Holland Ware's Takeover Bid for Forestar Looks Questionable

An unsolicited bid for Forestar Group (FOR), a company principally involved in residential real-estate with minor interests in gas and oil royalties as well as the sale of wood fiber from its undeveloped land, was made by timber baron Holland M. Ware last Thursday, Jan. 22, for $15/share in cash. Based on the company's outstanding shares as of Oct. 31, 2008, the deal is worth around $535.5 million. The board of Forestar said they would consider the offer.

I was ready to pounce on this but took a step back when I saw that the stock of Forestar hadn't risen much after the announcement—at least, not as much as one might have expected. On the first trading day post-announcement, the stock closed at $12.09, up 30% from the previous close but still 24% from its offering price. That's a lot. So, I did some quick research and came up with some reasons as to why investors may not be so thrilled with it.

I'm Ware-y of this deal for a couple reasons. One is because of Mr. Ware's reputation. In 2007, he tried to take advantage of a loophole in Georgia state law whereby a charitable institution is exempt from paying property taxes. What he did was to donate 67,000 acres of Georgia timber land (worth around $100 million) to his animal charity which up until then had only $300,000 in assets. (Click here for the full story.) Not terribly ethical but clever nonetheless. (FYI, the Georgia legislature didn't let him get away with it.) This leaves me to wonder what Ware is up to now...

The other reason is because of his stock position in the company. As of 12/18/08 when the stock was trading around $5/share, Ware reported owning 2.35 million shares of Forestar stock representing 6.6% of the outstanding shares. Guess who owns nearly 10% of the company? Mega-investor Carl Icahn that's who. He's reported as owning 3.5 million shares as of 9/30/08. Before the end of September, Forestar stock had never traded below $15 as you can see from the weekly chart below. What I'm wondering is if Icahn along with other stockholders and company officers and directors who had purchased their stock before October 2008 will be willing to tender their shares at a loss. Would you?

Of course, the real-estate market may not recover for a while so in that respect this deal may offer some luke-warm appeal. As for me, I'm staying away from it.

Disclosure: No position.

Comments

[je:]

It looks like FOR has made an inverse head and shoulder pattern. It gapped up .....maybe on this news but the target for this inv. head and shoulders is the previous head and shoulders of its decline. I doubt that it will be anytime soon though as the other technicals of the market look like it is about to fall out of bed. I expect new lows to be made in the next few weeks.

Jan 28 03:46 PM

[Dr. Kris:]

Thanks for your response, JE, and yes, the chart does look like an inverse head & shoulders pattern, but once a company is a take-over target, its chart ceases to have meaning.

What I was underhandedly fishing for was the reason why Holland Ware would make this supposedly low-ball unsolicited bid in the first place, and more importantly why the company is actually considering it. He's up against shareholders, the board and company officers, and most interestingly, Carl Icahn who have all bought the stock above his buy-out price of $15 (at least from the available data). Doesn't anyone besides me think there's something fishy going on?

Dr. Kris

Jan 29 02:07 AM

[neilfe:]

to be honest, i saw nothing in your article about why to be wary of this deal. What i see is a smart, somewhat opportunistic investor, trying to buy a good long term holding at a fair price (based on current market conditions)..It doesnt matter what Ichan bought FOR shares for, what matters is, where can he invest the cash..Do you think shareholders of Merrill complained at $27 per share, by saying the stock was trading at $40+ just a few months before that..

more importantly, where does FOR go if the bid is dropped. and what are the chances of them NOT accepting the bid. From what i can see, risk seems to be about $1-2 in the stock, with upside of $4.50, so if the odds are better than 33% of the deal happening, then you want to BUY it right here

Feb 06 11:25 AM

[Dr. Kris:]

Here's from today's AP news:

AUSTIN, Texas (AP) - Forestar Group Inc., which develops real estate, grows timber and produces petroleum, on Wednesday rejected a takeover bid as inadequate and announced plans to sell assets, cut debt and buy back shares.

The company said last month's $15 per share unsolicited takeover offer from major stockholder Holland Ware "significantly undervalues" Forestar. Based on the company's outstanding shares as of Oct. 31, 2008, the deal would be worth about $535.5 million.

Shares of Forestar, which has hired legal and financial advisers in the matter, fell 47 cents, or 5.1 percent, to $8.82 in morning trading.

At the same time, the company said it aims to generate significant cash flow by selling some 175,000 acres of timberland, cut debt by about $150 million and buy back up to 20 percent of its outstanding shares.

At the end of the third quarter, Forestar had about 35.8 million shares outstanding.

On Nov. 20, 2008, shares closed at $2.95, pennies above its 52-week low, before climbing in January to a range of $7.80 to $12.49.

Feb 12 12:24 AM

[Dr. Kris:]

Also from Business Wire:

Forestar Group Inc. FOR today announced the following strategic initiatives to enhance shareholder value:

Generate significant cash flow, principally from the sale of approximately 175,000 acres of HBU timberland Reduce debt by approximately $150 million, and Repurchase up to 20% of the company’s outstanding shares.

As a part of the plan, the Board of Directors authorized repurchase of up to 7 million shares of common stock, which represent approximately 20% of the company’s currently outstanding shares. Debt reduction and share repurchases will be funded by proceeds from the asset sales described above. Repurchases will be accomplished from time to time through open market or privately negotiated transactions, subject to market conditions and other factors.

“Forestar’s Board of Directors and management team are confident these initiatives will significantly enhance shareholder value,” stated Jim DeCosmo, president and chief executive officer of Forestar Group. “Despite difficult market conditions, we have confidence in our ability to execute these sales. We believe these strategic initiatives are consistent with our commitment to enhance shareholder value and position Forestar to take advantage of future growth opportunities.”

Feb 12 12:45 AM