COVID-19 has been a horrendous pandemic and it has caused some very interesting things to happen in the financial markets and our habits. You only need to take a look at Peloton’s stock and pandemic growth (we looked after buying a bike recently.. unfortunately) to see the impact.
A COVID-19 Case Study: The deal that died..?
Back in June we wrote about Front Yard Residential (NYSE:RESI). It is the owner of 14,000+ residential homes that it rents out and at the time was in the middle of a very very angry shareholder dispute. You can see the full write up here - http://www.canadianvalueinvestors.com/home/2020/6/21/front-yard-residential-corporation-nyseresi-covid-kills-a-deal-and-people-are-not-happy-about-it
Pre-COVID it was being taken out for $12.50 a share, but unfortunately the deal collapsed into an awkward equity and debt injection from the acquirer, causing the much hullabaloo we talk about in the June post.
And now… eight months later the Company has found a new deal that values it at $2.4 billion instead of the original $2.3 billion.. with the extra basically going to shareholders through an additional 8% per share.
The uncertainty caused by the pandemic blew up what was supposed to be an airtight deal. Yet the secondary effect of the pandemic is that it made single family residences more appealing and made a portfolio of these residences more appealing to bullish acquirers. So this was more a matter of a stumbling into success story by management rather than a thoughtful plan to get more value.. One of us was in this post-deal failure but out before being acquired – around $9-10 – as this seemed like a conservative fair value (and the shareholder disputes did not help encourage us to stick around).
If COVID has reminded us of anything it is that we always need to ask ourselves “and then what?” What are the possible secondary effects after something happens, particularly a crisis.
The press release:
October 19, 2020 - Front Yard Residential Corporation ("Front Yard" or the "Company") (NYSE: RESI), an industry leading provider of high- quality and affordable rental homes, announced today that it has entered into a definitive merger agreement whereby a partnership led by Pretium and including funds managed by the Real Estate Equity and Alternative Credit strategies of Ares Management Corporation(NYSE: ARES) (together, the "Partnership"), will acquire Front Yard in a transaction valued at approximately $2.4 billion, including debt to be assumed or refinanced. Under the terms of the agreement, Front Yard stockholders will receive $13.50 in cash per share. The per share purchase price represents a premium of approximately 35.5% over Front Yard's closing share price on October 16, 2020, the last trading day prior to today's announcement, and 45.4% over Front Yard's one- month volume- weighted average share price. "We are excited to have reached an agreement with Pretium and Ares Management for the sale of our company, which we believe represents an outstanding, value- maximizing outcome for Front Yard stockholders," said George Ellison, Front Yard's Chief Executive Officer. "Pretium has built an impressive portfolio of single- family rental homes and has developed an industry- leading platform that includes more than 40,000 homes undermanagement. I am confident that the combination of our complementary portfolios, with increased size and scale, operating leverage and efficiencies, will deliver significant benefits to our platform and residents." "The Front Yard Board of Directors has always been committed to maximizing value for our stockholders, and we believe this merger accomplishes that objective."….
Indeed..