Last month David Einhorn’s Greenlight Capital made a non-binding proposal to BioFuel Energy Corp. (NASDAQ:BIOF) to buy most of the company’s stock and extend a 10%, $150 million term loan, and its stock has risen from $3.14 to $8.75 at yesterday’s close as investors get more and more excited about the deal.

David Einhorn Greenlight Capital

“At Homebuilder peer group’s median P/E ratio of 16, a transformed BIOF could potentially trade at $24-$40 per share, multiples higher than its current price of $5.20,” wrote HBC Marquis Partners, LLC portfolio manager Farukh Farooqi in an April 14 letter to investors. Farooqi has added a long position on BioFuel Energy Corp. (NASDAQ:BIOF), calling it his ‘top idea’ in a report posted on HVST.com.

Three parts of the Greenlight deal

The Greenlight proposal has three different components, each of which could add value for shareholders. First, BioFuel Energy Corp. (NASDAQ:BIOF) will own a 100% stake in homebuilding / financing company JBGL, which Greenlight Capital and Jim Brickman currently own. Farooqi guesses that this is just a cheap way for Greenlight to take a private company public, but it means that BIOF shareholders stand to benefit from an entirely new revenue stream. The $150 million term loan gives BIOF the funds to expand, and with a close to controlling stake in the company, it’s a good bet that Einhorn will unlock shareholder value (Greenlight would get 49.9% equity and Brickman an additional 8.4%).

Farooqi believes that the stock is trading at a big discount right now because investors aren’t confident that the BIOF board will accept Einhorn’s proposal, and because the company is too small to reliably attract institutional interest if it doesn’t take the deal. At the time he was writing, BioFuel Energy Corp. (NASDAQ:BIOF) had a market cap of ~$30 million, up to $55 million now, but much of that value is speculation on the Einhorn deal and would likely drop off if that deal doesn’t go through.

How Einhorn will benefit from BIOF

This does raise the question of why Einhorn wants the deal to go through. It’s not that Farooqi doesn’t think BioFuel Energy Corp. (NASDAQ:BIOF) is a quality company, but simply buying an undervalued microcap and flipping it in a few years seem like too small of a play for a fund as large as Greenlight.

“What makes sense to me is that Greenlight wants to utilize BIOF’s $178 million in NOLs, take a private company public inexpensively and make a meaningful return on its investment in BioFuel,” writes Farooqi, but for him that’s almost beside the point. Whatever Greenlight stands to gain, Farooqi intends to come along for the ride.

Full presentation below.

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