By DAVID MOON, Moon Capital Management
Some Clayton Home shareholders are upset at the takeover price Berkshire
Hathaway is going to pay to acquire their shares. These shareholders may
know the history of the stock price, but that doesn't tell them a thing about
The stock peaked last year at more than $19 a share; why would Clayton accept
a $12.50 takeover price?
Answer: Regardless of the stock price, no one is about to pay $19 a
share ' particularly in this environment for a completely independent, public
(I most recently owned Clayton Homes stock in 2001, selling at $16 a
By now, everyone knows that Warren Buffett's pristine balance sheet will
offer Clayton's mortgage business access to much lower cost funds to originate
loans. But most people don't realize that Buffett's low-cost source of
funds may soon be one of the only sources of funds for these mortgages.
Years ago, banks ceded the business to aggressive lenders like Greentree/Conseco
and Oakwood. Both are now bankrupt. Wall Street, wary of the
bankruptcies, will only provide mortgage funding at much higher rates, pushing
payments outside of the reach of many would-be buyers. Very few buyers pay
cash; the industry depends on low cost mortgages to survive. Without some
fundamental change in the industry, sources for mobile home loans are likely to
dry up ' and with it much of the industry.
Buffett offers Clayton a fundamental change.
Some disappointed shareholders imagine that Jim Clayton, the company's
founder and largest shareholder, has some sinister reason for selling at this
time and at this price. If so, it must be a whopper of a reason; by
selling to Berkshire Hathaway for cash, Jim Clayton creates millions in capital
gains tax liabilities for himself.
More likely, Jim Clayton understands the value and dynamics of the business a
bit better than his critics. While $12.50 is lower than $19 (even in the
trailer business), it is significantly higher than where the stock would trade
should mortgages become more scarce and pricey. Without access to
affordable, lendable capital, the company is worth closer to zero than it is
Buffett's purchase not only allows the Clayton Homes business to survive,
access to lower cost capital should allow it to thrive. Clayton Homes
could generate as much as $400 million in mortgages this year. Berkshire
Hathaway's low funding cost allows Clayton to earn an additional two percentage
points on those loans. That's an additional $80 million a year in
revenue. This is a benefit the current Clayton shareholders could never
receive - because without Buffett's backing Clayton Homes could never borrow
money this cheaply.
Since the bear market began in March 2000, Clayton Homes shares have
increased more than 50 percent, from eight to $12.50 a share. But in March
1995, the shares traded exactly where they do now. The mobile home
industry is inherently volatile ' even more so than the site-built home
industry. By both guaranteeing and lowering its cost of capital, Clayton
Homes will eliminate a lot of its risk, allowing it to grow, thrive, serve
hundreds of thousands of customers and more than 8,000
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).