PICO Holdings Piques My Interest

 | Apr 17, 2017 | 11:00 AM EDT
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"Better late than never" is a phrase that has application in the often slow-moving world of value investing. It's exactly what crossed my mind last week when long-suffering value name PICO Holdings (PICO) announced that its majority-owned subsidiary, UCP Inc. (UCP) , is merging with Century Communities (CCS) . Each share outstanding of UCP will be converted to $5.32 in cash, and 0.2309 shares of CCS. The value of the deal to UCP shareholders at Friday's closing price of CCS is $11.22 per share.

The pertinent thing here isn't the merger per se or the price that will be realized if the deal closes (the law firms already are putting out feelers for UCP shareholders who don't believe the price is fair. Rather it is that PICO is continuing the process of monetizing assets -- if you can call it that in this case.

PICO Holdings has come under a great deal of fire in recent years. Bad business decisions -- including a foray into canola oil processing -- and overpaid management sunk the stock and attracted the interest of activist investors, who went to work and were able to force some change, including the exit of CEO John Hart back in October.

Upon completion of the transaction, PICO will own about 9% of new CCS stock. PICO's long-term intentions regarding its CCS stake are unclear at this point. However, under new management, the company has pledged that rather than reinvest any proceeds reaped from the sale of assets, it intends to return the capital to shareholders through the repurchase of shares or via special dividends. On last quarter's earnings call, management estimated that it had about $20 million to return to shareholders in the "near to intermediate term."

PICO shares were the beneficiaries of a 12% boost last week, following the announcement of the UCP deal. While they've risen more than 50% in the past year, that's still a far cry from the $25 a share they commanded three years ago or the $46 last seen in 2008. It is doubtful in my view that shares will ever return to the latter level.

What happens from here, though, could become interesting, not just in terms of how the company handles the proceeds of the UCP deal, but what the future holds for its most valuable business, Vidler Water, which owns an array of water-related assets. It sold 100,000 acre feet of long-term storage credits for $25 million to Arizona agencies in February, but that's just the tip of the iceberg, and significant assets remain.

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