UPDATE 6-Fairholme leaders resign from St. Joe board

Mon Feb 14, 2011 5:49pm EST

* Berkowitz and Fernandez resign from board

* Fund manager says he does not plan to sell shares

* Shares fall 2.4 percent (Recasts; adds analyst comment on possible proxy fight, ownership detail, updates share price)

By Ilaina Jonas

NEW YORK, Feb 14 (Reuters) - The largest shareholder of St. Joe Co. (JOE.N) on Monday quit the board just six weeks after joining it, raising speculation that he could fight for control of one of Florida's largest private land owners.

Mutual fund manager Bruce Berkowitz's abrupt resignation, along with colleague Charles Fernandez, is the latest twist for St. Joe, which has big stakes in the return of the hard-hit Florida real estate market.

Its shares have been on a roller-coaster ride since hedge fund manager David Einhorn last year attacked its aggressive real estate bets and said the stock is overvalued.

Einhorn, of hedge fund Greenlight Capital, is shorting the stock, betting its shares will fall. He rose to prominence for criticizing Lehman Brothers' accounting methods before the investment bank collapsed.

Berkowitz, who runs Fairholme Capital Management LLC, and Fernandez sent a terse email to the board on Monday saying the board was not committed to shareholder value or pay for performance for management.

Berkowitz said he does not plan to sell his shares. His fund firm owns nearly 30 percent of St. Joe's stock.

"We're not walking away, and whatever actions we take we're going to take for all shareholders," Berkowitz told Reuters in a telephone interview.

"We were trying to get this done in the nicest possible way, at the director level. But we stated that if we couldn't, we'll try to get it done at the shareholder level. That's the reason why we resigned and that's, just say, step one."

Berkowitz had no comment when asked if he would now launch a proxy fight to gain control of the board, but industry observers say he may be headed in that direction.

"He said he wanted to do it through the board level, but he was kind of on the outside looking in even within the board of directors," Raymond James analyst Buck Horne said. "So that kind of does imply that he intends to use his shareholder status to seek changes."

Berkowitz and Fairholme President Charles Fernandez joined the board in January and raised their stake in the company after Einhorn's October comments drove down the shares. Berkowitz has repeatedly said he would buy the whole company if he could.

St. Joe's ownership is highly concentrated. Other large shareholders include BlackRock (BLK.N), Janus Capital Group (JNS.N) and T Rowe Price Group (TROW.O).

"If you get two of those three remaining shareholders, you get whatever board you can get that quorum to agree to," Horne said. "You can install whomever you want.

Berkowitz and Fernandez joined the board on Jan. 1. On Monday they withdrew from consideration for election to the board at the company's annual shareholder meeting. Fairholme made the disclosures in a filing with the U.S. Securities and Exchange Commission.

St. Joe owns more than a half million acres of land in the Florida Panhandle. Since the housing bust, it has become a master-planner, getting permits and entitlements for others to build commercial buildings and residential communities.

After a board meeting last week, St. Joe said it had engaged Morgan Stanley to help it explore options such as a revised business plan, joint ventures, asset sales, a merger or sale of the company.

St. Joe shares closed down 2.4 percent, or 64 cents, at $26.06 on the New York Stock Exchange. The stock is still up about 53 percent since falling to about $17 in November. Shares had traded above $80 during the real estate boom in 2005.

"What's going on here has nothing to do with the fundamentals," Horne said. "The economy in this region is recovering rapidly. The airport traffic is phenomenal. Things are going better, but of course we're dealing with some corporate governance issues as well as a very high profile fight between the longs and the shorts here."

One issue is compensation. Horne said St. Joe is generous in pay to executives and board members, while the company is not producing any cash.

After last week's board meeting, the company implemented a new compensation policy tied to performance. "It's still very vague and very discretionary," Horne said.

SHORT-LIVED TENURE

Berkowitz and Fernandez resigned a week after attending their first St. Joe board meeting.

"Basically Charlie and I did not have a majority in favor of reform," Berkowitz told Reuters. "It was Charlie and I and everybody else said no. We had trouble even calling for a meeting. We clearly disagree with management on a lot of questions: for example pay for performance, effective governance and oversight."

St. Joe said in a statement that Fairholme's statements and actions were not in the best interest of all St. Joe shareholders. Berkowitz and Fernandez substantially agreed with the business plan and approved the exploration of strategic alternatives, the company said.

Einhorn has also been critical of St. Joe's moves.

"We agree with David on some points," Berkowitz said in the interview. "We may have a very different view with David on long-term asset value within the company. But we do agree that Joe has the wrong business plan, ineffective governance and needs to stop wasting stockholder money."

A Greenlight Capital spokesman declined to comment. (Additional reporting by Nadia Damouni, Jennifer Ablan, and Martha Graybow, editing by Dave Zimmerman and Bernard Orr)

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