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[Ulisses Pereira]

"FBR's IPO Alchemy May Be Horror Show"

By Jim Cramer
RealMoney.com Columnist
4/11/2007 1:35 PM EDT

"There may not be any real magic in this world, a laThe Illusionist, but I have spotted a deal that might be able to create wealth out of whole cloth. I have found a deal that is, basically, alchemy, and I want to share it with you.

The alchemy's being orchestrated by Friedman Billings Ramsey Group (FBR - commentary - Cramer's Take - Rating), which has always been a real innovator when it comes to finance, some of it good and some of it bad. (I'm thinking most notably of the PIPEs fiasco well documented by Matthew Goldstein in these cyberpages two or three years ago, in which the CEO and name partner Emanuel Friedman was basically told to retire by the SEC.)

FBR's in trouble. I have said several times here that FBR's got some awful subprime exposure, but now we have finally discovered how awful through the alchemy I am about to illuminate.

FBR's planning an IPO for its capital markets unit, the unit we all know for its excellent research. That unit is different from FBR's mortgage and investing operations.

FBR intends to offer, according to the Washington Post this morning, 13.5 million shares for $16 to $18 a piece, and perhaps will sell 1.76 million more shares if there is demand. The plan is to raise as much as $243.2 million, the Post says.

All well and good. But in July of last year, FBR Capital Markets placed 18 million shares with Crestview Capital, a private equity firm. That raised $270 million.

OK, so if you take $243 million from the IPO and $270 million from the private placement, you have $513 million. The Post says FBR is going to own 53% of FBR Capital markets after the deal. Which means that you have a company being valued at slightly more than a billion dollars.

Here's the alchemy: The whole company is worth less than that right now, with a market cap of $904 million. That means that the rest of the company -- including its subprime business -- is worth nothing!



Now, I am sure that the company will tell me that I am being overly simplistic. To be fair, this is just arithmetic.

But I want to know this: Why would I want to buy a big stake in a subsidiary of a company that's worth nothing? So that the parent can take the money and bail out the rest of the junk?

That's what has to happen here for FBR to make it, I believe.

Think about this deal long and hard. There may be something very wrong here, and you will be the proud owner of a piece of an easily crammed-down sub (they own 53%) if things go awry.

Avoid this business at all costs, I believe. This is truly sellblock material. "

(in www.realmoney.com)