Kategorie-Archiv: Opportunities

Short cuts: Gronlandsbanken, SIAS SpA, Thermador, April

Gronlandsbanken

Already some weeks age, Gronlandsbanken reported 2013 numbers and published their 2013 annual report, which is again a must read for anyone interested in Greenland. The bank seems to be a little bit more optimistic than last year.

Profit was around 10% lower than in 2012, which is not bad for a stagnant economy. The dividend has been kept stable which means the dividend yield of around 7,8% at current prices. Overall, Gronlandsbanken in my opinion still offers a lot of positive optimality, although it might need a few more years to really see an impact of potential large-scale mining projects. Better than with a “classical” option, I get paid for waiting.

SIAS Spa

Sias released 2013 results last week (in Italian only). Traffic was again down compared to 2012, but revenues increased due to the purchases out of the South America proceeds. They earned 0,61 EUR per share resulting in a trailing P/E of 13.8. For a “average” company like SIAS, this is already relatively expensive in my opinion, so I will sell down half of my current position (5,3%) at current prices, which would result in a profit of close to 100% for this part.

Thermador

Finally, Thermador released 2013 numbers and its English language annual report. Sales declined in a tough market by -2%, profit slightly more from 4.96 EUR per share to 4,68 EUR. Cash flow however was very strong due to a significant release of working capital, net cash is now around 32 mn EUR or ~ 7,4 EUR per share. The cash adjusted P/E of around 14 for a high quality firm like Thermador is in my opinion still adequate.

April SA

Already a few day<s ago, April presented preliminary 2013 results. Overall profits were a little bit lower than in 2012 resulting in 1.22 EUR Earnings per share against 1,38 EUR in 2012. Although this is the 5th decline in a row, this time the reason seems to be almost exclusively in the lower interest rates. I think one can expect that from a operational point of view, the bottom should be near.

Interestingly, they still earn very nice ROCEs even at those depressed levels. Adjusted for cash, they trade at single digit P/E which implies in my opinion still a good risk/return relationship.

Energiedienst Holding (CH0039651184) revisited

Almost exactly one year ago, I looked at Energiedienst Holding, the Swiss/German Hydropower utility.

That was my summary from last time:

The current system for renewable energy in Germany (selling renewable electricity into the market at any price with the consumer paying the difference) is hell for “traditional” utilities including hydro power.

The German utilities have maybe underestimated the extent of renewable production, otherwise they could have done the exactly same thing themselves. Now however, the are in a kind of “death grip” between having to run their expensive black coal and gas plants for peaks and the artificially low electricity prices. Combined with unfavourable natural gas delivery contracts, especially for E.on the air will remain quite thin.

So unless something changes significantly, German utilities (including Energiedienst) will need a long long time to adjust capacity and change their business models.

So the first questions is of course: Did something change ?

Well, firstly, the stock price of Energiedienst dropped a further -25% form around 38 CHF to currently around 29 CHF. So just from the pure valuation point of view, the stock clearly looks cheaper:

P/B 0.86
P/E 12
EV/EBIT 12
EV/EBITDA 7
Div. Yield 5.1%.

Energiedienst released preliminary numbers for 2013 today. At a first look, it doesn’t look pretty. EPS came in at 1.99 EUR per share, the third consecutive decline since the peak at 2.70 EUR in 2010.

Looking further into their preliminary numbers, I was especially surprised by this:

  2013 2012 change in %
EBIT in Mio. € 79 99 -20%
EBIT Segment Deutschland in Mio. € 53 56 -6%
EBIT Segment Schweiz in Mio. € 27 43 -38%

Profit in Germany was only slightly lower, but we see a big drop in Switzerland which is surprising. In the text they mention that they took a special charge for long-term electricity purchases in the first half-year so one can assume that this has to do with the Swiss business. So not surprisingly, Free Cash Flow looks better than earning:

  2013 2012 change in %
Free Cash Flow in Mio € 79 83 -5%
Bruttoinvestitionen in Mio. € 44 57 -23%

This results in a total net cash balance of 146 mn EUR at year-end or 4.40 EUR per share which is almost 20% of the current market cap. So “cash adjusted” P/E is around 10. Additionally, they announced some kind of strategy change and review, however without any real details

OK, so we do have a relatively cheap but declining business, why bother ?

