Monthly Archives: February 2012

Efficient markets – Quick check Greece 2012 bond

So we have a new “PSI” package for Greece.

If I understood everything correctly, as a current holder of the March 2012 bond, one will receive the following securities (example: 10.000 EUR nominal):

– 15% or 1.500 EUR in EFSF securities, which should be as good as cash
– 430 EUR or 4.3% of accrued interest in EFSF securities
– 31.5% in 20 different (!!!!) new Greek Government bonds. This means one will get 20 different bonds at a nominal value o EUR 157.50 each !!!
– a currently undefined “warrant” on the Greek GDP developement

At the German stock exchange, the march bond is currently selling around 37%. The August 2012 bond is selling at 26%, the longer bonds around 23%.

It seems that still a lot of people seem to believe that they will be paid in full in march. Because if you calculate the implict expected price of the new bonds at the 35% price tag, you would end up with a value of ~57% for the new bonds which is totally unrealistic.

The implict price for the new bonds priced into the longer bonds is more like 20% of the (new) nominal value.

There is no reason that the new Greek bonds should tarde significantly above the old bonds as the amount of debt will more or less remain constant and since last Friday, every private bondholder is effectively subordinated to the ECB.

So as a relative value trade, one could now short the march 2012 bond against the August 2012 bond if this would be theoretically possible.

For any “small money” gamblers, the transaction costs for having to sell at least 22 different investments after the exchange will further diminish any possible gains.

On the opther hand, this could open up some interesting opportunities AFTER the exchange, I am especially looking forward to the “GDP warrant”.

Spin-off watch – TNT and Cable & Wireless

Following last years oposts about spin-offs (part 1, part 2, part 3), I tried to keep track of some of the more interesting spin off situations.

TNT Express

TNT Express was the express service spin-off from the Dutch Postal company. I had them on my research pile somewhere at position 10 to 15. However on the weekend, UPS made a 9 EUR per share offer for TNT Express, roughly a 50% premium on the previously traded price.

If we look at the chart, until last week, both shares significantly underperformed the index since the spin-off happened, only TNT Express made it above the index after the offer.

The 30% stake of TNT Express which PostNL owns, has almost the same value as PostNL’s market value. So PostNL might be an interesting company to look at.

Cable and Wireless

Cable and Wirless, the UK telephone company spun off the “international” part into Cable and Wireless Worldwide in February year. The international part was supposed to be the sexy part, but due to management and accounting issues, the stock suffered.

Last week, there was the rumour that Vodafone might be interested in hte “boring” part, the UK fixed line operations. However there was no confirmation from Vodafone and so the shares didn’t manage to rise as TNT Express did.

Again, as with TNT/PostNL, both parts underperformed the index significantly, as the chart shows:

So is there something to learn form this ?

Both cases show that spin offs per se are not a sure thing at all. In the case of C&W it rather looks like a desperate measure of a desperate company. In both cases, the performance after the spin-off event was relatively bad, so there is no need to hurry aftger spin offs are executed. As with all other “special situation” investment startegies, patience is required.

Hyundai capital structure arbitrage – final thoughts

Following part 1 and part 2 about my thoughts on a potential Hyundai Motors capital structure arbitrage deal, I wanted to summarize my thoughts and come to a conclusion.

In between, some new information came up:

a) it is possible to trade single stock futures in Korea thorugh Interactive Brokers
b) the mentioned US ADRs are actually ADRs on Hyundai Motor pref shares, so no “cheap” short potential
c) a contact told me that stock borrowing costs for Hyundai Motors common shares in Korea would be about 3-4%

Based on this new information, the relative value trade (short common shares, long pref shares) looks less attractive.

Traditional long-short

In the traditional short with a long position in the pref shares and a short position in the common, the “carry” would be calculated as follows:

Yield long position (3.77%) minus yield short position (0,80%) minus cost stock borrowing (3-4%).

