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Double or Nothing, One of the Stranger Stocks That I've Seen in a While



April 25, 2014 – Comments (10) | RELATED TICKERS: GRBK


OK, I'll bite. I just read a compelling investment case for Biofuel Energy Corp. (BIOF) even though it has more than doubled since the start of the year.  This is one of the stranger stocks that I've seen in a while.  I could easily see it doubling or being worth nothing by this point next year.

To make a long story short, the super investor David Einhorn of Greenlight Capital made a bad investment in this biofuel company. A month or two ago he made a proposal to them to purchase a luxury home builder and financier that he co-owns with Jim Brickman in exchange for 49.9% of the company's stock for him and 8.4% for Brickman and that he would give them a $150 million loan at 10%.

So is this a good deal for BIOF shareholders? If the company's board accepts it, and that's a big IF, Farukh Farooqi of a successful special situation-esque fund called HBC Marquis Partners thinks so. He recently presented the following information on the company...

- BIOF has $174/share in net cash
- And more attractively, $178 million or $29/share of net operating loss carry forwards
- "Assuming an unlevered return of 15% - 20%, a transformed Biofuel could generate earnings per share of $1.50 - $2.50."
- Applying the current median earnings multiple of other public home bulders to that (16) would result in a stock price of $24 - $40 per share.

It seems like a lot could go wrong with this deal, but if it does go through and the home builder is managed decently even at a multiple that's half that of other companies in the sector this stock would double. Of course, it also could be worth nothing ;). Anyhow, I'm taking a flier on this in CAPS. If anything, it will be interesting to follow.

Thanks for reading.  Have a great weekend!  As always let me know if you come across any interesting special situation-like investment ideas.


10 Comments – Post Your Own

#1) On April 25, 2014 at 11:37 AM, constructive (99.97) wrote:

- BIOF has $174/share in net cash

Off by a couple of decimal places? Right now they have around $1.30/share in net cash.

How well do you understand the legal implications of change in control on the net operating losses? I don't understand how they can do this transaction without a change in control, wiping them out.

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#2) On April 25, 2014 at 12:18 PM, TMFDeej (98.33) wrote:

HA.  Good Catch Mega.  That should have been $1.74/share.  Amazing what a difference a decimal point makes isn't it?  $174/share would have been one heck of a pop for a single digit stock.  I'm not surprised that the cash per share is lower now.  There's definitely going to be some burn at a company withmanagement but no viable business.

I can't claim to understand all of the legal nuances here.  That's why right now this is a CAPS only trade.  I am NOT putting any real money into this one, unlike many of the other ideas that I hold here in CAPS.  One would have to think that both Einhorn and HBC Marquis Partners understand BIOF's ability to apply its past losses to a new future business.  I've certainly seen it done before.  Of course we all know what happens when we assume so again this is only something that I'm keeping an eye on for now. 


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#3) On April 25, 2014 at 12:42 PM, constructive (99.97) wrote:

Here is a quick model.

Step 1: $70M rights offering at $5. More or less fully subscribed since it's 40% below the current price.

Result: +$70M, +132% increase in share count (14.5M shares), no change in proportional ownership.

Step 2: JBGL acquisition for $150M debt, 23% of equity (58% - 35%) and the remainder in cash. At the current price, that's $37M in equity and $88M in cash (primarily funded from the rights offering and current balance sheet).

Result: +JGBL (value unknown), -$233M, +30% increase in share count (18.83M shares). At the current price, a $160M market cap.

Now it really depends on how good a business JGBL is and how much goodwill is in the price. Which I don't think BIOF shareholders have any visibility on. But if it is going to earn 15-20% ROTE, would Einhorn and Brickman really be willing to sell at book value?

JGBL book value    P/B      Net Income (15% ROTE - interest)      PE 
$157M                  1.75x            $8.57M                                  18.7
$183M                  1.5x              $12.45M                                12.9
$225M                  1.25x            $18.75M                                  8.5

I think it might have 0% - 100% upside, but unlikely 200% - 400% upside as HBC Marquis suggests.