First, at least to me it looks that Electricity prices have at least for now stopped their free fall as those two charts show:

I am clearly not an expert on electricity prices, but with the currently mild winter (or no winter at all), I would have expected a further drop but that doesn’t seem to happen at least for now.

Political environment

Since last year, again some things have changed. We have now the “GroKo” in Germany, the coalition between the two large parties, conservative (CDU) and Social democrats (SPD). Interestingly, the boss of the junior party SPD, Sigmar Gabriel, has taken over the responsibility for Energy.

As I described a year ago, under the current system, mostly retail clients have to pay a surcharge in order subsidize above-market prices offered to the owners of solar and wind power plants. Many large companies are not subject to this “tax”.

The surcharge is increasing every year, both because of lower wholesale prices and additional capacity. However, pressure is building up against this system from many sides. Clearly, the established utilities are fighting against this as hard as they can and threaten to switch of expensive gas-fired power plants which are essential for net stability. But now, also the EU commission started to look into the exceptions for large companies already in December.

Also the core voters of the SPD are mostly lower-income recipients which are most effected by increasing electricity prices along rising rents. So Sigmar Gabriel, the SPD energy minister has to do something in order to stop further retail price increases or he will have no chance of winning the next election. Some ideas were already floated, mostly a limitation of future renewable capacity and lower rebates in the future. The concept drew a lot of critic from all side, although some parts, especially the requirement for direct marketing of renewable power doesn’t seem to be that bad.

In parallel, the bankruptcy of wind energy “pioneers” like Prokon shows that even under current high transfer payments, the big boom in new renewable energy seems to be mostly over and I guess investors will be much more careful in the future.

On top of that, the big utilities are taking out a lot of conventional capacity in Germany, party also in order to increase the pressure on the politicians.

So without being an expert in those issues, it looks like that the “tide might be turning” at some point in time in the future with regard to electricity prices or at least that they are not falling that much more. But this is clearly my own opinion and cannot be supported by a stringent theory or facts.

But why Energiedienst ?

As I have written before, the big traditional utilities like RWE, EON etc. have a lot of other problems, like too much debt, nuclear liabilities, pensions, problematic foreign subsidiaries etc. Even Verbund, thy Austrian Hydro Power utility has a lot of issues with Italian and other foreign investments. Energiedienst, on the other hand does not have those additional issues.

Energiedienst still looks more expensive than its peers:

Name P/E EV/T12M EBIT EV/EBITDA T12M P/B Dvd 12M Yld – Net Net D/E LF
             
ENERGIEDIENST HOLDING AG-REG 11,8 10,2 5,9 0,8 5,2 -7,8
VERBUND AG 9,4 9,8 4,8 1,1 3,8 70,5
RWE AG 108,3 7,2 3,0 1,5 7,4 77,9
MAINOVA AG 15,4 50,5 23,3 2,3 2,4 76,4
E.ON SE 12,2 8,2   0,7 8,3 45,2
ENBW ENERGIE BADEN-WUERTTEMB 51,0 13,0 6,1 1,4 3,1 43,0
LECHWERKE AG 21,7 21,6 14,7 3,1 2,8 -55,8

They do not jump out of this comparison table as the “super cheap” utility. But if we look at Lechwerke in comparison, a comparable, regional, Hydropower utility in Bavaria owned by RWE, sometimes quality is honored with very rich valuations.

In my opinion, the quality of Energiedienst, especially in comparison to EON, RWE & Co is not reflected in the share price. Clearly they suffer as well from current electricity prices and they are not a growth stock, on the other hand, as a hydropower generator without variable input cost, they will benefit the most from increasing prices.

The downside at the current level is in my opinion relatively protected, unless they do something really stupid with their net cash. This is in my opinion the key issue to watch going forward. Energiedienst will generate a lot of cash as reinvestment requirements will be rather limited. If they owuld actually start ti buy back shares, this couldbe a nice surprise but there is no indication that they willdo so.

