On September 10, 2007 I wrote an article about Dominion Homes (DHOM), the struggling homebuilder based out of Ohio. The company was highly leveraged, had close to no cash on the balance sheet, and owned roughly 400 million dollars in land on the books. With tight liquidity in the housing market, the company was having trouble selling off its inventory. With roughly 200 million dollars of long term debt on the balance sheet, the company was flirting with bankruptcy.
I suggested the company would make a fantastic buyout candidate as the company was trading for a mere fraction of the 200 million dollar book value. The reasoning behind a buyout was that a larger company with a stronger balance sheet could pay down its debt which would take bankruptcy out of the question as well as increase Dominion’s credit rating. The transaction would also allow for Dominion Homes to wait until the housing market rebounded to sell off its land instead of forcefully liquidate.
While the company may get below book either way, there is no question Dominion Homes would get more for their inventory if they had the luxury of not having their lenders demanding payment. Of course the only way they could achieve that luxury would be paying down their debt and the best way to do that would be to have someone else do it for them.
On January 18, 2007, Angelo Gordon & Co., L.P. a well respected firm, along with Silver Point Capital, L.P., decided to take the company over for the bargain price of 65 cents a share which would equate to about a 5.5. million dollar market cap. While Angelo Gordon and Silver Point are practically getting this company for nothing, shareholders of Dominion Homes faced two awful choices to make: Sellout at fire sale prices or go bankrupt and be left with possibly no equity. Bankruptcy was just an option they couldn’t afford so they had to do the next worst thing which happened to be the only other option.
Management made a press release that very day saying, “The homebuilding industry continues to be in a very difficult period,” said Mr. Borror. “This transaction will allow Dominion Homes to continue our 55-year tradition of building quality homes that exceed our customers’ expectations.”
The press release also hinted to one of the obvious reasons of the buyout saying, “The Company also announced today that it has entered into certain amendments to its existing credit facility with its lenders in anticipation of the merger transaction. The lenders have agreed to increase the Company’s borrowing capacity under the credit facility by approximately $3,500,000 and to forbear until the earlier of June 30, 2008 or termination of the merger agreement from exercising their rights and remedies under the credit facility.”
This deal could be no further from what was perfectly inevitable. While I did predict this several months prior, my feat was none other then logic and far from predicting the future. This is also a good example of why never to buy a company in hopes for a buyout, as the company looked cheap at 3 dollars, where the stock price hovered at the day I wrote my original article. There is an arbitrage opportunity where one has to see whether the probability of the deal will go through. As I write this, the spread is roughly 6.5% and levered up 2:1, a pretty nice rate of return within the amount of time the deal should go though, assuming it doesn’t fall through.