FOR - Forestar Group

[BG2008]

I don't think this was that much of a take under frankly.  I've been tracking this company from the sideline for a few years now.  At one point, my entry point was about $15/share.  Clearly I was early/bought too high.  Luckily the position size was small.  I was never fully confident in the assets. 

 

The issues is that an orderly liquidation doesn't actually yield that much from the lots.  Despite an impressive feat in slashing cost.  There is a still an incredible amount of SG&A in the lot business.  I'm increasingly learning that lot development is a pretty terrible business.  It justifiably deserve a very high IRR due to the high SG&A, depletion, constant need to re-invest in newer lots, etc.  At one point, a caller asked them about what the company will do with lots.  Management mentioned that "you can easily track how many we have been selling" and add the gross margin and back into a number.  They also suggested that investors can look at the total inventory and divide by the depletion rate and can back into when they will need to acquire new lots again.  Frankly, I estimated that the inventory will only last a few years without new acquisition and or developments.  The water rights were written down and I think they were acquired for about $12mm or so.  At one point, I did a bunch of math and couldn't justify buying at $13 per share.  The truth is that the buyers need to make a profit as well.  And they are taking on incredible risk to wind this down.  There is some parallel between this and CTO.  CTO shopped their assets and found buyers with a $50 price.  I've talked to some RE guys in the private market who said that the discount rate for land lots should be 20+%. 

 

I think the key here is to find people who are very talented who can actually earn those 20% IRR.  Then you could be sitting on a large position that can be harvested/developed correctly.  Without talent and urgency, these assets tend to lose value over time as the SG&A absorbed so much of the value. 

[thepupil]

Fair points BG, though I'd counter this was far more favorably priced than CTO. I can't decide whether to hold what remaining shares I have or move on. It's an all cash merger with no financing risks set to close in 2 quarters so I feel like the risk of holding is low but I don't have a strong sense of the probability of an increased or different Bidder.

 

Based on the thread, CTO was actually looking to make a hostile run at FOR.

[thepupil]

DR Horton bid for 75% at $16.25, guess I sold too early. Wonder if Starwood will counter?

 

https://www.reuters.com/article/us-forestar-grp-m-a-dr-horton-idUSKBN18W1B7

 

 

D.R. Horton Bids $16.25/Shr for Forestar Stake, Topping Starwood

By Felice Maranz

(Bloomberg) -- D.R. Horton submits proposal to Forestar board to buy 75% of FOR for $16.25/share cash, 14% premium vs existing $14.25/share merger agreement between FOR, affiliates of Starwood Capital.

FOR shares up 9.2% pre-mkt to $15.50

Under DHI proposal, FOR would remain public co. to ensure continued access to capital to support increasing scale

DHI sees value for FOR holders in strategic relationship helping FOR grow organically into leading residential land development company in U.S., selling developed residential lots to DHI, other homebuilders

FOR would be led by new executive chairman Donald Tomnitz, who served as DHI CEO for >15 years

Transaction would be effected via merger of newly formed, wholly owned subsidiary of DHI with FOR

Would have cash election feature, with FOR holders having right to elect either to receive $16.25/share in cash or keep shares of surviving entity

Cash, stock elections will be prorated so that 75% of FOR shares otstanding before merger are converted into $16.25/share cash consideration

Post-merger, DHI would own 75% of outstanding FOR Successor shares, existing stockholders would own 25%

DHI has cash, other immediately available capital to fund ~$520m investment

Moelis advising DHI

NOTE: April 13, Forestar Group to Be Acquired by Starwood Capital for $605m

Call 8:30am 877-407-8033

[colinwalt]

DR Horton bid for 75% at $16.25, guess I sold too early. Wonder if Starwood will counter?

 

https://www.reuters.com/article/us-forestar-grp-m-a-dr-horton-idUSKBN18W1B7

 

 

D.R. Horton Bids $16.25/Shr for Forestar Stake, Topping Starwood

By Felice Maranz

(Bloomberg) -- D.R. Horton submits proposal to Forestar board to buy 75% of FOR for $16.25/share cash, 14% premium vs existing $14.25/share merger agreement between FOR, affiliates of Starwood Capital.

FOR shares up 9.2% pre-mkt to $15.50

Under DHI proposal, FOR would remain public co. to ensure continued access to capital to support increasing scale

DHI sees value for FOR holders in strategic relationship helping FOR grow organically into leading residential land development company in U.S., selling developed residential lots to DHI, other homebuilders

FOR would be led by new executive chairman Donald Tomnitz, who served as DHI CEO for >15 years

Transaction would be effected via merger of newly formed, wholly owned subsidiary of DHI with FOR

Would have cash election feature, with FOR holders having right to elect either to receive $16.25/share in cash or keep shares of surviving entity

Cash, stock elections will be prorated so that 75% of FOR shares otstanding before merger are converted into $16.25/share cash consideration

Post-merger, DHI would own 75% of outstanding FOR Successor shares, existing stockholders would own 25%

DHI has cash, other immediately available capital to fund ~$520m investment

Moelis advising DHI

NOTE: April 13, Forestar Group to Be Acquired by Starwood Capital for $605m

Call 8:30am 877-407-8033

 

Likewise - sold too soon  :'(

[thepupil]

And another bid @ $17.75... :'(