On September 10, 2007 I wrote an article
about Dominion Homes, 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 which was 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 that is a pretty nice rate of return within the amount of time
the deal should go though, assuming it doesn’t fall through.
