Calton Homes, Again

You know I rarely write about specific stocks, if only because I’m not so great at picking them. But I did fall into the trap not long ago of telling you about Calton Homes and then to my amazement see some good news.

I think it’s worth a follow-up, because of the curious way it is unfolding.

To refresh your memory (and fully disclose my interest): I bought a little of this dog at 5, more at 3, and lots more at three-eighths.

It is an American-Stock-Exchange-listed homebuilder that did pretty well under its founder, a guy named Calderone, who then I guess figured he should take some time to enjoy his success and largely sold out. The new guys didn’t do nearly so well, witness the stock price, so when we entered this story (or at least when you did), Calderone had reacquired control to try to rescue his investment (and maybe us shareholders). Of the 29 million shares outstanding, he and his family own 11 million. And when I wrote about it here this summer, the stock was trading between 50 cents and five-eighths of a dollar.

Sure, it could go to zero, I acknowledged (and still do), but here’s a guy with 11 million reasons not to let it – and who apparently has demonstrated the ability to build a decent house and perhaps even a decent company. (Not that I’d ever been to one of the Calton-built homes or met or spoken with Calderone – I still haven’t.)

Anyway, less than a month later (after years of waiting on my part), Centex announces on September 2 that it will acquire CN’s principal (only, I think) asset, its homebuilding subsidiary, in return for assuming all CN debt and $50 million in cash, which works out to a little better than $1.70 a share.

So the stock jumped to $1 but last I looked was trading a few pennies below $1.

Huh?

Well, there was the fear the deal might not go through (which is still a fear, though it seems to be headed for completion). And there was the issue of taxes (I really should have checked this out, but even if the subsidiary had a zero basis and the entire purchase price were a taxable-to-CN capital gain, they’d still be left with a pretty penny). And there was the issue of what CN would do with all that cash. Because, you see, the public company was not being bought – that would remain and I would still own my little piece of it – only the public company’s homebuilding subsidiary.

What if Calderone took that $50 million and managed to turn it into $3 million? That is certainly a possibility. But, again, he has 11 million reasons not to do something dumb with it. So my sense has been that he’s at least as likely to make it grow as to make it shrink. And then there’s also the smallish but real value of being a public company in good standing with the various stock exchanges and regulatory authorities.

Now, just a few days ago, CN filed its proxy statement explaining its plan for the future. If I read it right (and you should absolutely do more research on this than I have if you are considering investing any of your hard-earned dollars in this speculation), the plan is, first off, to repurchase up to 10 million shares in the open market. If this doesn’t include any of Calderone’s own, then that would be about half the remainder.

So if the deal goes through, it seems unlikely the stock would drop much, given this repurchase plan. And think about it. If you could buy $1.70 coins for, say, $1 each, wouldn’t you? Between all the people just eager to get out of CN after all this time, or anxious to take their tax loss, maybe a lot would sell an uncertain $1.70 for $1. (Remember, that $1.70 may be diminished by taxes CN will owe; I haven’t checked.) So the more shares CN can buy for less than their worth, the more the remaining shares are worth to Calderone and those of us who don’t sell. Let’s say CN really gets $1.70 a share after tax (I’m not sure about the taxes) and that for $10 million it can buy up 10 million shares. Now there are 19 million shares outstanding, not 29 million, and the shareholders have a $40 million pile of cash, not $50 million. Well guess what: that’s $2.10 a share.

The proxy says the company will explore other investment alternatives, or it may just wrap everything up after 18 months and distribute the cash.

So am I suggesting you buy shares in this? No. That would be really dumb, because if it works out, you’ll forget who suggested it (you’re human) and if it all turns to disaster, you’ll remember exactly who suggested it. But is this something perhaps to research and consider? Well, that could be a useful exercise.

Tomorrow: Let’s Buy Mars