EMAK SpA (ISIN IT0001237053) – The Italian Job ?

EMAK is an Italian manufacturer of different gardening tools, motor chainsaws, lawn mowers etc.

I discovered the stock when I was looking for Einhell peers a year ago. (Un)fortunately, the trading volume at that time was much too low to include it in the blog portfolio.

However I held some shares in my personal account, which I sold after this news message.

What happened was the following:
– the 80% shareholder decided to sell his other businesses to EMAK
– the size of the sold businesses is similar to EMAK itself, the valuation was at that time slightly more expensive than EMAK
– the purchase price should mostly be financed through a capital increase equal to 80% of EMAK’s Market cap
– the 80% shareholder guaranteed to take up his share of the capital increase, Mediobanca guaranteed the rest.

In any case, this deal looked “murky” from a corporate governance perspective and I decided to get out of the share and wait for the capital increase. The share price the went down from ~4 EUR to around 2,30 EUR last Friday before the capital increase.

Now this is where things really got strange:

EMAK decided to execute the capital increase in the following way:

– each holder of the old share (at that time price ~2,35 EUR got the right (ISIN0044778046) to purchase 5 new shares at a price of 0,425 EUR.
– So based on the old price, this resulted in theoretical price of the rights of 1,60 EUR, around two times the theoretical price of the shares after splitting the subscription right
– however, both the shares and the subscriptionn rights got y slaughtered starting on Monday.

Rermark: The Yahoo Chart doesn’t reflect the subscription rights since monday, on a like for like basis, the current share price is around ~1,20 EUR.

Currently, the shares trade around 0.58 cents, the subscription rights at 47 cents, after hitting a low of 31 cents.

The subscription right itself is fairly easy to value, the value is (current shareprice – 0.425 cents)*5 or around 75 Cents based on a share price of 0.57 cents.

When we look at the toal valuation of EMAk, at current levels of the shares, EMAK would be valued at ~94 mn EUR.

In my “home forum” Winter has calculated that based on the results of the first half year, the combined entity could earn around 25-30 mn EUR, which would result in an P/E of ~3-4.

If one buys the subscriptions rights now at let’s say 50 cents, one would buy the shares even with a further 10%-15% discount.

At the Milano stock exchange the price for the subscription right is currently oscillating between 0,37 EUR and 0,50 EUR, so this hardly looks like an efficient market to me.

Even taking into account the corporate governance issues surrounding the whole transaction, at the current prices EMAK looks like a compelling special situation.

So for the portfolio I will actually start with buying both, subscription rights + the shares as “special situation” Investment (as ususal, 20% max of daily trading volume).

5 comments

  • I found this story interesting and thought about buying some rights. But I am a bit confused because of the chart.

    At Reuters.com or my broker comdirect.de ISIN IT0001237053 or Symbol EM.MI takes me to a different chart – with prices around 1.30 Euro before the capital increase was announced.

  • let’s wait and see how this works out.

    however you are completely right. I don’t speculate on the subscription right alone,but on the implicit share price.

  • Ah, you already mentioned it, that the discount is 10-15% (it would not make sense to calculate it on the basis of the fair value of the subscription rights, since this is leveraged, because you need further cash to invest). If the stock falls below 42,5 Cent, my rights are worthless, i.e. I can buy the shares for less than 42,5 Cents, but of course it is still better to buy for max. 48.7 Cent, than buying the shares now for 56 Cents! (Corresponding MCap on the basis of 163.78 million shares is 79.8 million Euro).

  • Now, I bought some more subscription rights for 31 Cents (bid 30 Cent). The share itself can effectivly be bought at 56 Cent. So now, we are combined at 81 million euros of market capitalization (with only the share, at 90 million euros).
    The rights are cheaper, but with the share @56 Cents, we don’t know, if the rights will have any intrinsic value next week… (but then, of course, it is even better for the buyer, in any case).

    But I think, 25-30 million euros earnings for the combined entity is way too much – one should not project the half year results to the full year due to strong seasonality. Emak earned even less than the year before. But with 18 million euros for 2010 (a better year for “greenfield” than 2009), it would nevertheless be pe 4.

    P.S. When I bought the rights for 31 Cents, the mean price for one share will be 48.7 Cents for me, so the discount is not that huge (I think this perspective makes more sense).

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