The proposal now goes before a Delaware Chancery Court judge, who will conduct a hearing on Dec. 23 to decide whether the agreement is fair. That hearing could be contentious, as an investment fund that holds 14.9% of BFS shares signaled--even before an agreement was signed--that it could fight the proposal. "We are considering our options, including without limitation intervening in the pending litigation and asserting objections to the potential settlement of shareholder lawsuits," Stadium Capital Management of Bend, Ore., said in an Oct. 29 letter to BFS. (Story.)
The settlement stems from a proposal made Sept. 1 by JLL Partners and Warburg Pincus to issue common stock, rights to buy future shares, and new IOUs, all of which would be used to extinguish exsiting debt. JLL and Warburg own 49.9% of BFS' shares nearly a third of its roughly $319 million in long-term debt. They also hold six of the 10 seats on BFS' governing board.
JLL, which formed BFS in 1988, and Warburg, which began putting money into the dealer in 2006, have seen their investments rise and fall dramatically in recent years. In the first quarter of 2007, BFS stock traded for as much as $19.88 per share. By the fourth quarter of 2008, it was down to 82 cents a share. The day before they made their proposal, BFS shares had reached $7.64, but in the four days after the news came out, BFS' share price shrank to $4.44. (It was trading late today at $4.22.) That prompted several law firms to announce they would conduct investigations for suspected violations of fiduciary duty. Between Sept. 10 and Sept. 15, four such suits were filed.
Those four cases plus a fifth filed later were consolidated into one. On Oct. 23, BFS announced a new plan: a $205 million common stock rights offering, of which $75 million would be used for general corporate purposes and most of the rest would be used to exchange for outstanding Second Priority Senior Secured Floating Rate Notes due 2012. JLL and Warburg hold $98 million worth of those notes. The exchange would involve both cash and net notes that mature in 2016.
Apparently satisfied by the new agreement, representatives of the groups that had filed suit signed a settlement agreement on Nov. 5 and prepared to file it with the Delaware court.
The filing requests that the lawsuits be regarded as a class action on behalf of all potentially affected BFS shareholders, and thus the settlement would apply to all. That could rankle Stadium Capital Management, which has argued that BFS doesn't need a recapitalization. That comes despite BFS CEO Floyd Sherman's revelation recently that the company lost 8% of its market share during the third quarter 2009 due to an "extremely competitive pricing environment." The Dallas-based dealer had reported earlier a net loss of $15.9 million for the third quarter on a 29% drop in net sales to $188.9 million.
SCM's letter to BFS noted that existing home sales nationwide are up, median prices are down, and the inventory of unsold homes is at its lowest level since March 2007. "All these data points support an improvement in the overall housing market since mid-summer, not a deterioration," it wrote to the BFS board. It also quoted Sherman's statement to analysts that bad weather could have caused the recent market problems he reported during the conference call, and that it's possible 2010 will be better than 2009.
SCM also took note that BFS management planned to use $75 million of the rights issue to maintain operations. During the analysts' call, CFO Charles Horn said the major reason for doing so is that, other than $92 million in usable cash, BFS didn't have any other borrowing ability. "If BLDR's board is, as it claimed, focused on maintaining the company's financial flexibility, BLDR should keep the cash processed from a rights offering so they will be available to fulfill corporate obligations and/or preserve opportunities as they present themselves."