Tuesday, April 12, 2011

Genesis Land: The Disbelieved Offer

For the reasons outlined here, Genesis Land has been on this site's Stock Ideas page for about a year. Last week, the company received a buyout offer at a large premium, presenting a potential exit opportunity for investors who purchased the shares on the cheap. Unfortunately, based on the stock price reaction, the market doesn't believe the proposed deal will actually close.

While the offer was for $5.80 per share, shares closed at just $4.56/share yesterday. The press release disclosing the offer listed an intention to close the transaction by August 12th of this year, which is only four months away. As a result, the market is offering arbitrageurs the potential for an annualized rate of return of more than 80%!

Of course, that return is only realized if the transaction closes. Before that happens, a number of conditions must be satisfied, not the least of which is the fact that the buyer needs financing. The buyer is a brand new company with no operations, recently incorporated by a Calgary businessman named David Crombie. Crombie will now attempt to raise several hundred million dollars in just four months in order to complete this transaction, which would be a rather daunting task for most individuals.

So now that an offer has been made, should investors take their profits and sell, despite the large discount at which the stock trades to the buyout offer? That would be the safest thing to do, but may not be the wisest.

First of all, the buyout offer isn't at some pie-in-the-sky valuation whereby the stock will fall precipitously if the transaction fails. The stock is only up a few percent following the offer announcement, so the immediate downside does not appear large.

Furthermore, the company is now clearly in play, which could bring a competitor or strategic buyer to the forefront. The breakup fee on Genesis' side is only $500,000 (or just over a penny per share), which should act as little deterrent for a well-financed real-estate development company looking to grow their size and reach. Third-party appraisers have put the value of Genesis' land holdings much higher than its current price, which could entice a buyer to come to the forefront now that an offer is on the table.

Normally, I don't like to play the role of risk-arbitrageur. But in this case, the market's discount to the offer price coupled with the value of the firm's underlying assets suggest that the downside risk is low relative to the upside potential. As such, I'm sticking with it despite the significant chance of a price retreat in the event of a failure.

Disclosure: Author has a long position in shares of GDC


Idang said...

Hi Saj,

couldn't find the offer on their website. Can you provide a link?



Anonymous said...

Thanks for the response. Now I can rest in peace(lol!).

I will be checking out this blog more often. I found it through google.

Taylor said...

Apparently Crombie has raised over $100 million for various real estate projects in the past, and along with his extensive executive experience, there is a fair chance he will be able to raise capital for this acquisition, all things being equal of course.

However, I am not so sure I want THIS offer to go through. If the NAV is truly $8.01 per share (38% greater than Crombie's offer), then there is definitely room for additional bidders. Either way, the shareholder will still get a decent return.

Paul said...


I was looking up some information on Paul Sonkin on Google and stumbled upon an old post from you from 9/11/08. You mentioned that you and Reyer run the site with guest posters Stephen Stewart,Amit Sahasrabudhe, and
Alex Garcia. Do these people still post on this site? Was Reyer someone who posted here a long time ago?

Anonymous said...


So someone finally noticed little GDC. It moved today to the upside. Appreciate any news. Thanks

Saj Karsan said...

Hi Idang,

Here you go

Hi Paul,

There are occasionally some guest writers on this blog, but those guys you named haven't written in a while! I started the site originally with Reyer, but he now works for a large, well-established value firm (that you probably know pretty well!) and so he couldn't continue to participate.

Anonymous said...

Hi Saj,

I stumbled across this site while looking for information on Genesis. I invested a large summ about 4 years ago in the Delacour and Airdrie projects. To date, I have received nothing for the investment. I knew nothing about what I read on your post. Please tell me what to do. I'm very nervous that I'll never see any return not even my principal again!

Saj Karsan said...

Hi Sue,

I don't know much about those projects, however, if I read what you wrote correctly, I understand that you invested in limited partnerships alongside Genesis? If you know the names of those partnerships, you can search for updates in Genesis' recently issued annual report. Beyond that I'm not sure how to help.

Anonymous said...

Genesis has issues... I don't know why you would love them so much. Someone in the end will go to jail from there.

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