I am aware that buying a German utility stock now is a pretty contrarian play and many people will say EON and RWE are cheaper and could more speculative upside or not to invest in utilities at all. My focus however is more on the downside, where I think Energiedienst is much better protected than the big, indebted players. So overall, I think the “full” risk/return relationship of Energiedienst is better.

Summary:

An investment into Energiedienst is clearly a bet on constant or higher electricity prices based on potential political changes, so it is rather a “special situation” investment with regard to potential regulatory changes from the current, unsustainable status quo. What I like about this bet is that to a large extent this will be driven by political actions which will be either uncorrelated or even negatively correlated to the overall economic situation and hence, to the rest of my portfolio.

My return target over 3 years would be the annual dividend of currently 5% plus a stock price increase of ~30% which would indicate a target P/E of 13-14 at current Earnings (ex then cumulated cash).

So for the portfolio, I will initiate a 2.5% position for the “special situation” bucket at ~29.50 CHF / 24.50 EUR per share.

Prime Office AG (DE000PRME020) – Strange rights issue

I have linked to the “special situation” stock Prime Office already in the past. The story in short:

Oaktree has effectively taken over a struggling German Office Reit by contributing a portfolio of office assets of their own. They then changed the status from REIT to “normal” company. In order to reduce the debt level, they started a rights issue a few days ago.

However this rights issue has a strange twist: Although the subscription rights are already traded (ISIN DE000PRME1B7), they did not publish the subscription price of the new shares yet.

Just as a reminder, let’s look how the value of a subscription right is calculated (from Stockopedia)

The calculated value of a subscription right. The theoretical value of a right during the cum rights period – which is the interval after the announcement of the rights offering but before the stock trades on an ex-rights basis – is calculated by the formula:

(Stock Price – Rights subscription price per share) / # of rights required to buy one share + 1

What we do know is that there will be 8 new shares for 23 old shares, that they are offering (up to) 46.58829 mn shares and that they want to raise 130 mn EUR. So one could calculate a theoretical subsrciption price of (130/46.59) = 2.70 and a value of the subscription right at the time of writing of (2.81-2.70)/(23/8+1)= 0.0283 EUR which is silghly lower than the traded prcie of 0.031 EUR per right.

But what I am asking myself is the following: Why did they do this in such a strange way ? Why didn’t they fix the price in the beginning as in very rights issue I have seen up to now ? I have no idea but I will watch that one closely.

Celesio Merger arbitrage “Post mortem”

So roughly 10 days after the first failed attempt, Haniel today announced that they have an agreement with both, McKesson and Elliott and that Haniel will sell for 23,50 EUR per share to McKesson.

What happened in between ? Elliott, after the failed attempt further increased its stake to 32% (including convertibles).

In a second step, Elliott sold its stake for an undisclosed price to Haniel, which then in turn sold the 75% plus stake to McKesson at the initial 23,50 EUR.

This structure achieved the following goals:

- Elliott got more than 23,50 EUR
- McKesson does not have to pay more than 23,50 EUR

The “Looser” is clearly Haniel, which will have proceeds lower than 23,50 EUR per share. A friend of mine argued that most likely Haniel paid 24,50 EUR which would roughly equal the initial 23 EUR per share. If this is that case, then we would have the paradox outcome, that the majority owner got the lowest price, the minority a little bit more and the Hedgefund the most.

This is something to keep in mind for potential future merger arbitrage deals: The minority shareholders might not get the same deal as the activist shareholder, at least in the cases where a majority shareholder is selling. In this case, the minority holders got a 50 cent better price than the initial bid, but I could imagine scenarios where there is also the risk of a lower bid.

Interestingly, the stocks jumped today over 25 EUR, I guess some people are already speculating on a compensation payment following the Profit & loss transfer agreement which is the logical next step after the purchase.

Personally, I don’t think that there is a lot of upside, but who knows ? In any case, I think Elliott played that one pretty well for themselves. In any case, this is a hard blow to JP Morgan as M&A advisor to Haniel.

There could be open questions if the whole deal could be interpreted as “acting in concert” between Elliott, Haniel and McKesson. In this case, the bid for all shareholders would need to be increased to the price paid from Haniel to Elliott. I have no idea how likely that is and would not bet on this either.

