Category Archives: Opportunities

AGEAS (ISIN BE0974264930) – Potential litigation play ?

The company:

Ageas is a Belgium based insurance company and formerly known as “Fortis”, one of the biggest Eurpoean casualties of the financial crisis. Fortis, together with RBS and Santander tried to take over ABN Amro but especially Fortis then failed spectacularily and was saved by the Belgian Government and finally sliced and diced into Insurance and Banking, of which the banking part was sold to BNP Paribas.

Ageas itself is an interesting case, similar to NN Group, it is a strange collection of Belgium, UK, and Asian insurance companies plus some weird stuff at corporate level, resulting from the quite ugly split of a combined group into two separate businesses. However, a lot of the ugly stuff has already been cleared over the last few years and Ageas was looking like an almost “Normal” insurance company

The litigation

A few weeks ago, a Dutch court decided that Ageas is liable for misinforming Fortis shareholders in 2008:

The Amsterdam Appeals Court ruled that Fortis is liable for misleading investors by saying the firm was “financially stronger than ever” after a government bailout on Sept. 28, 2008, only to be replaced by a break-up plan five days later.

and further down:

Ageas should be able to meet a worst-case liability of 2.5 billion euros before taxes possibly stemming from the ruling, Matthias De Wit, a Brussels-based analyst at KBC, said in a note today. Still, potential indirect effects shouldn’t be ignored, he said.

Looking at the stockprice, we can estimate that the stock lost ~ 5 EUR per share:

With about 230 mn shares outstanding, the market seems to have implied ~ 1,1 bn EUR loss after tax. Ageas itself has provisioned around 130 mn EUR against this case.

Is this interesting ?

At the moment, it is hard to say. Ageas trades at ~0,62 times book value, which is relatively cheap. They are very active in repurchasing shares (sharecount decreased by -115 since 2011). I do like the insurance sector at the moment because its cheap and the problems (low interest rates etc.) are well known.

Insurance companies do have traditionally very good lawyers on their payroll and litigation is part of their business, so one can assume that they handle this very professionally. On the other hand, other than the CIR Spa case, there is no direct catalyst as the law suit can linger on quite some time.

Valuation wise, Ageas look similar to NN Group, actually, I could easily see those two Groups merging at some point in the future. My guess is that someone is maybe already working on the idea to form a strong Benelux players out of the available mid size companies (Delta lloyd, NN Group, Ageas, SNS).

Nevertheless, I do not think that AGEAS is a “Litigation play” at the moment, as I don’t have a good idea on the time line of the law suit. However it it looks like a pretty cheap insruance company with some upside potential, so I will keep it on my watchlist.

Alstom SA (ISIN FR0010220475) – an interesting potential “sum of parts” play after the GE deal ?

Profitlich & Schmidlin (“P&S”) had a post a week ago (in German) on how they view the current situation at Alstom.

A short refresher: Both, General Electric and Siemens wanted to take over Alstom and/or parts of it. At the end, GE prevailed, however they failed to take over Alstom completely. Instead, they purchase the Grid, Renewables and Power businesses, leaving the Transport business at Alstom.

In order to make it more “interesting” and to please the French Government, GE and Alstom will form 3 Joint Ventures of which Alstom will buy a 50% share each. Plus Alstom will buy a transport related business from GE for 600 mn EUR. Additionally, Alstom seems to have a put option for these JV back to General Electric with a floor of 2,5 bn EUR.

So in theory, one could now use the information given for instance in the GE press release and calculate a prospective “sum of the parts” valuation for Alstom after the deal and this is how P&S have done it:

No op Assets  
Net cash 4.122
London Metro loan 364
Transmash 700
Pension, others -620
Total 4.566
Per share 14,78

On top of those ~15 EUR per share “extra assets” they add the 2,5 bn EUR for the JVs, which results in around 22,87 EUR per share for all those non-transport assets. With a “fair value” of the transport business of ~11 EUR per share they come up with their target value of 34 EUR per share, which would mean a nice +30% upside potential based on the current share price of 26 EUR.