So we would end up in the best case with 0% carry, in the worst case with -1 % carry for the long short position. Negative carry trades are much less attractive because you actually loose if nothing happens. A good carry trades gives you something in case nothing happens (“positive cary”) plus upside to compensate against the potential unlimited risk from the short position.

Long pref / short future

The problem with the long pref and short future strategy is that one has to fully fund the long position as the short future does not provide funding. So the overall potential return on investment is much lower than a fully funded long short trade. Only if you believe that the pref shares could close the valuation gap dramatically you would get an interesting return out of this strategy. However I do not have any view on this.

So to summarize this: based on current dividend yields and and stock borrowing costs, the long-short trade does not look too attractive as it doesn’t provide a positive carry. The long pref / short future trade might not be worth the effort too implement it as the upside potential is relatively limited and now real catalyst is on the horizon.

Draegerwerk Genußschein – some more thoughts on the repurchase offer

Following yesterday’s post about the 210 EUR offer per “Genußschein”, some other interesting aspects should be considered.

Dividend cut

I think this is the only time in history I remember that a 80% suprise dividend cut led to a almost 3% increase in the corresponding share price. The reason could be very simple and I have maybe underestimated the Draeger shareholders:

Many Draeger shareholders were maybe well aware of the effective massive dilution through the Genußscheine. The repurchase offer with 210 EUR is considered to be very advantagous for shareholders and therefore the net effect of the Announcement (Dividend reduction against cheap repurchase price) is a positive for shareholders.

As the announcement alone maybe caused this jump, a high acceptence ratio could possibly move the stock price even higher. So there is a lot of “upside risk” in the stock from a short perspective.

Another reason for the jump in the share price could of cours be some short covering, if I was not the only one who has the relative value trade in place.

Game theory Genußscheine

I am still struggling how to interpret potential acceptance outcomes for the offer. If we have a very low acceptance for instance, we have two potential factors which could influence future Genußschein prices:

1. With a low acceptance ratio, everyone knows that Draeger needs to do more to buy the Genußschein back (positve)

2. In theory, they could try to make life difficult for the Genußscheine either by continuing low dividends for a longer time (negative) or try some other tricks like possible dilution etc. (negative)

With a high acceptance rate we have the following potential issues:

3. The Genußscheine will become illiquid, larger investors will no longer be interested (negative)

4. Draeger will not need to increase the offer (negative)

5. However, Draeger could afford to raise the dividend quite fast back to or above last years levels as it doesn’t hurt shareholders anymore (positive).

So we can see, there are many paths how this could develop.

I think what is also interesting in this case is the fact that as Genußscheinholder the interests are not aligned with Management (and shareholders) but directly opposed. This is something one should keep in mind.

Portfoliomanagement update – sale KSB vz.

As I plan to reduce the Draeger Vorzugs short, my cash quota will fall significantly below 10% after buying back the shorted shares.

In order to stay at my 10% threshold and as I have some ideas for new investments, I will need to reduce or sell other positions.

My current “priority selling list” looks like this:

1. KSB Vz.: As KSB is approaching the “fair value” I have estimated last year, I will start selling them today with the usual restrictions (max 20% of daily volume)

Other candidates for further sales would be:

Sto Vz. –> despite great performance in the last few years on ehas to watch closely if margins can be maintained (see Westag)
– next in line would be my 2 remaining large caps Walmart and Nestle. Despite good performance, I have a lot less conviction here than with my other position

210 EUR repurchase offer Draegerwerk Genußschein

In a classic “carrot and stick” approach, Draeger issued a buyback offer today for the Genußscheine at EUR 210.

