DFR

Before we get to more on Adobe, I thought I would take a moment to go over my latest thoughts on DFR. Merrill published a report last week cutting numbers slightly but still expecting them to have earnings and dividends that would drive a 20%+ dividend yield at current prices. I was surprised they were as optimistic as they were. I will be pleasantly surprised if their Q3 results are as good as Merrill thinks.

I wonder what everyone's thoughts would be if DFR was able to still do the deal for DCM but used all stock instead of the current terms of cash and stock. If they kept to the original terms but cancelled the cash portion, then the deal would be for just $80 mill -- probably too much of a drop from the original value of $290 million. But if they could increase the number of shares and get the deal done for $125-150 mill, that would be interesting. By paying stock, they wouldn't have to worry about the liquidity impact of borrowing money for the deal. It would make sense that DCM's value has dropped a lot -- no new CDO's will be issued for quite some time -- so maybe a drop of 50-60% in value makes sense -- well to a DFR shareholder (I'm not so sure those terms would excite a DCM shareholder. Under the current terms the deal likely won't happen -- too difficult to get bank financing.

If DFR's mortgage assets have not dropped in value, that would mean book value should still be in the $13 range assuming no new credit losses from the alternatives side. From that level they should be able to produce a dividend that is actually higher than the 42 cents they have paid so far. Reading the merrill note, I didn't get the feeling that they had talked to management and gotten some kind of scoop -- it was more just that analysts analysis of the situation. I am afraid he was too optimistic but I hope he is right!

With any luck maybe DFR will do a midquarter update like TMA is doing.

If they make it through the current liquidity crisis, then the stock's value will jump back to the mid teens. On the other hand, one of the reasons I so liked the story was the ability to play the growth in an alternative asset manager and their ability to rapidly raise the dividend to the $2.50 range. Now I doubt the deal goes through so that leg of the thesis is gone. They probably won't be raising the dividend to $2.50 any time soon so that leg of the thesis is questionable too. So why hold on if the thesis is not playing out? Because the loss has already hit the stock hard -- question is what new issue could bring it down further besides a liquidity one. At this point the only risk I see is the liquidity one. Even if you assume their future earnings power has been impaired, has it been hurt more than $8 a share? I doubt it. As long as they survive this is a low risk high gain play. Of course that risk they might not survive is real and is what keeps this from being a buy. but a hold -- why not?