Married, Divorced and Married again! (BBX)

You know those couples who get married, divorced and then married again? Unless you have actually been through this yourself you probably find the whole thing kind of strange. Why did they get divorced in the first place if they were only going to tie the knot again? The answer is not always logical; these things just happen.

OK so I’m having that kind of relationship with BBX Capital (BBX). I owned BBX until last summer; I sold when the courts upheld Mr. Alan Levan’s appeal against an earlier guilty verdict in an SEC lawsuit. Mr. Levan was back in as Chairman at BBX and I thought it time to get out. OH WHAT POOR TIMING ON MY PART. Shortly thereafter, BBX announced that BBX and BlueGreen Vacations (BXG) would sell 10% of BlueGreen’s equity to the public (5% to be sold by BBX and 5% by BlueGreen itself). What was interesting was that post-IPO BBX was still going to own 90% of BXG and that per the preliminary prospectus BXG shares were going to be priced in the $16-$18 range. This meant that the implied market cap of BXG was going to be substantially larger than that of BBX (which had some other holdings in addition to its 90% interest in BXG). I assumed that the purpose of the IPO was to highlight the value of BXG, demonstrate how undervalued BBX was and thus goad Mr. Market into bidding up BBX shares. When I finally realized what was happening BBX shares had climbed from my exit price of $6.40/share to around $8.50/share and I thought “Gee, the easy money’s been made and besides I don’t really know anything about the time share market except that it seems to me a real scam!”. Of course hundreds of thousands of people own time shares so it can ‘t be a TOTAL scam. Somebody must think buying a timeshare vacation house is a good investment. In any case, I thought that since the IPO hadn’t happened yet, perhaps BXG wasn’t really going to end up priced in the $16-$18 range, so maybe the opportunity wasn’t as attractive as it seemed.

Fast forward to the end of December. The BXG IPO had already successfully taken place at the beginning of November. The price of the IPO was, as I expected, lower than the price in the preliminary prospectus, $14 a share rather than $16-$18 (still, not bad!). But more importantly, shares in BXG had climbed from their initial IPO pricing to around $18.00/share. However, Mr. Market, being that unpredictable fellow that he is, had bid DOWN shares in BBX, which were then trading in the $8.00 range. I can only imagine what BBX management (read Alan Levy) was thinking at this outcome; I too was simply stumped by Mr. Market’s reaction to the IPO. OK so BBX management HAD done some rather flakey things in the past and maybe they’d do something flakey again in the future. They had, after all, just invested $60 million in a chain of sweet shops called IT’SUGAR this past summer. (What, were they trying to imitate Buffett’s investment in See’s Candies?? Well, I could actually think of stupider things to do …..) Furthermore their investment in Renin, a manufacturer of interior doors and hardware, didn’t seem to be generating much cash. And then there were the various investments in real estate. Were they actually worth anything? I found them more than somewhat difficult to value (accounted for with the equity method as they are). Top that off with about $165 million in cash (some pre-existing, some from the IPO) and $145 million in debt at the corporate level ($80 million in borrowings from BXG plus $65 million in subordinated debentures). So, yeah, maybe Mr. Market didn’t have any great expectations for BBX management’s investing prowess. But all that aside, unless you believed that net, net these assets had a significant negative value, the valuation of BBX simply didn’t make sense. Each share of BBX owned the equivalent of .656 shares of BXG (103 million A & B class BBX shares outstanding with BBX owning 67.3 million shares of BXG). BXG shares were trading over $18.00 at year-end 2017. Thus each share of BBX owned about $12 of BXG share value but was trading at around $8! I can understand a holding company discount, especially when management of the holding company has done some odd things in the past. Maybe it would be understandable if management at the holding company was different from management in the owned investments, but here that’s not the case. So my simple investment thesis is that the share prices will converge; either the BBX share price will begin to increase (maybe even retaining a small discount) toward the underlying value of its BXG shares, or BXG shares will begin to drift downward, bringing the value of the BXG investment down towards the price of BBX.

Note that I know nothing about the time-share market. (Have I said that before?) And therefore I have no idea whether BXG is trading at an appropriate market valuation. My investment thesis is based solely on the seeming discrepancy in valuation between the two shares. I have no idea how long this  divergence will last, months, years even, but I think that eventually Mr. Market will come to his senses and be ‘rational’ about valuing these two securities.

Further note: again a hat tip to Clark Street Value who had a nice write-up on BBX Capital a couple of months ago.

 

Disclaimer: You should be aware by now not to rely on this or any other of my posts for investment advice; this blog is simply an externalization of some of my random thoughts about investing.