The “carrot” would be the 30 EUR premium compared to yesterday’s prices. The stick is the annoncement to drastically reduce the dividend for 2011:

Zur Finanzierung der verbesserten Kapitalstruktur beabsichtigt der Vorstand der persönlich haftenden Gesellschafterin, gemeinsam mit dem Aufsichtsrat der Hauptversammlung am 4. Mai 2012 eine einmalig reduzierte Dividende von 0,19 Euro je Vorzugsaktie und eine Dividende von 0,13 Euro je Stammaktie vorzuschlagen

The German announcement is quite funny, they argue to finance the repurchase with a one time dividend cut by ~-90%. This one time cut wouldn’t even finance 5% of the to be repurchased Genußscheine, so the only reason to do this is to scare some Genußschein holders to sell if the yield drops to less then one percent. As an additional effect the 2011 result of Draeger shows a positive effect as they have already accrued a higher amount of interest for the Genußscheine.

Going forward, they announce additionally to reduce the dividend from the current 30% of net income to 15% of net income until they meet their target equity ratio of 40%.

Bis zur Erreichung dieser Eigenkapitalquote beabsichtigt der Vorstand der persönlich haftenden Gesellschafterin, 15 % des Konzernjahresüberschusses (abzüglich der Ergebnisanteile nicht beherrschender Anteilsinhaber) auszuschütten

So what to do now?

If history is any guide, as a Genußschein holder you most likely should just lean back relax and get some popcorn.

Bertelsmann in 2010 was in a similar situation and tried to buy back their Genußscheine at 180, from that the price went straight to 225.

Inmy opinion the Draeger offerproves the following: They actually proved that the Genußscheine are a problem for the shareholders andthey need to get read of them. Effectively they introduced a “put option” at EUR 210 for the Genußscheinholder.

There might be less liquidity in the future,but with the preference shares at 70 EUR plus,the 210 EUR are still a joke.

For the long Genußschein short Vorzug strategy in the portfolio I will reduce the short position at least by half,as the implicit put at 210 EUR reduces the downside significantly.

Update Westag und Getalit

A couple of weeks ago, I decided to exit Westag and Getalit despite looking cheap and solid.

My argument was that without any visible competitive advantages, profit margins will most likely “revert to the mean” and then Westag doesn’t look so cheap any more.

Yesterday, Westag pre issued it’s 2011 results.

The results were quite sobering:

Die Westag & Getalit AG konnte im Gesamtjahr 2011 den Umsatz um 4,8 % auf 227,1 Mio. € steigern (Vorjahr 216,6 Mio. €) und übertraf damit das bisherige Rekordjahr 2008. Sehr erfreulich war die Tatsache, dass der Exportumsatz, bei deutlich schwierigeren wirtschaftlichen Bedingungen gegenüber dem Inland, überproportional um 13,8 % auf 48,7 Mio. € erhöht werden konnte (Vorjahr 42,8 Mio. €).

Das Ergebnis vor EE-Steuern betrug 11,8 Mio. € (Vorjahr 15,1 Mio. €). Die Ergebnisentwicklung in 2011 wurde durch einen sehr deutlichen Anstieg der Rohstoffpreise belastet, der nur teilweise und in Schritten durch höhere Verkaufspreise für unsere eigenen Produkte ausgeglichen werden konnte.

Der Jahresüberschuss entwickelte sich parallel zum Vorsteuerergebnis und erreichte einen Wert von 8,2 Mio. € (Vorjahr 10,7 Mio. €).

So despite solid headline growth, profit decreased significantly by almost -25%. With a 2011 profit margin of 3.6%, we are now almost exactly at the 23 year average net income margin of 3.5%. With ~1.40 EUR per share we have a trailing P/E of 12 which is quite expensive these days.

The share didn’t move much yesterday, but it clearly shows that the upside of Westag’s business model is quite limited. They don’t seem to have any kind of pricing power despite a relatively well business climate in the home market Germany.

Due to the low trading volume, I am still selling down the shares in the portfolio, currently the position still amounts to 1.46% of the portfolio.

Shares at Westag can be a good “reversion to the mean” investment, if the P/E is low AND profitablity is low by historical standards. Ohter than that it will most likely be a “value trap”.

