Vetropack Update – SELL

Vetropack is one of the original constituents of the portfolio. A few weeks ago I already posted my doubts on Vetropack.

So why did I decide to sell now ? Despite the Ukaraine issues, one other aspect caught my eye while reading the annual report:

Market trends.
Unlike the packaging market for glass containers, which is growing worldwide, the glass market in Europe has been trending negatively since 2012. Regional differences in purchasing power and consumer behaviour have also affected this trend. In the Eastern European countries, it is primarily declining purchasing power that is increasingly causing consumers to turn to cheaper products in alternative packaging.

Vetropack is mostly making beer bottles. For me, this looked like a utility business. From my own (Western European) experience I know that for instance German beer drinkers don’t easily change their favourite beer brand for a cheaper one. As it does not make sense to transport glass bottles across Europe, a local glass bottle manufacturer should enjoy some “utility like” competitive advantages and stable sales.

But it seems to be that in Eastern Europe, where Vetropack makes a large amount of business, people just subsitute more expensive brands in glass bottles with cheap ones in cans or plastic bottles. This basically eliminates a large part of my investment case.

On top of that, Vetropack did nothing with regard to share repurchases that year and the chart looks quite ugly:

So overall, after holding the share for 3,5 years, I will sell Vetropack at current prices as I do not have any indication of a clear higher value of the stock. Including dividends, I lost ~ -6% in total on this position.

The last remaining “intitial” positions are now Hornbach, Tonellerie, Draeger and HT1.

Some links

Jim Chanos on Charlie Rose with an update on his China bear case

Great story about the 32 year old CEO of Burger King

Detailed presentation on the (not so bad) future of television

Red Corner has two posts about in interesting China/Macau stock called Future Bright Holdings (part 2)

David Einhorn’s Q2 commentary with some colour on his short positions

Damodaran on why the Fed should not be your preferred investment advisor

Good 15 minute feature on Ben Graham, the “father of value investing”

“Bonus savings account” with Sky Deutschland (ISIN DE000SKYD000) voluntary tender offer

Ruppert Murdoch is reshuffling his empire. Today he announced that BskyB, his British carrier has bought the 21st Century Fox 57% stake in German broadcaster Sky Deutschland.

Under German rules, once you transfer more than 30%, you have to make an offer to all other shareholders as well. This is from the offical web site:

Offer to minority Sky Deutschland shareholders
Following the agreement to acquire 21st Century Fox’s 57.4% stake in Sky Deutschland, BSkyB has announced that it will launch a voluntary cash offer to Sky Deutschland’s minority shareholders at €6.75 per share. There is no minimum acceptance condition as BSkyB believes it can realise the advantages of closer collaboration with Sky Deutschland and support its continued growth and development with the 57.4% stake it is acquiring through this transaction.

Although no details have been published yet, I think the likelihood of this going through is very high. Consequently, the stock now trades at 6,75 EUR.

However I find this quite interesting because if you buy the stock now, you get a free put option, as you will be able to tender the stock into the offer at some point in time. Depending on the time horizon, this option is worth between 4,5-8% (30-90 days). I don’t think that there will be a higher offer or something, but based on the historical volatility there is a good chance that we see slightly higher prices. Effectively it is a 0% savings account (quite attractive these days) with a bonus component.

Of course you cannot sell the option directly, but you can buy the share and make a pretty one sided bet on higher prices until the offer expires. At current prices there is no downside risk. A more sophisticated investor could buy the stock and sell a call in order to monetize the put option.

It is to a certain extent quite similar to the FIAT case but in my opinion with less execution risk.

Just to be on the safe side: I would not buy Sky Deutschland outright, this is a pure “special situation” investment.

For the portfolio, I will allocate a 2,5% position at current prices to this special situation, my return target is 5% within the next 30-90 days.

DISLAIMER: This is not a free lunch, of course there are risks which I haven’t mentioned or though of. But to me it looks like a pretty good risk/return progile.

Short cuts: KAS Bank, April SA, Draegerwwerke GS

KAS Bank

When I invested into KAS Bank, the Dutch, the main motivation was the cheap valuation and the stable core business (custody). One add-on was that they wanted to extend their retail business together with dwp bank from Germany.

For some reason, dwp decided not to go ahead with this cooperation and cancelled it in June 2014. Kas Bank will be compensated for this according to the press release:

As a compensation for the loss of the anticipated annual saving that KAS BANK would have realised from 2016 onwards, dwp bank will pay KAS BANK a lump sum at the end of June which, after deducting the costs in 2014, amounts to approximately € 20 million. KAS BANK will use this one-off compensation to invest in further improving its efficiency and its services to institutional investors. dwp bank will focus its future investments on improving the quality and standards of its operations and IT.

20 mn compensation for a 160 mn Market company is a lot, but it seems that this contract would have been quite good for KAS Bank going forward. Maybe it was so good that dwp bank only recognized it after signing ? I don’t know. In any case, I think the “Value case” for KAS Bank is still intact. Book value should still be achievable, which would mean the stock has still 50% upside let, despite the quite satisfactory performance of +58% (incl. dividends) since I bought the stock 2 years ago.

