* Fairholme can raise stake in St. Joe beyond 30 pct
* Fairholme reserves right to find a partner
* Prompts speculation in a strategic shake-up
* St. Joe shares close 7.3 pct higher (Adds Fairholme's Berkowitz not available for comment)
By Ilaina Jonas
NEW YORK, Jan 12 St. Joe Co (JOE.N) shares rose 7.3 percent as Fairholme Funds Inc (FAIRX.O), its largest shareholder, was freed to acquire more stock, prompting speculation about a strategic shake-up at the Florida land company.
St. Joe and Fairholme ended a 2009 "standstill" agreement that capped Fairholme's stake at 30 percent, which included voting rights, effective Jan. 12, according to a filing with the U.S. Securities and Exchange Commission. The agreement was previously to have expired on April 6, 2012.
The company has been the focus of two investors holding opposite positions. Bruce Berkowitz's Fairholme, a mutual fund, has been buying shares and holds a 28.93 percent stake. On the other side is Greenlight Capital hedge fund manager David Einhorn, who is shorting the stock, betting its price will fall.
Einhorn, who in early 2008 made a prescient call on Lehman Brothers' accounting troubles before the company collapsed, said in October he believes St. Joe needs to take "substantial impairments" and accounting writedowns on many of its properties.
During the last two weeks of 2010, short interest in St. Joe rose to 28 percent of the float shares, up from 25.4 percent, according to the latest reporting period.
In a separate filing with the SEC, Fairholme reserved the right to find a partner or other shareholder to recommend alternatives to increase shareholder value.
St. Joe shares closed up $1.71, at $25 on the New York Stock Exchange, where they were among the top percentage gainers.
Funds of BlackRock Income Trust Inc (BKT.N) recently have raised their collective stakes in St. Joe to 12.59 percent.
JMP Securities analyst Jim Wilson said Fairholme could sway St. Joe to go private with the help of a private equity firm or it could merge with a private landholder in exchange for shares.
"I would think they would go out and look at other land companies or other land acquisition opportunities," Wilson said. That would allow St. Joe to expand outside of Florida.
Berkowitz was not available for comment on Wednesday, a representative said.
St. Joe is in the master-planning business, planning and getting the necessary permits and zoning for others to build homes or commercial buildings on its land. It owns more than a half million acres in the Florida Panhandle, an area hard hit by the U.S. housing downturn.
Fairholme can now increase its stake, although those shares will not have voting rights, Keefe, Bruyette & Woods analyst Sheila McGrath said.
"Once you have 30 percent, it's still a dominant part of the vote," she said.
St. Joe advised shareholders on Monday the SEC recently launched an informal inquiry into its policies relating to the writedown of the value of its real estate. [ID:nN10293764]
A couple of analysts dismissed the SEC inquiry as "nothing to fear," as Raymond James analyst Buck Horne said in a note.
The analysts pointed to a similar, but more formal situation that unfolded with homebuilder KB Home (KBH.N). In that case, the SEC's formal inquiry into the homebuilder's impairment process ended with the company announcing the investigation was completed with the regulator taking no enforcement action.
"We suspect a similar outcome would be likely for St. Joe, but we would still expect the process to take several months," Horne wrote. (Reporting by Ilaina Jonas; editing by Tim Dobbyn, Gary Hill)