In many books which deal more or less explicitly with “special situation” investing, for instance Joel Greenblatt’s “You can be a stock market genius” or seth Klarman’s ”Margin of safety”, many so-called “Corporate actions” are mentioned as interesting value investing opportunities.
Some of the most well know corporate actions which might yield good investment opportunities are:
- Spin offs
- tender offers /Mergers
- distressed / bankruptcy
However one type of corporate action which is rarely mentioned are rights issues and especially “deeply discounted” rights issues.
Let us quickly look at how a rights issue is defined according to Wikipedia:
A rights issue is an issue of rights to buy additional securities in a company made to the company’s existing security holders. When the rights are for equity securities, such as shares, in a public company, it is a way to raise capital under a seasoned equity offering. Rights issues are sometimes carried out as a shelf offering. With the issued rights, existing security-holders have the privilege to buy a specified number of new securities from the firm at a specified price within a specified time. In a public company, a rights issue is a form of public offering (different from most other types of public offering, where shares are issued to the general public).
So we can break this down into 2 separate steps:
1. Existing shareholders get a “Right” to buy new shares at a specific price
2. However the shareholders do not have to subscribe the new shares. Instead they can simply choose to not subscribe or sell the subscription rights
Before we move on, Let’s look to the two alternative ways to raise equity without rights issues:
A) Direct Sale of new shares without rights issues
This is usually possible only up to a certain amount of the total equity. In Germany for instance a company can issue max. 10% of new equity without being forced to give rights to existing shareholders. In any case this has to be approved by the AGM.
B) (Deferred) Issuance of new shares via a Convertible bond
Many companies prefer convertible bonds to direct issues. I don’t know why but I guess it is less a stigma than new equity although new equity is only created when the share price is at or above the exercise price at maturity. So for the issuing company, it is more a cash raising exercise than an equity raising exercise. Usually, the same limits apply to convertible debt than for straight equity.
So if a company needs more new equity, the only other feasible alternative is a rights issue. But even within rights issues, one can usually distinguish between 3 different kinds of rights issues depending on the issue price:
1) “Normal” rights issue with a relatively small discount
Usually, a company will issue the new shares at a discount to the old shares in order to “Motivate” existing shareholders to take up the offer. If they do not participate, their ownership interest will be diluted. Usually “better” companies try to use smaller discounts, high discount would signal some sort of distress
2) Atypical rights issue with a premium
This is something one sees sometimes especially with distressed companies, where a strategic buyer is already lined up but wants to avoid paying a larger take over premium to existing shareholders
3) Finally the “deeply” discounted rights issue
Often, if a company does not have a majority shareholder, the amount of required capital is relatively high and there is some urgency, then companies offer the new shares at a very large discount to the previous share price.
But exactly why are “deeply discounted” rights issues an interesting special situation ?
After all this theory, lets move to an example I have already covered in the blog, the January 2012 rights issue of Unicredit In this case:
- Unicredit did not have a controlling shareholder. One of the major shareholders, the Lybian SWF even was not able to transact at that time
- the amount to be raised was huge (7.5 bn EUR)
- it was urgent as regulators made a lot of pressure
As discussed, in the case of Unicredit, before the actual issuance at the time of communication the stock price was around 6.50 EUR, the theoretical price of the subscription right was around 3.10 EUR. However even before the subscription right was issued, the stock fell by 50 %. At the worst day, one day before the subscription rights were actually split off, the share fell (including the right) almost down to the exercise price without any additional news on the first day of subscription right trading.
But why did this happen ? In my opinion there is an easy answer: Forced selling
Many of the initial Unicredit Investors did not want to participate or did not have the money to participate in the rights issue. As the subscription right was quite valuable, a simple “non-exercise” was not the answer. As history shows, selling the subscription right in the trading period always leads to a discount even against the underlying shares, in this case some investors thought it is more clever to sell the shares before, including the subscription rights. Sow what we saw is a big wave of unwilling or unable investors which wanted to avoid subscribing and paying for new shares which created an interesting “forced selling” special situation.