My 5 cents on this

First of all I find it great that P&S share their investment case via their blog. This is definitely a good thing. And clearly, as with everything, it is their opinion and not everyone will agree with this. My opinion differs from theirs, but that does not mean that they are wrong or vice versa.

Before jumping into the details, I would just want to refer back to some earlier stuff I have written about holding companies. The question is: will investors really apply a “full valuation” to the operating business plus all the “extra assets” or will they discount the extra assets, especially the JVs and the other non-consolidated assets. I think it is more prudent to apply a discount to the extra assets. Unless there is clear evidence that those assets get liquidated, I think it is too optimistic to assign full value to those assets.

A second big issue is that at the moment no one knows exactly how much of the liabilities will get transferred to GE. Especially with regard to operating leases (nominal ~830 mn EUR), litigation liabilities (528 mn EUR) and pension liabilites (gross 5,2 bn) there is no definitive answer how much will be transferred to GE and what remains at Alstom. In a sum of part calculation, any of those remaining liabilities will have to be deducted from the extra assets as they are economically equivalent to debt.

Net cash position

Let’s start with that one. In their annual report, Alstom provides us with EUR -3.041 as net cash at March 31st 2014. GE stated that the whole transaction will generate a 7,3 bn net cash outflow for them which is an equivalent inflow for Alstom.

So theoretically we could calculate -3.041 + 7.300 = 4259 mn EUR net cash for Alstom. However there are several caveats to this:

- transaction costs: A transaction like this easily swallows up a large amount of costs for lawyers, consultants bankers etc. I would assume between 100-300 mn cash costs for Alstom before closing, with an expected value of -200
- mark to market debt: Although any financial assets under IFRS are marked-to-market, debt is still accounted for at cost. If Alstom would really want to buy back their bonds to shorten the balance sheet, they would have to pay market value which is ~350 mn higher than book value. So net debt has to be adjusted for this.

So for my calculation, net cash would be 4.259-200-350 = 3.709 mn net cash after closing of the deal


Transmashholding is a 25% stake alstom holds in a Russian transport equipment manufacturer. P&S value this company 10x average 2012/2013 earnings at 700 mn EUR which is around 90% higher than book value. I would value this asset significantly lower because

- according to Bloomberg, the majority of the profit is “extraordinary profit”
– if we value them based on operating income (EBIT) with the same averaging, we would get on average 2800 mn Rubels EBIT p.a. (which is around 60 mn EUR p.a.) and assuming 10 times EV/EBIT we get 600 mn EUR EV. Minus ~10 bn RUB or 200 mn debt, the equity would be worth 400 mn, 25% of Alstom then would be 100 mn EUR.

Other liabilities

As I said before, we how much of the liabilities go to GE. My own assumption would be that all the critical ones (Litigation, Pension deficit, operating leases) are divided proportionally to the total amount of liabilities for the transport segment. According to the segment report in the annual report, transport had ~28% of all liabilities of Alstom. My default assumption therefore is that 28% of all “debt like” liabilities remain at Alstom as part of the transport business

Discount to extra assets

Finally, I would argue that especially as this complicated deal will only close in mid 2015, it would be quite optimistic to assume zero discount on the future cash inflow, JV assets etc etc. So I would actually discount those assets to be on the safe side with between 10-20% at the current status, as a compromise I will use 15% both, for net cash and the JVs. Just as a reminder: I am not sure if anyone remembers the planned GE – Honeywell merger in 2001. This looked like a done deal for a long time before the deal actually fell through. The deal might be very likely but there is always the risk of a deal stopper and one has to adjust for this in my opinion.

