Description

SUMMARY: This is a quick and dirty explanation of BIOF, majority owned by David Einhorn and Dan Loeb . BioFuel Energy(BIOF and BIOFR) is a short term trading opportunity caused by a low float, and the issuance of rights related to a soon-to-close-merger transaction, resulting in the stock trading well below its liquidation value of the pro forma entity with huge upside, perhaps as much as 50% in the near term. A year out, this stock could likely be a two-bagger or better based upon company fundamentals, that make it stand apart from the crowd.

A COMPLEX TRANSACTION: BIOF is merging with a private company controlled by David Einhorn. BIOF is a SPAC with approximately $180MM in NOLs, a few million dollars in cash, and no operating assets. In March of 2014, David Einhorn, a current member of the BIOF Board, filed a 13D upping his stake to approximately 35% from 27% and proposed a merger with JBGL, a private real estate operator involved in the purchase of land for residential development, homebuilding and construction finance in the metropolitan areas of both Dallas, Texas and Atlanta, Georgia. JBGL is majority owned by Greenlight Capital.

The deal structure is complicated, valued at $275MM consisting of $70MM of gross proceeds to be raised in a 14MM share rights offering struck at $5, issuance of new stock to Greenlight as well as to Jim Brickman, JBGL’s CEO, to get them to 49.9% and 8.4% of pro forma outstanding shares, respectively, and the balance to be paid in cash.

The source of cash for the acquisition would be a 10% $150MM term loan from Greenlight to the surviving entity, to be renamed GreenBrick Partners. The rights offering is backstopped by Third Point, a current 16.7% holder of BIOF as well as four firms committing to buy up to 4.99% each of the pro forma stock. The backstop parties are JMB Capital Partners, Lonestar Partners, North Run, and Scoggin.

Third point has an oversubscription right to keep its stake at 16.7% to make up for the dilution caused by the issuance of new shares to Greenlight and Brickman. Of the 14MM shares to be issued via the rights, each of which entitles the holder to buy 2.2455 shares @ $5, 7.3MM will be purchased by Greenlight and Third Point in conjunction with their existing stakes. Third Point’s backstop obligates it to purchase another 1.8MM shares in the RO, and the four other backstop parties will each purchase up to 1.56MM shares. This totals about 15.6MM shares, which is about 110% of the 14MM shares to be issued via the rights.

VOLATILITY CAUSED BY SMALL FLOAT & DAY TRADERS: BIOF is still largely traded by day traders who believe it is an ethanol play (for instance, you can compare stock charts of BIOF and PEIX to validate my assertion) and a substantial amount of the 3.2MM share float can trade in a single day. As subscription rights have materialized in retail accounts, mostly day traders with no understanding of them, it caused them to sell the rights at any price. This, in turn, has resulted in BIOF common getting dragged down with BIOFR. GL is likely loving this, as the new stock they are to be issued is going to be priced at the daily VWAP of BIOF in the five days prior to close of the JBGL acquisition. The net result is less cash on the pro forma balance sheet.

THE RIGHTS OFFERING: The rights expire on October 17, but trading will be suspended on Tuesday, October 14th to allow a full settlement cycle prior to expiry. BIOF shareholder vote is scheduled for

October 17, and the deal will likely close within 2-3 business days of the vote. Once the rights stop trading, I believe that there may be a sharp upward reversal in the price of BIOF into the closing of the transaction or shortly thereafter. Assuming the backstop parties are not called upon, between GL, 3rd Point and Brickman, approximately 75% of the 31.4MM pro forma shares will be held by insiders. Over the medium term, I would expect the company is likely sold after the NOLs are used and a change in control does not have adverse tax consequences.

VALUATION: The pro forma 2014 EPS for Green Brick is $0.35, and management has guided to 50% top line growth in 2015 per proxy statement. At a conservative 15x multiple for a fast growing homebuilder, I value the pro forma stock at $7.50 plus a bit under $2 of PV of the NOLs. Additionally, it is highly likely that GreenBrick will refinance the GL term debt once it is a seasoned company, which is about $0.15 accretive, assuming a 6% or better rate. This refi rate assumption is in line with other small homebuilders costs of credit and is higher than the existing JBGL credit agreements. The GL debt has a 1% early repayment fee if paid within the first year and can be paid in kind for one year. I believe it is structured to force JBGL to refi as soon as practicable and not to enrich GL funds by $10MM after tax on an annual basis.

JBGL’s EBIT margins are approximately 19%. LGIH is a small cap comp with significant exposure to TX as well as similar margins to BIOF, trades at 2.5x TBV. This would imply a price in excess of $10 for GreenBrick. BIOF is currently trading the low $5s suggesting a two-bagger potential.

Finally, here’s what I meant when I said that the stock is trading well below liquidation value

Lots owned as of 6/30/14: 3,517

Sale Price per lot: $100,000 (Dallas/Atlanta home prices are actually higher since 6/30/14)

Gross Proceeds: $351,700,000

Less: Book Cost: $194,278,246

Book Profit: $157,421,754

Taxed @ 40%: ($62,968,702)

NOL offset: $62,000,000

Cash Taxes: ($968,702)

Net Cash Proceeds: $ 350,731,298

Plus assumed cash balance: $30,000,000

Less Debt: ($170,000,000)

Net Liquidation Value: $ 210,731,298

NLV Per share: $ 6.72 (Pro forma shares post rights and JBGL acq 31.3M)

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