Making the Most of a Buyout Offer

The ink on my last column hadn’t yet dried when the market gods presented a potential answer to my problem. (The problem: no cash in my portfolio, which means no ammunition to take advantage of any buying opportunities that might arise.)

The possible solution came in the form of an announced buyout of one of my holdings, residential development company AV Homes (symbol AVHI, $21.50), by a similar company, Taylor Morrison Home Corp. (TMHC, $21.17). But Scottsdale, Ariz.–based Taylor Morrison hasn’t made it easy for me. The company’s buyout offer gives me three choices to evaluate: Take the payment in cash, receive 60% in cash and 40% in stock, or simply exchange my AV Homes stock for Taylor Morrison shares on a nearly one-for-one basis.

I originally snapped up 1,000 shares in AV Homes in March 2016, when the stock was trading at just $11.90 per share—about 10 times earnings projections for the year ahead. I considered that a bargain because the company’s earnings were expected to more than double. The stock was cheap because AV had lost money from 2007 through 2014. The company had just returned to profitability in 2015, and investors were skeptical of rosy projections.

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I was less skeptical because of the improving economy and the pending sales detailed in AV’s annual report. AV proved to be a nice score, returning 81% in just over two years.

A nice upgrade. The buyout offer gives me the chance to exchange my AV shares for Taylor Morrison stock, so I decided to check whether that would be an attractive option. I think it is. In fact, I really like this company. Like AV Homes, Taylor Morrison buys land and develops it into residential communities. AV has focused mostly on first-time buyers and active adults; Taylor Morrison is big in the move-up, luxury and custom-home markets.

In addition to winning awards for its home and community designs, Taylor Morrison was recently named one of the best places to work by job-search site Glassdoor.com. I think happy employees become marketing machines for the companies they work for, impressing customers and inspiring good opinions via word of mouth. In my opinion, being a good employer is a smart long-term strategy. According to Glassdoor, 92% of Taylor Morrison’s employees would recommend their job to a friend, and 97% approve of the com­pany’s CEO, Sheryl Palmer.

Better yet, I think the stock is cheap. Taylor Morrison stock is trading at about eight times projected 2018 earnings and just over seven times projected 2019 profits. It does not pay a dividend, but its earnings are expected to increase 32% this year and nearly 15% next year. By my calculations, that makes the stock a screaming bargain.

However, the offer has one funky glitch. If I go for the all-stock option, I get 0.979 of a share of Taylor Morrison for each share of AV Homes. But a share of AV Homes sells for a touch more than a share of Taylor Morrison, because the buyout offer has kept AV’s market price steady, even as the rest of the market has wobbled. Theoretically, I could sell my AV shares, repurchase Taylor Morrison shares and make a little extra money on the arbitrage.

I assume this tactic won’t be necessary—that the terms of the buyout will be adjusted at the close to make the cash option equivalent to the all-stock deal. But the company has not yet circulated its merger materials, so that’s not 100% clear. Nor do I know whether this deal will be a tax-free merger or a taxable buyout, so I’m waiting to hear. Either way, the Practical Investing Portfolio is likely to remain cash poor. Taylor Morrison seems like too good an opportunity to pass up.