Bringing it all together & Summary:

So this would be my version of the “extra asset” calculation:

Net cash 03/2014 -3.041
+ Cash proceeds GE 7.300
– mtm bonds -350
– deal cost -200
Net cash adj 3.709
+ London Metro 364
+ Transmash 100
+ JVs 2.500
Total “extra assets” 6.673
– 15% discount JV&Cash -931
Discounted extra assets 5.742
– “pension others” from P&S -620
– 28% of Litigation liab -148
– 28% of operating leases -210
– 28% of pension underfunding -217
Adjusted “extra” assets 4.547
per share 14,71

With my rather cautious approach, i would value the potential extra assets after the deal ~ 8 EUR per share lower as P&S. Together with their valuation of the Transport business od ~11-12 EUR, the current Alstom price at 26 EUR looks fair with no big upside.

Clearly, any of my assumptions could (and should) be challenged as well. Transmash could be worth a lot more and maybe all the liabilities go to GE. On the other hand, one should not forget that the deal is not done yet. I am for instance not sure how happy the potential clients are and if I read correctly, they need approval of 32 national regulators for this deal. Plus, the French Government will be heavily involved in Alstom going forward which might lower the prospects of aggressive share repurchases and increase the risk for “strategic” acquisitions.

Alstom has proposed more detailed information in November before an extraordinary shareholder meeting. For me, at the moment Alstom is not a buy. This might change especially if most of the liabilities would be assumed by GE, then the Alstom “stub” could be really interesting. In the mean time, the stock however is “watch only”.

Bilfinger SE (DEDE0005909006) – Opportunity or Falling knife to be avoided ?


Bilfinger is a traditional German and international construction company with a history going back to 1880. As many of its peers, it tried to diversify away from the risky large-scale construction business into concessions and services. 3 years ago, Bilfinger surprised many by naming the the former German politician Roland Koch as new CEO. In 2011, Swedisch activist fund Cevian disclosed a 10% position and has increased this to 20% making them Bilfinger’s largest shareholders. Under Koch many of the traditional construction subsidiaries were sold and many new services companies were acquired. I counted 13 acquisitions in 2012 and 2013.

Up until early 2014, the strategy seemed to have worked well, margins and ROE/ROIC increased and the stock price hit an all time high of 93 EUR in April 2014.

Current situation

However since then, it seems that the “wheels went off”. Koch had to lower the guidance for 2014 2 times with quite significant impact on the share price as we can see in the chart:

Quite surprisingly for a traditional German company, he left the office on the very same day with his predecessor becoming his successor. There is some speculation in the press why this happened so fast but I think that activist investor Cevian was most likely also involved in this decision. Interestingly, Koch was buying shares for his personal account in July, so even he seems to have been surprised to a certain extent.

Falling knife vs. opportunity

I am a big fan of the saying “never catch a falling knife”. In the Bilfinger case we have a lot of risks:

- some of the many acquisitions could lead to further write downs, especially if a new CEO comes in and goes for the “kitchen sink” approach
– especially the energy business has some structural problems
– fundamentally the company is cheap but not super cheap
– often, when the bad news start to hit, the really bad news only comes out later like for instance Royal Imtech, which was in a very similar business. I don’t think that we will see actual fraud issues at Bilfinger, but who knows ?

On the plus side however we do have also a couple of arguments:

+ Bilfinger still has only a low amount of debt outstanding, so I don’t thin we will see a “Royal Imtech scenario”
+ Cevian will not sit back and watch. They have board members and a proven track record. They are usually in for the long-term but act quickly if things go wrong
+ Bilfinger does not have a majority owner and could be an M&A target
+ Bilfinger is a traditionally well-managed company
+ Analyst sentiment is already pretty bad (lowest quarter of the HDAX)

Especially the Cevian involvement looks interesting. The final target is pretty clear: By shifting the business mix more into engineering/service, they want to realise higher multiples than what traditionally is associated with “real” construction companies. Especially companies like Arcadis or Atkins trade at EV/EBITDA multiples of 8×-10. Bilfinger currently trades at around 6x EV/EBITDA, 10x EV/EBIT and 11 times earnings based on the reduced 2014 estimates. So there is clearly some potential here if they manage to stabilize the company.