Celesio – why merger arbitrage is hard business

Let’s start with a few quotes from yesterday’s post:

a) It is almost 100% assured that the bid goes through, there is now a “floor” under the stock price at 23,50 EUR

and

I have written above that this was a “Low risk” bet. In reality, I do not know if it was high risk and I was very very lucky or if it was indeed low risk. In statistics, one would call this a “beta error”, assuming that one was right but in reality the probabilities were very different. For me the best way to handle this is to do only small “bets”, keep track of assumptions and outcomes. Systematic “beta errors” in investing in my opinion are very dangerous as this will inevitable lead to some disastrous outcomes in the long run (Bill Miller).

Very rarely, one gets such a direct feedback from the market. McKesson said yesterday around 7 pm that they did not reach the 75% threshold and dropped the bid.

So this was clearly no a low risk M&A arbitrage situation but a high risk one and I was very very lucky to exit just in time.

McKesson themselves seems to be surprised as well:

“This is fresh news to us. We obviously had the support of the management team, we had the support of the family, which obviously was a significant holder, we had the support of Elliott, which was one of the vocal players in this process,” he said. “The best I can speculate is that people either forgot the tender date or they somehow believed that there is more on the other side of this.”

Let’s quickly check the facts:

In their 9th notification, dated January 9th, 2 pm, McKesson reported the following:

As of the Notification Reference Date, based on the regular conversion price, the aggregate number of Celesio-Shares held by the Bidder and/or persons acting jointly with it plus the number of Celesio-Shares for which the Takeover Offer has been accepted plus the number of voting Celesio-Shares which can be acquired through instruments pursuant to section 25a WpHG amounts to 106,213,544 Celesio-Shares; this corresponds to approximately 62.44% of the currently issued share capital and the currently existing voting rights in Celesio. In relation to the acceptance threshold in section 13.1 of the offer document the aggregate number amounts to 107,617,021 Celesio-Shares, which corresponds to approximately 52.94% of the share capital and the voting rights in Celesio on a fully diluted basis.

This was a significant increase against the 44,88% (fully diluted) a day before.

How much did Elliott own ?

This is from their official “recection” notice as of December 23rd:

Elliott Associates, L.P. and Elliott International, L.P. together with affiliated entities (“Elliott”), which own or have an interest economically equivalent to over 25% of Celesio AG (1)
(1) Calculated in accordance with Section 25a of the German Securities Trading Act (Wertpapierhandelsgesetz/WpHG), in connection with Sections 21, 22 and 25 WpHG

Elliott did report surpassing the 25% threshold in late November 2013.

If I read this correctly, they owned 25.1% on a non-diluted basis.

So let’s do quickly the math with what we have available:

  Undiluted Diluted
McK 107,617,021 62.44% 52.94%
Elliott 42,803,603 25.16% 21.06%
Total   87.60% 74.00%
       
Celesio      
Shares undiluted 170,100,000    
Shares diluted 203,281,113  

So this is interesting: Even with Elliott tendering its full stake, McK was still short 1% to their threshold on a diluted basis.

Could it be that this whole thing was just an accident ? No super-clever play by Elliott but rather a stuoid one ? Were other people assuming like myself that the offer period would be extended ? I don’t know, but I think it would have been better if MCK had said something about the offer period.

Looking back at the Rhoen chart after the first bid failed, one can expect the stock price to be very very volatile:

Anyway, I will watch this from the side line and will be extra carefull with the next M&A arbitrage situation….

Celesio Merger Arbitrage – follow up (and exit)

On Thursday, acquirer McKesson and Elliott agreed on a slightly increased offer 23.50 EUR (vs. 23 EUR) per share which Elliottt promptly accepted.

Interestingly,the stock trades now higher than the offer:

Apparently, during Wednesday some people already anticipated the increased offer. Technically, the acceptance period has not been extended and closed on Friday, January 9th according to the official statement. Honestly, I do not understand this. If I read §21 of the German take over law correctly, any late change in the offer automatically extends the offer period by 2 more weeks. I will need to double-check this.

The offer for the 2018 bond was also increased to 123.4 according to the amended bond offering document.

So what to do now with the price of he shares trading above the 23,50 EUR offer ?

