What was Carl Icahn thinking?

Carl Icahn has had a good run the past few years, and the consensus thinking is that he is a genius. But some of his recent moves have left us befuddled, and even had us questioning our view of the world.

Icahn stirred the pot at WCI Communities Inc. (WCI-NYSE) late last year, just as we were pondering homebuilding valuations with Wayne Nef…

I do not expect a strong turn in the spring.  About $1 trillion in adjustable rate mortgages are due to reset next year and I think that while some will be refinanced, some of the riskier credit risks will not be able to do so.  This could lead to higher inventories of houses on the market and lower prices. 12/7/06

WCI was actually outperforming the market as Icahn got his ducks in a row, but Wayne was not buying any of it…

Looking ahead, my intermediate term call on the builders is bearish.  I would look for a dead-cat bounce near the current levels as the stocks could bounce with the market if we get a near-term oversold rally.  I think WCI is a good short here, particularly if it bounces towards $22.  WCI is being propped up by investors expecting someone to step in and buy them.  Meanwhile, on their last conference call the company noted that they will likely be in violation of a bank interest coverage covenant in the near future. Management said that early indications are that the banks will provide relief for this covenant in exchange for a fee and possibly higher pricing. With that said, homebuilders are selling land not buying.  The time to buy assets is when their is blood in the streets, not ahead of it.  In three of the past five years WCI has sold below 0.6x book...and that is without tripping a bank covenant. My guess is that no buyer will appear until the stock falls further.  My target is $15. 3/6/07

We wondered what Icahn knew that we did not know. And the answer was...Nothing. Nada. Zippo. Did he escape intact? It looks like some other geniuses might have failed on this one as well…

WCI, which put itself up for sale earlier this year, rebuffed several efforts by billionaire investor Carl Icahn to buy the company for $22 per share, saying that price was too low. Icahn’s tender offer, which allowed shareholders to sell their stake to him at that price, expired without any shares changing hands. AP

With the stock printing an $8 handle, it is time to reassess...here are Wayne’s latest thoughts:

On WCI I think the company speaks well for itself. “To date, the Company has not received a definitive proposal for the purchase of the Company. While initially several companies expressed an interest in acquiring WCI, deteriorating conditions and uncertainty in the homebuilding and debt markets have made the sale process more challenging.”

WCI builds condos in Florida.  Florida is hurting from the fall out in real estate, and the company has already broken debt covenants on some of its debt.  Given all of the above, I would cover here (from my initial short from back in March) and just watch it.  Nef Value Research 7/26/07

Fair enough Wayne, but at some point we might have to break ranks with you. Are you sure the stock is not a long here?

No, I don’t try to catch a falling knife...particularly when that knife has potential debt problems.

There you have it folks.

WCI Communities Says Sale Attempts Fail
Associated Press

Nef Value Research
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. 1440 Wall Street and Wayne Nef/Nef Value Research have no positions in securities mentioned above.

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