April SA

A few weeks ago, I finally sold the rest of my April SA position. I never really explained this in more detail. When I first looked at April SA, I didn’t buy it because the stock was not cheap enough (part 1, part 2, follow up, follow up).

I only established a position when the stock got hammered during the EUR crisis, as they were then trading in single digit P/E territory and implcitly I asumed at least constant earnings going forward. Fast forward 2 years. EPS developed negatively, both in 2012 and 2013:

31.12.2010 1,96
30.12.2011 1,37
31.12.2012 1,32
31.12.2013 1,26

Nevertheless, the new-found enthusiasm for European and especially French stocks led to a significant multiple expansion from around 8xP/E to ~ 14xP/E in June. Although I still think that April is not a bad company, I had to admit that the ~63% return I made on the stock was much more luck than anything else as I don’t think that multiple expansion like this (even considering shrinking EPS) could be forecasted. Additionally, I found much more interesting alternatives in the insurance sector (Admiral, NN Group), so I decided to sell although the two years holding period were shorter than I would normally target.

Draegerwerke GS

A few days ago, Draeger revised their guidance for 2014 significantly downwards. The stock got hammered significantly, the Genußscheine lost some value as well but less than the shares.

For me, Draeger was always a relative bet, assuming that the intrinsic value of the Genußscheine (10 times the Vorzuege) would at sometime close. I never believed that Draeger itself was a “great” company. Looking at the developement of the ratio (price Genußschein / Price Vorzuege) we can clearly see that currently we are in a territory which we haven’t seen for the last 15 years:

draeger upd 2014

At almost 6 times the Pref shares, the relative risk/return ratio is not as good as it was before. With almost 7%, the Draeger Genußschein is still with a margin my largest position. In order to reflect the somehow lower relative potential of this position, I will cut the position to a 5% stake going forward.

Some links

GMO’s very interesting Q2 letter. Their speculation about a massive M&A boom is quite realistic

Wexboy’s 6 month performance review

A list of 5 unknown but interesting books about investing

A great profile of Hedge Fund honcho Leon Cooperman

An interesting but very exotic stock analysis from WertArt (UK listed Indian private equity…..)

Finally, in German, the second quarter report of ProfitlichSchmidlin Fonds. Especially the bond section is worth reading with a lot of interesting ideas.

Book review: “The Go Go years” – John Brooks

“The Go Go years” was how the late 1960ties were called at Wall Street. Although covering a time almost 50 years ago and written in the early 1970ties, this book is still a very good read as a lot of things that happened and a lot of things invented in the 1960ties still influence capital markets.

Among the innovations of the 1960ties were Mutual funds, conglomerates, earnings per share games via acquisitions, financial “innovation” like convertibles, letter stocks etc. etc. Especially the interaction between the new and red-hot Mutual funds and the acquisition hungry conglomerates pushed up stock market levels significantly over the 60ties.

The book gives a very good account especially how stocks were actually traded back then. Paper certificates had to e moved from seller to buyer and due to the increasing trading levels, a lot of transactions wer not correctly settled. Also woman were rarely seen in “real” finance jobs and were denied entry to most of the restaurants around Wall street.

The book contains also some amusing side stories about the beginning the Hippy movement, for instance that many of the back office guys were pretty much on drugs all the time which further added to the back office problems.

There is also good coverage on some of the most “notorious” conglomerates and early “Raiders” like Saul Steinberg, who, finally unsuccessfully tried to take over one of the biggest banks back then, Chemical Bank.

Although this isn’t mentioned in the book we all know that Warren Buffett closed his partnership in 1969 because he didn’t find anything interesting to invest in, but he was definitely not a houshold name back then. Funnily enough, Buffet’s Berkshire itself became the most succesful conglomerate ever over the next 50 years, although with a clearly more conserative structure then the “Go go” guys.

The whole story culminates in the “almost fail”of two of the biggest brokerage houses at that time, Goodbody and Du Pont in the early 1970ties. Du Pont was actually rescued by Ross Perot, founder of EDS and future billionaire presidential candidate.

This part of story almost reads like a 1:1 copy to Bear Stearns and Lehman Brothers 40 years later. Too much leverage, aggressive deals etc. Interestingly, the partnership structures did not prevent those problems as “partners” could take out their capital with a 30 day notice. of course those institutions “had to be saved”, a 1970ties version of to big to fail. Goodbody by the way was “saved” by Merril Lynch, which as we all know now had to be saved 40 years later by Bank of America. Other than now, no tax payer money was involved though.

There is a pretty good Wikipedia entry about the author John Brooks, a “New Yorker” staff writer who has written a couple of other interesting sounding books.

Overall I found this a very very good book and a “must read” for anyone interested in the history of Wall Street and the stock markets in general.