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#4) On April 25, 2014 at 12:49 PM, constructive (99.97) wrote:

Correction, ROTE should be ROTA.

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#5) On April 25, 2014 at 1:09 PM, Schmacko (89.15) wrote:

This article implies the only reason for the takeover offer is the NOLs, which is BIOF's only real asset.

Brickman becomes the new CEO, and I'm assuming the compnay will change its name since it has no Biofuel related business anymore.  Seems like a great deal for Brickman and Einhorn.  I don't know how well BIOF shareholders really come out though.  Anyone who has been lucky enough to have been holding since $1.80 probably should have sold off by now.

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#6) On April 25, 2014 at 1:51 PM, constructive (99.97) wrote:

Side note, doing a huge rights offering far below market price in a penny stock strikes me as ethically questionable. Greenlight and other large exercizers will benefit at the expense of small retail shareholders who are too cheap or uninformed to exercize.

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#7) On April 25, 2014 at 4:31 PM, TSIF (99.97) wrote:

I don't think it works well to look at today's share price after the announcement several weeks ago.  I think the best for shareholders is baked in AT BEST. I think in reality, the current shareholders aren't going to realize $3-4 per share if that.  (I actually doubt $2-3).  What's a good deal for Einhorn, who I agree is savvy is rarely a good deal for shareholders. What it seems to me he is trying to do is get something for what is currently worth nothing.  When a company gets as far down the drain as BIOF there is little to salvage without getting creative.

Einhorn will loan them the money at high interst and as a secured creditor against the Real Estate firms.  NOL's are only of value if you expect to take more losses in your new business, so it doen't appear Einhorn is valuing it vary high either. 0.1 + 0.5 might equal 1 if the two pieces go together, right now they aren't worth much stand alone.

AS far as cash and other assets, the short term debt is more than the current assets on the open market.

Interesting, play and good for educational purposes.  I agree that you it will be worth much more or much less.....much more to Einhorn, much less to shareholders.  :)

I'll play it on the downside again, after another irrational pop.  The story of BIOF at this point is the ultra low float which is "SUPPOSE" to be somehwere between 1.5M shares and 5.44M shares outstanding.

I understand day traders, I understand speculators, I understand shorts, reupping, etc.
I don't understand how 18M shares can trade hands on the first spike 31March in one day, and 7M shares on April 17th in one day.  Both generating 25% plus share price increases.

Since March 31st, we have 46M shares trading hands on a 1.5M share float???

IS this arbitration?  I don't think so, I think it's transfer of wealth and while large share holders are "suppose" to file, I think someone is making money here, maybe on multiple plays and perhaps the Real Estate transaction is only a small piece.

I try not to be too cynical, (really I do), but these stubs that "supposedly" reverse split down to miniscule shares appear to me to demonstrate that the SEC needs do a study on counting.....



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#8) On April 25, 2014 at 5:18 PM, constructive (99.97) wrote:

NOL's are only of value if you expect to take more losses in your new business

This is backwards. NOLs are only valuable if your business becomes profitable.

Tax assets aren't like normal tangible assets since you can't earn a return on them or monetize them. But they can enhance the return on other assets since they reduce the effective tax rate.

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#9) On April 25, 2014 at 6:56 PM, TSIF (99.97) wrote:

I agree Mega, thanks for the correction.


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#10) On April 25, 2014 at 7:07 PM, TSIF (99.97) wrote:

MrMonopoly pointed out this article on one of my pitches that explains the rights offering/change of ownership.

While I agree that the real estate companies, and Greenlight may benefit by this proposed trasaction, that current shareholders will not.

My only experience with NOL's are SEC complaints against a few other companies who carried these on their books incorrectly. The companies who "inherited" the NOL's and carried them as an asset never made any money to speak off, and never utilized them.

Thanks again Mega. 

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