WCI Slides After Rejecting Bid
From Billionaire Activist

When billionaire activist Carl Icahn proposed a $22-a-share buyout of WCI Communities Inc., the Bonita Springs, Fla., home builder rebuffed him in hopes of finding a richer suitor.

But as the housing market continues to slide, along with WCI's stock price, it looks as if WCI should have gotten hitched.

Since the company put itself on the market in April, the nation's housing picture has grown even more grim. Inventory is piling up as interest rates and foreclosure counts rise. Things got worse in mid-June after Bear Stearns Cos. acknowledged reports that two of its hedge funds gambled and lost on risky mortgages. The losses fueled concerns about the housing sector and created a tougher environment for financing a purchase of WCI and its nearly $2 billion debt.

The company pushed its June 15 annual meeting back to Aug. 30 so it could entertain further offers. Since its close before its June 12 announcement that it was delaying the meeting, the stock has fallen almost 21%, including a 5.1% drop yesterday to $16.40. Under Mr. Icahn's now-expired $921 million offer, shareholders would have pocketed a 16% premium.

Mr. Icahn is still trying, and an affiliate entered WCI's sales process as a bidder in early June, though there are no details on what Mr. Icahn might be willing to pay. WCI won't say who else, if anyone, is interested.

"I just think it's going to be difficult to find a buyer that would be willing to pay more than $22," said Alex Barron, a senior research analyst with the Agency Trading Group in Minnesota. In February, he speculated WCI could fetch book value, then about $25 a share.

WCI wouldn't discuss progress toward a sale, and the company hasn't set a deadline. Mr. Icahn didn't return calls seeking comment.

"The longer this goes on, I think the more concerned people get," said Sue Berliner, a Bear Stearns home-building analyst.

Optimists say a bid could come from foreign companies, private-equity firms or competitors looking to cherry-pick assets such as valuable land. But any buyer would likely take a hit to profits until the housing market improves. That's one reason why industry watchers don't expect a home builder such as Toll Brothers Inc. or Lennar Corp. to buy the entire company.

Most builders already have a presence in Florida, where they're battling record-high listings and a plunge of more than 40% in monthly sales over the last two years.

On July 6, Meritage Homes Corp. described operations in Fort Myers, Fla., and Naples, Fla., as "significantly challenged" and said it expects "severely depressed conditions" to continue. Meanwhile, Miami-based Lennar, which has operations across Florida, posted a loss of $244.2 million for its second quarter. Both stocks have hovered above their year lows.

"Home-building stocks have been decimated," Ms. Berliner said.

So has the Florida condo market, a big part of WCI's business. In the first quarter, WCI's tower home-building division reported 12 new contracts but 19 defaults by buyers who didn't close sales that were under contract. And competition for deals is fierce. In the Miami-Dade area, where WCI is building condos, there's already 31 months of supply on the market, with 20,000 new condos expected by the end of next year, according to Jack McCabe, chief executive of McCabe Research & Consulting in Deerfield Beach, Fla.

"Miami-Dade is the poster child for the condo bubble," said Mr. McCabe, who doesn't predict prices in the once-hot markets will start rising again before 2011.

At the height of the frenzied housing boom, WCI's sale might have sparked a bidding war. The name alone carried enough cache to draw buyers to luxury Florida condos with multimillion-dollar price tags. Buyers ranging from retirees to speculators came in waves. Between 2004 and 2005, revenue jumped 44% to $2.6 billion.

Then the market changed -- with "little warning," according to WCI's 2006 annual report. That spooked buyers, and defaults rose.

"Any project that WCI came out with after 2005 was destined for disaster," said Mark Zilbert, president of Zilbert Realty Group in Miami Beach, Fla. "The boom was over."

WCI, which also builds traditional homes, responded by significantly cutting its work force, curtailing land purchases and shaving construction costs. The company's net income fell to $9 million in 2006, 91% below 2002's $105 million.

That dramatic decline didn't dissuade Mr. Icahn from boosting his stake to 15% in mid-January. WCI enacted a poison pill, engineered to prevent hostile takeovers.

When Mr. Icahn made a tender offer in March, WCI rejected the bid but offered Mr. Icahn a board seat. He nominated his own slate of 10 directors. WCI avoided a vote and kept its board intact by postponing its annual meeting. But it also prolonged the sale process as its stock declines.

The company "would have been smarter to make a deal sooner," said Mr. McCabe.

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