Going back to the initial post, that’s how I valued the shares back then:

Now if we want to speculate on a top up, we have to make two assumptions: How likely is a top up and how large will it be ? In order to keep it simple, I would assume a 50/50 chance for a top up and as I like “round” numbers, I assume 5 EUR per share or a final offer at 28.

This leads us to the following expected value under those assumptions:

Exp. value Celesio share = (3.4% x 17) + (48.3% *23) + (48.3%*28)= 24.25 EUR or around 10.6% higher than the current share price.

So if we leave aside the rather bad mistake in calculating the upside potential, the price is now where I saw the “fair value” before, although I was totally wrong about the size of the “top up”. The reason that I still can make some money was that I bought below the initial bid price and the stock price did overshoot the offer.

Now we do have a very different situation compared to some weeks ago:

a) It is almost 100% assured that the bid goes through, there is now a “floor” under the stock price at 23,50 EUR
b) on the other hand it is a lot less likely that the bid will be further increased.

I can think of two reasons why the stock is currently trading above 23,50 EUR:

1) People are hoping that Elliott might have one last trick up in its sleeve to increase the offer within a relatively short time
2) Speculation that McK wants to quickly achieve a squeeze out and will buy more shares and/or have to pay some compensation for implementing the profit and loss transfer agreement (similar to MAN).

Overall, the “new” situation for me is harder to grasp and the time frame is more difficult to estimate. One should also expect, that Celesio will show most likely a lot of extra charges etc. in the next few quarters in order to both, build some buffer for Mckesson in the future and to discourage shareholders bidding up the remaining shares.

So for the portfolio, I will exit the position at current prices with a modest gain of around 6.5% for the shares and a little less for the bonds. Not spectacular but also not bad for a 4 week and relatively low risk investment.

One final remark on such M&A Arbitrage situations:

I have written above that this was a “Low risk” bet. In reality, I do not know if it was high risk and I was very very lucky or if it was indeed low risk. In statistics, one would call this a “beta error”, assuming that one was right but in reality the probabilities were very different. For me the best way to handle this is to do only small “bets”, keep track of assumptions and outcomes. Systematic “beta errors” in investing in my opinion are very dangerous as this will inevitable lead to some disastrous outcomes in the long run (Bill Miller).

Special situation: MAN AG (ISIN DE0005937007 / DE0005937031)

Short Background:

Volkswagen, the Geman car giant bought the majority of MAN AG, the German truck maker back in 2011. Over the next year, they increased their shareholding to 75%.

Under German law, once the 75% threshold is reached, a majority owner can implement a contract which cedes the full control to the majority shareholder. However, a compensation amount plus a guaranteed dividend has to be offered to minority shareholders. (for a true squeeze out, at least 90% ownership is required). The main benefit of those kind of contracts is not only control but also a big advantage from a tax perspective.

In the 2013 shareholder meeting of MAN, a “Beherrschungs und Gewinnabführungsvertrag” (BGAV) was decided with the following amounts:

- shareholders will receive a compensation of 80,89 EUR directly if they hand in the shares
- OR a guaranteed dividend of 3,07 EUR per share if the compensation offer is not accepted

Normally, investors have 2 months time after the BGAV has been registered in the commercial register (Handelsregister) in order to tender the shares. Minority holders however have the right to challenge the terms if they think that the offer is too low.

And here it gets interesting

As part of the process, MAN had to present the underlying assumptions and the valuation details to the shareholders. The document can be downloaded here (German).

And there the fun starts.

For instance on page 114, they describe the inputs for the calculation of the terminal value starting 2018. For some unexplained reason, the starting EBIT is some 24% lower than the official company plan on page 91.

As a risk free rate they use 2.5%, which for a German company should be a lot lower. Also the assumptions for Beta and Growth (-1%) as well for the equity premium are not in line with “standard” assumptions.

If any of those assumptions gets successfully challenged, Volkswagen has to pay more. One can easily calculate this in a spreadsheet.

All in all, a final price of 105-110 EUR might not be unrealistic. The downside is limited. If the court approves the original price, shareholders can still “put” the shares to Volkswagen at 80,89 EUR plus a 5% interest since the BGAV has been implemented.

