market folly

There are two enthralling recent developments in the ongoing saga surrounding The St. Joe Company (JOE). As we've detailed before, Bruce Berkowitz's Fairholme fund is long JOE. David Einhorn's hedge fund Greenlight Capital has taken the other side of the trade and is short JOE. Recently, rumors surged that St. Joe could be taken private which caused shares to jump 15% over the past few days. The company refused to comment on such rumors, citing company policy.


Einhorn Skeptical of Potential Takeover

We originally posted Einhorn's short thesis on JOE in which he laid out a bear case where the company could be worth $7-10 per share if it were converted into a rural land company. When Einhorn made his bearish presentation at the Value Investing Congress, his speech caused shares to plummet. Recently, shares have staged a slight comeback due to recent takeover rumors. Einhorn addressed this concern in a recent interview with Bloomberg TV:

"Well, I don’t think taking over St. Joe would make very much sense. The talk yesterday was that Bruce Berkowitz and maybe some private equity guys were going to pay a big premium for the company and so that caused a lot of excitement. What I think is that this is going to be a very hard thing to take private on a reasonable basis because there is no cash flow in the company. The company has negative profits and they have no means of generating ongoing cash to service debt. Which means that there’ s not a lot of bank lending for the sort of undeveloped land that St. Joe has at this stage of the cycle which means that it’s going to be very tough, I think, to finance a leveraged transaction for this company."

The Greenlight Capital fund manager also touched on how this short position is somewhat different than a typical short, saying:

"What’s kind of neat about the St. Joe analysis as a short as opposed to some other things is that there’s no ongoing business. They have this many acres. Ten years ago they had twice as many acres. All they do is sell acres. They take in cash for selling the acres. Most of it goes to the operating expense of the company so there’s not a lot of profits left for shareholders. And so basically, this isn’t an ongoing business, it’s basically a run-down of the assets. And my feeling is that if they continue on their current course, it’s going to take them a few decades, but, by the end of the day, there just won’t be anything left."

It's clear that Einhorn feels a takeover would be hard to secure and he is sticking to his guns with his thesis. After all, he has been short the company in the past as well.


Fairholme Duo Joins JOE Board

On the other side of the spectrum, you have Bruce Berkowitz's Fairholme Capital in the 'long' camp. News came out recently that both he and Charlie Fernandez (also of Fairholme) would join St. Joe's board of directors. Fairholme is JOE's largest shareholder and owns almost 29% of the company. As we've detailed in the past, Berkowitz's ownership stake is effectively capped at that level due to a standstill agreement with the company.

Since Berkowitz can't purchase more shares, it's clear that he's flexing his activist muscle in a different direction by trying to aid JOE's board. He faces a tough battle against Einhorn in an attempt to restore/create shareholder value and fend off short-sellers and pessimists. Of his position in JOE, Berkowitz said in a statement that:

"St. Joe has uniquely valuable assets and some of the most attractive, concentrated and well-managed real estate in the U.S. The value is in its development expertise, communities, infrastructure, entitlements, master plans, timberlands and most importantly the company's long-term vision."


Battle of Fund Managers

This is the definition of a battleground stock as you have two well-respected fund managers taking different sides of the trade. Einhorn won round one by sending shares spiraling with his bearish presentation. Will Berkowitz win round two? With his new seat on the board of the company, he'll aim to take a hands-on approach. It will be interesting to see if the takeover rumors are just that (rumors), or if there's something more substantial to them. One thing's for certain: this saga is just getting started.

Keep in mind that we've analyzed the portfolios of both Greenlight and Fairholme in the latest issue of our newsletter. For more from David Einhorn, we recently posted up his new position as well as his recent television interview. You can also check out all our coverage of Bruce Berkowitz here.