Clayton deal will benefit detractors

By DAVID MOON, Moon Capital Management
June 8, 2003

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 business.

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 company.

(I most recently owned Clayton Homes stock in 2001, selling at $16 a share.)

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 $19.

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 employees.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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