momentum traders which could make for a wild ride until the transaction is completed, but I took a very small starter position in the name (with the intention to participate in the rights offering) as I think there could be substantial upside once the dust settles.
Disclosure: I own shares of BIOF