Some lessons to be learned are from my point of view:

1. On Wall Street and in finance generally, “innovation” very often means gains for the guys who run them and big risks and big pain in the long-term for investors

2. Brokerage houses and banks are naturally unstable institutions. Even the best regulation will not make them stable businesses

3. Investors forget quickly, only 10-15 years after that episode, the junk bond mania broke out. After 10-15 years it seems one can run the same schemes again. The current startup, social media etc “craze” is taking place 15 years after the first boom

4. Whenever the “plumbing” of the market is not working, it gets dangerous. Something similar was happening in 2007/2008 with unsettled CDS contracts

5. Business stratgies relying on ongoing and ever biiger acquisitions are risky and most often do not end well (Valleant anyone ?)

The author closes the book with the expectation that Wall Street will never be the same. To a certain extent he was right as future events were not “The same” but the basic patterns were very similar. Boom bust, speculation, greed, fraud belong to Wall Street, only their appearance changes slightly.

P.S.: The “go go” years were called so because quite often, people would stand before stock tickers in brokerage offices and shouting “Stock x – go go go stock x”….

Fiat Merger Cash Exit rights – Short term “high yield deposit” ?

Thanks to the reader who sent me this idea. Althought the stock price has risen in between, I still think it is interesting to look at this country specific “special situation”.

The Italian stock market is always worth a look as things are definitely different south of the Alps. I have documented a couple of cass where minority shareholders were the victims, but sometimes, Italian stockmarket laws actually seem to protect minority shareholders.

The FIAT merger

FIAT Spa is currently in the process to merge its Italian operations with a Dutch Holding company which holds Fiat’s interest in Chrysler.

In order to do so, FIAT is holding an Extraordinary shareholder meeting on August 1th. Now comes the interesting part: Under Italian law, any FIAT shareholder can vote against the merger (or not vote for it) and is then entitled for a so called “cash exit right”, which gives him the right to sell the shares back to the company. Normally, this compensation is a 6 month average, but in Fiat’s case the cash compensation has been fixed at 7.727 EUR per share.

Details about the cash exit rights can be found in the official prospectus.

Q: Are Fiat shareholders entitled to exercise dissenters’, appraisal, cash exit or similar rights?
A: Under Italian law, Fiat shareholders are entitled to cash exit rights because, as a result of the Merger, the
registered office of the surviving company in the Merger, FCA, will be outside of Italy, Fiat ordinary shares will
be delisted from the MTA, and FCA will be governed by the laws of a country other than Italy. Cash exit rights
may be exercised by Fiat shareholders that did not concur in the approval of the merger plan at the extraordinary
general meeting. The exercise of such cash exit rights will be effective subject to completion of the Merger. A
Fiat shareholder that has voted shares in favor of the Merger may not exercise any cash exit right in relation to
those shares. A Fiat shareholder that properly exercises cash exit rights will be entitled to receive an amount of
cash equal to the average closing price per Fiat ordinary share for the six-month period prior to the publication of
the notice of call of the extraordinary general meeting which is equal to €7.727 per share. If the aggregate
amount of cash to be paid to Fiat shareholders in connection with the exercise by such shareholders of cash exit
rights under Italian law and to creditors pursuant to creditor opposition rights proceedings under Italian law and
Dutch law, respectively, exceeds €500 million, a condition to closing of the Merger will not be satisfied.

Exercise period Timeline:

This is from the prospectus:

In accordance with Article 2437-bis of the ICC, Qualifying Shareholders may exercise their cash exit rights, in relation to some or all of their shares, by sending notice via registered mail to the registered offices of FIAT no later than 15 days following registration with the Companies’ Register of Turin of the minutes of the FIAT Extraordinary Meeting of Shareholders. Notice of the registration will be published in the daily newspaper La Stampa and on the FIAT corporate website.

If I read this correctly, this will at the earliest start with the day of the annual shareholder’s meeting, if they manage to register on the very same day. I asume that it is then 15 calender days. The money will be received on the “effective date of the merger” (A-15), which after reading the

The 500 mn EUR threshold

If more than 500 mn EUR “cash exit rights” are exercised, the merger will not take place and the cash exit rights are not valid. How big is the risk ? Fiat did the same structure with Fiat International and there, only 25 mn EUR rights were exerecised. In my opinion, FIAT will want to make this merger happen IN ANY CASE so I consider this as a very remote risk.

Stock chart

Last week, when I first looked at this, Fiat was still trading at around 7,35 EUR which would have meant a 5% upside (or 10% annualised) for this relatively riskless trade. At the current price of almost 7,60 EUR and considering transaction costs, it looks less compelling.

Nevertheless it is worth watching the FIAT stock in the next few days i there is a potential entry point if we see weakness in the overall market.


Although at the moment, the Fiat Merger Cash Exit Rights do not look that interesting, in general this looks like an interesting short term “high yield” opportunity. I could imagine that also other Italian companies are trying this sort of cross border merger to escape onerous Italian provisions so it will be worth keeping an eye on similar situations.

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