Summary: In my opinion, deeply discounted rights issues can create interesting “special situation” investment opportunities. Similar to Spin offs, not every discounted rights issue is a great investment, but some situations can indeed be interesting. On top of this, those situations often are not really correlated to market movements and play out in a relatively short time frame.
I hate to admit it, but I am somehow a Seth Klarman “groupie” after reading his “margin of Safety” a couple of years ago.
So when ever Baupost reveals a new position, I stop everything else and try to find out why they did it (see my Microsoft analysis).
So I was quite surprised that Klarman now invested in Vivendi, the French media company.
In the hedge fund’s 2011 annual letter, they disclosed buys in private companies and mentioned recent purchases in Europe, without giving any names. The letter mentioned an expansion of the London office, as the hedge fund has been finding value due to large selling in Europe.
However, we have just discovered that Baupost’s largest disclosed equity holding (at least at the time of the purchase) was Vivendi SA (EPA:VIV) (VIV FP). The purchase was recently disclosed in Vivendi’s 2011 annual report.
Baupost owned 25.5 million shares as of February 29th, 2012; then worth close to $530 million using a ratio of 1.3:1 for euros to dollars. The $550million figure comes from looking at where Vivendi’s shares traded in 2011 and early 2012.
In the back of my mind I have always booked Vivendi as just another shitty media stock who spends all the money on stuopid acquisitions, however Klarman sticks to his strategy of buying cheap and struggling companies instead of “beautiful expensive” companies.
One of the reasons why they bought Vivendi are relatively clear: Vivendi generated a ton of free cashflow over the last few years. Some of this cashflow made it as dividend to investors, but most of this (plus some) went into acquisitions.
Lets look at some historical data:
|EPS||BV||BV tang.||FCF/Share||Dvd||net Debt/share|
From a free cashflow perspective, Vivendi generated an impressive 2,40 EUR free cashflow per year. Howver, less than half of it was distributed as dividend and a small amoutn was used to reduce debt.
Tangible book as one could expect for a media company is negative, but for a media company I would accept it to a certain extent. Debt is relatively high, but even including the debt load, the total valuation is quite low at 3.7 EV/EBITDA.
The share price looks really really ugly:
So based on yesterday’s post about momentum, this would be a clear “no” or better “non”.
Some more interesting points:
1. Vivendi does not have a majority owner
2. A couple of their subsidiaries are listed. That makes an interesting “sum of parts”:
- 61% in Activision are worth around 6.5 bn
- 53% of Maroc Telecom are worth around 5 bn EUR
A very simplistic comparison with Vivendi’s total marekt cap of 14 bn shows a maybe interesting situation.
- Vivdendi paid almost 8 bn EUR in 2011 for the 40% they did not own in its French Telecom subsidiary. However, after Iliad SA launched its aggressive enntrance into the French mobile market this amount was most likely much to high.
- in parallel, Vivendi is bidding for EMI and has bought several other companies, like a tv station for 350 mn EUR last year.
One has also to keep in mind that Klarman is managing around 25 bn USD, so the Vivendi position is for him a 2% postion, similar to News Corp, HP and BP. And not all of his invetsments are winners, despite the “Margin of Safety”.
I am howver not sure if the Iliad scenario was included in his “Margin of Safety” considerations.
Nevertheless it is very interesting situation as this is basically his first major contintental European Investment (despite a 5 mn EUR stake in a samll fFrench company named Chargeurs SA).
For the time being I nevertheless prefer to watch this from the outside as for me Vivendi is still a company which generates a lot of free cashflow but spends most of it for stupid acquisitions.
Was bitte hat Seth Klarmann mit den IPOs von zwei Spanischen Sparkassen zu tun könnte man sich fragen ?
Die Antwort ist ganz einfach: In seinem 1991 erschienen Buch “The Margin of safety” (Pdf z.B. hier), gab es ein Kapitel dass ich nur oberflächlich gelesen hatte, aber irgendwo in meinem Hinterkopf hängen geblieben ist.
