Description

       PICO is an old VIC story with good values but held back by two of its three assets which finally is in the crosshairs of an activist. River Road Asset Management with a new 8.8% of Pico has been urging management to sell/monetize its holding of NorthStar its agribusiness and UCP its real estate holdings, to return capital to stakeholders byway of dividends/buybacks and conduct a strategic review if company should remain public (letter to PICO of 2/23/2015). Management in a letter of March 16 expressed support for various items suggested by River Road. They appeared to be in reasonable agreement.

Then on April 24, River Road submitted a shareholder proposal to be included in Pico’s proxy material for its 2015 annual meeting to recommend that the Board of Directors declassify itself.

 This is a potential major change for the board of Pico. “Staggering” replacing one third of directors every three years, entrenches the board and thus “ossifies” action.

Since we know that institutions hold 80+% of Pico stock, it seems that such a proposal in the proxy should easily pass initially by the board or eventually by the stakeholders’ actions. Insiders are holders of 7% of Pico. The latest insider actions were purchases of about 50000 shares in Dec 2014 at prices in the $17 area.

 According to Factset SharkRepellent, 448 proposals to destagger boards, have received 64% of votes in favor of the action. In other words “….companies are bowing to the will of shareholders.” Obviously this action would pressure the current board or a new board to hasten sales, mergers and/or a restructuring.

 So the question is-what is Pico worth?

 Pico is composed of three parts- UCP a 57% owned California public homebuilder;

Northstar a wholly owned  Minnesota rapeseed crusher and the star of the operations-Vidler, a Southwestern water land bank.

 We will acknowledge upfront that UCP and Northstar have under performed over the past years. It appears that both management and activists agree that they are better disposed of and sold.

 Valuing both items of course is more art than science. Attempting to use liquidation  and book values, one firm has estimated a range of $13.00 for the former and $16.50 for the later or $250 million  and $315 million respectively for the UCP holdings.

 Northstar employing an Ebidta multiple and replacement cost estimates give us a range of

$100-$150 million. Pico has retained the investment banking firm of Stephens Inc to assist with its review of financial and strategic alternatives for Northstar.

Pico has encouraged UCP’s management to also evaluate options for unlocking shareholder value. Pico in a recent filing stated that they believe the stock is undervalued and could use funds acquired from any monetization of Northstar and/or UCP for Pico stock repurchases.

And now for the star of our story-Vidler- the water company.

 One of the more challenging issues today facing many regions of the US is the supply of water. Drought conditions out West take their toll on growth of farm products, real estate developments, chemical processes, families to name a few of the affected- life in general.

While California is action central, three other states- Arizona, Utah and Nevada- are also having their own severe drought problems. Indeed droughts have occurred in 11 of the last 14 years.

Lake Mead (outside of Las Vegas) fell to its lowest level of capacity (39%) since the Hoover Dam was placed in service, to create the reservoir in 1935. To add some perspective, if the Lake falls below 1050 feet above sea level (today it is about 1088),

then the Hoover Dam may have issues generating power and electricity. Below 1000 feet of water and we have drinking water problems.

 What is important here is how significant water rights are to the growth of the country.

Out West, developers must have access to and pay for water rights before they can build any new homes. Pico’s main asset- Vidler Water buys, develop and sells water in these states. A typical example of the growth in water needs is Reno, Nevada  and its limited water supplies with population growth accelerating, Vidler offers the city one of the largest accessible alternative  water supplies.

 Let us remember Amazon is building a 1000 employee distribution center here in addition to Tesla’s Gigafactory with over 5000 employees- both requiring new homes and of course water to supply them. Not far away are water properties serving Las Vegas area, one which is carried on the books for about $4 million and probably worth at least $40 million.

 Arizona also holds much promise for the company. Since Phoenix is one of the country’s fastest growing cities, the market has seen water prices continue to steadily rise over past years. Indeed it is estimated that  based on a 2014 sale, the market value of Vidali’s Phoenix assets is twice what it is carried on the books. Since Phoenix is one of the countries fastest growing cities, one can expect continued higher water prices.

 Putting a value on these assets of course is more art then science. Based on recent water sales in these areas suggest a range of $370-$500 million compared to a book value of about $243 million.

 So now let us summarize what we have- several estimates of values-

UCP       $250-$315 million

Northstar  $100-150 million

Vidler    $370-$500 million                                      

 A low to high range of $720 to $965 million less $220 million in long term debt

or $21.70 to $32.40 per share.

 One commentator feels that if the first two parts can be sold for a combined $240/$326 million less Northstar debt of $90 million, would leave about $150 to $230 million of excess cash capable of tendering for 7-13 million shares at $20 of the 23 million outstanding. At that point with 16-10 million shares outstanding and a water bank worth

$370-$500 million or a conservative $23.12 up to an optimistic value of over $35 dollars  per share –we should have an attractive stock price.

Catalyst

1.Annoucement of Northstar sale

2.Annoucement of UCP sale/merger/spinoff

3.Cash released to buyback/tender 30/50% of stock

4.Creation or sale of a stand alone water company in the parched West