The big hubbub over St. Joe Company

December 17, 2010, 10:10 PM UTC

Bruce Berkowitz, the mutual fund star and St. Joe’s largest shareholder, is now on its board. But don’t bet on a Berkowitz buyout.

St. Joe Company is grabbing a lot of headlines for an obscure residential real estate developer in Florida’s Panhandle. If you haven’t followed, here’s a quick recap: noted short seller David Einhorn gave his idea of what the company is worth during a hedge fund conference back in October. The stock plummeted from $25 to $20.

Meanwhile, St. Joe’s largest shareholder, Bruce Berkowitz, added more shares to his stake after Einhorn’s presentation and said he’d buy the whole company if he could. (He can’t, more on that later.) Then, two days ago, someone in the options market made a big wager that the stock would rise. Traders were said to be chatting about a takeover by Berkowitz, and shares jumped 12%.

It was all curious timing, because yesterday St. Joe (JOE) announced that Berkowitz and his Fairholme Fund partner Charlie Fernandez have been added to its board. That boosted the stock even more, sending shares up 1.2% in after hours trading.

Here’s what seems obvious: despite winning St. Joe board seats, Berkowitz isn’t taking St. Joe private in the near future. Berkowitz has owned majority stakes in companies before and sat on company boards, but he’s really only interested in being a passive investor who offers his opinion to the board. (For more, see Bruce Berkowitz: The megamind of Miami)

There’s also the case of a standstill agreement that Berkowitz’s Fairholme Funds signed with St. Joe, which limits what Berkowitz can do for the next 16 months. The standstill is the result of a poison pill law created by Florida lawmakers in the ‘80s, which says that investors can’t buy more than 20% of a company’s stock without board permission. If an investor does take a large stake, they often have to vote with the board. So even though Berkowitz owns 30% of St. Joe, if he says the company should be sold and the board doesn’t agree, he can’t vote with Fairholme’s full position.

But Berkowitz will be able to do what he couldn’t before. Namely, learning about St. Joe happenings in real-time and bringing his advice to board members accordingly. As Einhorn told Bloomberg Television yesterday, St. Joe is struggling as quarterly losses have hurt its ability to service debt and banks are restricting lending for the development of its land. Berkowitz brings an expertise in financial markets and a restructuring whiz in his partner Fernandez.

Berkowitz has admitted that Einhorn may be able to drive down the stock in the near-term. But he’s still bullish on St. Joe for its huge tracts of real estate across the last undeveloped area in Florida. Berkowitz says he bought shares of St. Joe when its land was valued at $3,000 to $4,000 an acre, and he figures some of its beachfront property could be worth $1 million an acre after being developed.

Though it’s too early to say what happens at St. Joe, Berkowitz and Fernandez could help the company raise capital, find partners or find merger possibilities. What’s clear is that Berkowitz thinks by joining the St. Joe board he can create value for shareholders, including Fairholme. He’s said in the past that St. Joe is a long-term holding for Fairholme, and the latest news supports that. Joining its board seems to be the next step in a long road for Berkowitz and St. Joe both.

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