Konkret war es das Kapitel 11: “Investing in Thrift Conversions”. In diesem Artikel beschreibt er die Situation in den 80ern in den USA, wo während und nach der “S&L Krise” in USA, viele S&L oder Thrifts (im Deutschen klassische Sparkassen) in börsennotierte Gesellschaften gewandelt wurden.
Aus seiner Sicht wwar das eine besondere Situation und zwar aus diesem Grund:
So long as the thrift has positive business value before the conversion, the arithmetic of a thrift conversion is highly favorable to investors. Unlike any other type of initial public offering, in a thrift conversion there are no prior shareholders; all of the shares in the institution that will be outstanding after the offering are issued and sold on the conversion. The conversion proceeds are added to the preexisting capital of the institution, which is indirectly handed to the new shareholders without cost to them. In a real sense, investors in a thrift conversion are
buying their own money and getting the preexisting capital in the thrift for free.
Ein wichtiger Punkt den es zu prüfen gibt ist folgender:
Unlike many IPOs, in which insiders who bought at very low prices sell some of their shares at the time of the offering, in a thrift conversion insiders virtually always buy shares alongside the public and at the same price.
D.h. man sollte darauf achten, dass “Insider” an den entsprechenden Aktien beteiligt sind. Klar ist, dass man auch auf die Asset Qualität achten muss:
Many thrifts, of course, are worth less than their stated book value, and some are insolvent. Funds raised on the conversion of such institutions would pay to resolve preexisting problems rather than add to preexisting value.
Ein Grund für die damalige Unterbewertung war auch die fehlende Coverage durch Analysten:
Why were thrift stocks so depressed in the 1980s? The sell side of Wall Street has historically employed few thrift analysts, and the buy side even fewer. The handful of sell-side analysts on duty typically followed only the ten or twenty largest public thrifts, primarily those based in California and New York. No major Wall Street house was able to get a handle on all of the many hundreds of converted thrifts, and few institutional investors even made the effort. As a result, shares in new thrift conversions were frequently issued at an appreciable discount to the valuation multiples of other publicly traded thrifts in order to get investors to notice and buy them.
Als Beispiel bringt er noch die “Jamaica Savings Bank”, die anscheinend mit einem KBV von 0,47 emittiert wurde obwohl dem ein qualitativ hochwertiges Portfolio genenüber steht.
Sein Fazit dürfte generell auch auf Spanische Sparkassen zutreffen:
Thrift conversions, such as that of Jamaica Savings Bank, are an interesting part of the financial landscape. More significantly, they illustrate the way the herd mentality of investors can cause all companies in an out-of-favor industry, however disparate, to be tarred with the same brush.
Interessanterweise hat Klarman’s Firma Baupost gerade im Mai bekannt gegeben, das man ein Office in London eröffnen will um von den erwarteten “notverkäufen” zu profitieren:
Baupost Group LLC, a $24 billion Boston-based hedge fund run by Seth Klarman, will open its first overseas office in London this year as the sovereign deficit crisis prompts a wave of distressed debt sales, two people with knowledge of the plans said.
Jim Mooney, a managing director at Baupost, will oversee the operation to tap investments mainly in commercial real estate, structured products, corporate and debt that trades at distressed levels, said one of the people, who declined to be identified because the move hasn’t been made public.
Ich vermute mal nicht, dass Klarman in börsengelistete Aktien investieren wird, aber es zeigt doch, dass es hier eine größere Anzahl von möglichen Valueinvestments geben könnte.
Fazit: Die Privatitisierung der Spanischen Sparkassen könnte evtl. ähnlich den US Amerikanischen Vorbildern in den 80ern interessant sein. Allerdings muss man die einzelnen Unternehmen noch eingehend analysieren.
P.S.: Wer sich für (Deep) Value Investing interessiert und das Buch noch nicht gelesen hat, sollte das schleunigst nachholen. Viel Besseres gibt es zu dem Thema nicht….
Das Buch ist bestellt und wir hier vorgestellt (There’s Always Something to Do – The Peter Cundill Investment Approach)
Damodaran contra Buffet zu Black Scholes – Siehe auch den Buffett Shareholder Letter 2007.