On the other hand, Cevian clearly didn’t see that coming either. They actually increased their position in May when the stock traded north of 85 EUR. I would estimate that they paid around 70 EUR per share for their whole position.

Also, when we look at other comparable situations for instance Suedzucker, we can clearly see that the “knife can fall” a very long way down:

Clearly Suedzucker is not comparable to Bilfinger but it shows that one can easily lose 2/3 or more within a relatively short period of time if things og bad.

So what to do ?

Despite the lure of a “bargain” I will not invest now. For now I will stick to my principles and not catch a falling knife

What could make me change my mind ? For instance a new CEO who does not need to start with an accounting bloodbath……

“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.

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.

Portugal Telecom follow up – SELL

In April, I invested ~1% of my portfolio into Portugal Telecom because I found the merger situation with Brazilian Telco OI very intersting.

In the last few days, the stock price dropped like a stone because they disclosed a 900 mn “investment” into the troubled Portuguese “Espirito Santo” Group

Reader benny_m post a very good comment on the old post, asking where to find in the balance sheet those 900 mn EUR.

Looking into the 2013 annual report and the Q1 2014 report, there are only 2 possibilites:

1. Cash and Cash equivalents
2. Short term financial investments

Those are the respective amounts:

Q1 2014 2013
Cash 1.276 1.659
ST investments 1.071 914

So theoretically, the could be within either category. However two important caveats from my side:

- if they would book this under Cash and Cash equivalents, this would be scandalous and reminds me very much about the Royal Imtech fraud
– in the annual report, the comment to short term investments reads as follows:

This caption consists of short-term financial applications which have terms and conditions previously agreed with financial institutions.

They disclose 750 mn of “debt securities” which are described as follows:

(i) This caption includes primarily debt securities issued by PT Finance and Portugal Telecom that had an average maturity of approximately 2 months and were settled in 2014 at nominal value plus accrued interest.

This makes no sense. “Issuing” a security means actually receiving money. They cannot own their own issued securities as those would have to be consolidated out. Also the second part of the sentence makes no sense at all. Those amounts were not “settled” as the total amount even increased in Q1 2014.

To add insult to injury, Portugal Telecom actually discloses “related party transactions” with Banco Espirito Santo (BES) on page 219 of its annual report as they are a significant shereholder, but there is no word of the loans to “Rioforte” another Espirito Santo group company.

Let’s look back at the “official” press release of PTC:

PT subscribed, through its former subsidiaries PT International Finance BV and PT Portugal SGPS, a total of Euro 897 million in commercial paper of Rioforte with an average annual remuneration of 3.6%. All treasury applications in commercial paper of Rioforte will mature on 15 and 17 July 2014 (Euro 847 million and Euro 50 million, respectively). Treasury operations are carried out in the context of analysis of various short-term investment options available in the market and taking into account the attractiveness of the remuneration offered and are monitored and approved by the Executive Committee.

Additionally, it is thus important to note that the subscription of commercial paper of Rioforte is based on the 14-year long adequate experience in treasury applications of Banco Espírito Santo (“BES”) and GES entities, in the context of the strategic partnership signed in April 2000 between both parties. This strategic partnership contemplated the cross shareholding between both entities as well as the designation of PT as a preferred supplier of telecommunications to BES Group and the designation of BES as preferred provider of financial services to PT.

Both sentences are in my opinion a clear prove of dishonesty of PTC management. No, lending 900 mn EUR to a troubled financial institution IS NOT part of normal treasury operations. And second, if you have a “strategic partnership” then you shoul disclose this under the relvant section in your annual report instead ogf hiding it behind nonsensical comments.

I have actually send some simple questions to PTC IR (where did they book it etc.) but received no answer.


At this stage, I cannot say for sure if this is “only” dishonesty on part of PTCs management or if there is even fraudulent activity involved. In any case this looks really bad and as a result I will sell my PTC shares at current prices (2,18 EUR) and take the loss (~-27%. This is a company where you can’t trust management and even less their accounts/disclosures and this is an absolute “no go” for me.

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