The “Spruchstellenverfahren” is held in Munich which is known to be rather minority friendly.

One remark: 3. quarter results of MAN on a net income basis were quite weak, but this will not be taken into account for the current trial. Only the assumptions of the submitted document are relevant, not the “real world developement”.

Valuation:

So we have a quite interesting situation here:

The downside is ~82 EUR, I.e. a loss of 7 EUR for the common shares vs a potential gain of 15-20 EUR. If we assume a 50/50 chance, we already have a positive “expected” value of 11-13 EUR per share.

The stock price itself is slowly trading up since July:

Although this does not sound like a huge deal, I think it is a nice, uncorrelated “bet” with a rather short time horizon and a clearly limited downside. Therefore, I have opened a 2.5% position in the common shares at 89 EUR and hope for a minority friendly outcome….

Edit: There are by the way a couple of erman stocks which have this guaranteed dividend. Some of them might be an interesting alternative to bonds. More in a later post.

Portfolio transactions: MIKO BV, Emak SpA

MIKO

MIKO issued a short Q3 trading update 3 days ago, which in my opinion is very very good. I did already buy more MIko before and have now upgraded into a full 5% position.

This is an excerpt from the release:

Turnhout, 28 October 2013 – Miko NV, the coffee service and plastic packaging specialist listed on the NYSE Euronext Brussels, has announced that during the third quarter of 2013 its turnover was 12.8 % higher than during the same period last year. The combined turnover for the first nine months of 2013 increased by 6.7 % compared with the first nine months of 2012.

The growth in turnover is due, firstly, to increased sales in the plastic segment and, secondly, to the acquisitions in the coffee segment that marked the first half of the year (Kaffekompaniet in Sweden and ABC Mokka in Denmark).

In terms of results, there were encouraging increases in both these segments.

According to Mr Frans Van Tilborg, CEO and Managing Director of the Miko Group: “Within the coffee service sector, we have seen a slight drop in sales in most domestic markets, Germany being a positive exception. Although the economic crisis is far from over, the situation has been helped by a number of acquisitions and by reductions in the price of raw materials. In addition, the plastics division is still performing well, with impressive sales growth at each of our plants in Belgium, Poland and Germany. We are optimistic for the rest of 2013.”

This represents a huge acceleration against the first 6 months.

It is a kind of strange feeling to buy at an all-time-high, but on the other hand I try to avoid any kind of anchoring with regard to past stock prices in my decisions. Fundamentally, I think MIKO is a really good deal at this price level.

EMAK Spa

On the other hand, I sold half of my EMAK Spa position. EMAK is/was a “special situation” investment I made during the brutal capital increae in 2011. Now, the price jumped to a level where I think the risk/return relationship is not as good any more. There was no fundemenatl news, so I assume that part of this price jump is the due to the momentm of PIIGS small caps in the last few weeks.

Compared to MIKO for instance, which is growing nicely, EMAK seems to be now rather overpriced, even assuming a further recovery in the “PIIGS”.

As I am always selling too early, I sold only half of the position now ;-) I will decrease my FTSEMIB hedge accordingly, as now the Italy exposure is down to only around 12.5% of the portfolio.

Short update Portugal Telecom /OI: Sale of 6.1% stake by Caixa Geral

In my first post on the PTC/OI merger I wrote among others the following:

For some PTC shareholders, the problem might be that the suddenly do not hold a Portuguese/European stock but a Brazilian one. According to the official announcement, the new stock will be listed in Brazil, US and on NYSE Euronext, so technically it should be not a problem for shareholders.

Today, Government owned Portuguese Bank Caixa Geral, which owns 6.1% in PTC announced to sell their stake:

Oct 24 (Reuters) – Portugal’s state-owned bank Caixa Geral de Depositos will sell its outstanding 6.11 percent stake in Portugal Telecom in a private sale as part of plans to sell non-core assets, the bank said on Thursday.

The sale of 54.77 million shares will be carried out via an accelerated bookbuilding process aimed at certain investors.

I am not sure if they wanted to sell anyway or if they have issues to hold a Brazilian stock, but in either case I think such a sale provides a good opportunity.

The stock has been currently suspended from trading, but I will try to increase my 0.5% stake to 1% today.

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