St. Joe Co., the Florida developer criticized by hedge-fund manager David Einhorn, fell 7 percent Wednesday in New York trading after the company said it hired Morgan Stanley to explore a possible merger or sale.
St. Joe will consider a new business plan, partnerships, joint ventures, alliances, asset sales and acquisitions, the Watersound, Florida-based developer said in a statement. The announcement came a month after Bruce Berkowitz and Charles M. Fernandez of Fairholme Capital Management LLC, the company’s biggest shareholder, were named to the board.
Berkowitz and Einhorn have placed opposing bets on St. Joe, the largest private landholder in northern Florida. The timber company-turned-developer, which has reported 10 consecutive quarterly losses, may have trouble finding a buyer, said James Wilson, director of research at JMP Securities LLC.
“I question anyone buying it,” Wilson said in an e-mail from San Francisco. “With no earnings, it’s tough to get a deal done with any private or public buyer. I think they decide to grow the business beyond the Florida panhandle, probably through acquisition.”
The shares dropped 7.1 percent to $27 as of 4:15 p.m. in New York Stock Exchange composite trading. The stock had gained 16 percent from Jan. 12 through yesterday after the company said it ended a cap on Fairholme’s ownership and that the investor can discuss alternatives for the company with the board.
Fairholme owns about 29 percent of St. Joe’s shares. Berkowitz, named U.S. stock-fund manager of the decade last year by research firm Morningstar Inc., said he and Fernandez “applaud” their fellow St. Joe board members for taking steps to explore options.
“Yesterday was a good day for Joe and its shareholders,” Berkowitz said in a statement. “Joe’s independent directors know they have more to do. Stay tuned.”
It may be hard for St. Joe to find a buyer given the stock’s valuation, Einhorn’s hedge fund Greenlight Capital Inc. said. Einhorn, who profited from bets against Lehman Brothers Holdings Inc. in 2008, said in October he had taken a short position in St. Joe because the property owner needs to take “substantial” asset-impairment charges on its land.
St. Joe said last month that the Securities and Exchange Commission opened an informal inquiry over the company’s policies for impairing investments in real estate assets.
“With the company trading at more than three times its value, it is easy to see why the Board wants to sell, but hard to fathom why anyone would buy,” Greenlight said in a statement. “The lack of cash flow creates a particular challenge for any financial buyer.”
Short selling, or bets against the stock, increased to a 52-week high of 27 percent of outstanding shares on Jan. 25, according to data compiled by Data Explorers, a New York-based research firm. That compares with a low of 12 percent a year ago and 17 percent on Oct. 12, the day before Einhorn said he was betting against the stock.
St. Joe’s market value of about $2.5 billion indicates that its 576,000 acres of land are worth about $4,400 an acre. That is “way too high” compared with what other undeveloped Florida land fetches, said John Burns, chairman of John Burns Real Estate Consulting in Irvine, California
‘At the Bottom’
“I’ve got plenty of clients now looking at land,” Burns said in a telephone interview from Sacramento, California. “And St. Joe’s land is at the bottom, really because you can’t develop or monetize much of it anytime soon.”
St. Joe’s land, in Florida’s panhandle, is valuable mostly for its timber, because demand for new homes and commercial property will remain weak for years, said Steven Ruoff, senior associate at Land Advisors Organization, a Scottsdale, Arizona-based land broker. Florida timberland gets about $2,000 to $3,000 an acre today, he said.
“If they just want to sell the whole company as is, they’d take a scalpel and cut very deep on the price,” Ruoff said.
St. Joe reported a net loss of $13.1 million and revenue of $27.1 million for the quarter ended Sept. 30.
The company is more likely to seek partnerships or joint ventures rather than a merger or sale, Sheila McGrath, an analyst with Keefe, Bruyette & Woods in New York, said in a telephone interview.
“It’s an asset-rich, no-debt company,” McGrath said. “Those alternatives are going to include things that will enhance the value more quickly. So I think there’s more upside than downside.”
Raymond James & Associates Inc. cut St. Joe to “market perform” from “strong buy” today.
“This is a prudent time to step to the sidelines,” Buck Horne, a St. Petersburg, Florida-based analyst, wrote in a note to clients. “A neutral investment position is appropriate until more details are revealed.”
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