BNC Mortgage Inc. of Irvine, Calif., is really worth more than the $50.4 million that management is offering for it, but that is a reasonable offer in today's market, several analysts said.
The situation illustrates the capricious nature of a stock market that can value unprofitable companies highly but assign little value to those with high or sustained profitability.
"The public market wasn't giving BNC any credibility," said Daniel Vincent, an analyst with CIBC World Markets. "If the market is not giving you what you want, take it private."
The deal for the subprime lender was announced Friday. No shareholder vote has been scheduled, but an analyst said one will probably be held in a month or two. Though BNC has maintained cash holdings of close to $30 million and earned more than $1 million in three of the last four quarters, its stock has tumbled. From a high of $14.125 in April 1998, a month after the company went public at $9.50, it sank as low as $4.438 last March.
Last Thursday, before the deal was announced, it was trading at $7.375, for a market capitalization of $37 million. It had risen to $9 by noon Tuesday.
The management offer - $10 a share - is fair but "at the low end of the spectrum," said Mike McMahon, an analyst for Sandler O'Neill & Partners.
Mike Crawford, an equity analyst at B. Riley & Co., said the company could have fetched $15 a share.
Mr. Crawford contrasted the deal with Washington Mutual's acquisition of Long Beach Financial last year. Wamu paid 13 times 12-month earnings, 3.3 times tangible book value, and 1.6 times monthly earnings, he noted. That is almost twice the comparable figures for the BNC deal. If you applied the Long Beach multiples, he said, BNC would be worth at least $85 million.
Still, Mr. McMahon said the deal will probably succeed, because a competing hostile offer is unlikely. "Overall this is a good deal," he said. "It's good for management and good for shareholders - though the price could have been a dollar or two higher."
Mr. Crawford said $10 a share is a good price, "especially for investors who recognized there was value in this franchise" and bought in at $7 or less.
But analysts said the deal is not so great for investors who bought shares when the company went public, or when the stock traded in the low to mid-teens in the months after the IPO.
An official for Greenlight Capital, BNC's largest institutional shareholder, declined to discuss the deal. Greenlight owns 665,000 shares, or 13% of the company. The sale may have been pushed by Evan R. Buckley, chairman and chief executive officer, an analyst said. Mr. Buckley wants out and his contract is set to expire in March, the analyst said. The buyout deal would enable BNC management to take advantage of the "arbitrage opportunity between public and private market value," he said.
Repeated calls to BNC officials were not returned.
The sale would also set the stage for a number of lucrative scenarios for BNC Mortgage in the next few years. "It's a potential way for management in two or three years from now to take it public at a much higher price or sell to another investor," Mr. McMahon said.
Mr. Crawford said that if the company maintains its positive cash flow for the next year, someone else might buy it, giving management "another nice payday."