Quick news: EMAK, WestLB and Tonnelerie


I just saw that after the capital increase, EMAK has a new “number 2” shareholder, a company called “Girefin SpA”. Girefin SpA is a holding company which holds 55% of Landi Renzo SpA, a quoted Italian company. Girefin is controlled by Stefano Landi who was CEO of Landi Renzo before.

From a minority investor point of view this might be interesting, to have a “local” guy on board.


There is an interesting article in the FT Germany (in German) about the current situation at Westimmo, the real estate lending sub of WestLB. If they succeed in moving the whole subsidiary into the government owned “bad bank” and maybe at book values, than the 2011 result might only show minimal losses if all. This would be very good for the 2011 “Genußscheine”.

Tonnellerie Francois Frere

There are news that Tonnelerie and listed competitor Oeneo are negotiating about Oeneo’s oak barrel business, Tonnelerie Radoux. Although the news was already out on Friday, it looks like some people who think that this is a reason to buy Tonnellerie.

However in my opinion one has to wait to see what Tonnellerie is actually paying for this and how they finance it.

What’s you competitive advantage (in investing) ?

There is a very interesting post at the (higly recommended) Psy-Fi blog about the general chances of small investors against institutional investors.

They compare it for short term trading to the “Sanzibar war”:

In terms of competitive advantage private investors engaging in short-term trading against financial institutions is the greatest mismatch since the Anglo-Zanzibar War of 1896 which lasted only 45 minutes – and which ended with the British being paid for the shells they’d fired into their opponent’s country.

They also correctly mention privileged information from companies available for institutional investors:

We find significant increases in trade sizes during the hours when firms provide off-line access to investors, consistent with off-line access providing selective access advantages. We also find significant increases in trade sizes after the presentation when the CEO is present, consistent with CEO meetings providing selective access advantages. … Finally, we find significant future absolute abnormal returns after the conference for firms providing off-line access, suggesting such access is potentially profitable for investors. While we cannot conclusively state that managers are selectively disclosing new information outside of the presentation, our evidence does suggest that investor conferences confer a selective access advantage on the buy-side investors that have been invited to attend.

Additionally they think that private investors ar much less likely to exploit statistical anomalies:

The ability of the securities industry to automate trading to capture the abnormal returns from any anomaly in the market (Pricing Anomalies, Now You See Me, Now You Don’t) means that anyone attempting to out-compete them is facing the hopelessly overwhelming odds of the Zanzibar Effect and, like the hapless Zanzibarians, paying them for the privilege.

So should we just stop messing around with managing our own money and hand over our hard earned money to the institutions ?

Psi Fi offers some hope: They stress that small cap investing with a longer time horizon could be one way to beat the institutions:

Our competitive advantages are elsewhere; the Law of Big Numbers dictates that smaller companies simply aren’t big enough to justify lots of institutional analysis, so the asymmetric informational advantages often lie with private investors prepared to put in the effort. One reader noted that he invests in smaller French companies because the reporting language rules out a lot of competition. Nor are private investors constrained to make quarterly or annual returns – we can buy companies with good business models but which are temporarily distressed and wait. Or we can make sure we’re ready to supply liquidity to the markets when institutions are forced to give it up in one of their once a decade panics.

I fully support their arguments, but I think in addition to long term contrarian small cap investing , private investors have much more advantages than they are aware of.

1. Asset class restrictions

Most asset managers are restricted to certain asset classes. Many large institutions (pension funds, insurance companies) employ either consultants or own employees who are supposed to be great allocators acrosss asset classes, leaving actual money managers with very narrowly defined mandates for only small sub sets of the investment world.

Anyone with some institutional knowledge can tell some stories how the supposedly superior asset allocation process works: Money almost always goes into the historically best performingasset classes which is the dominant “cover your ass” strategy in this area.

As a private investor, you have a big advantage here : you are not restricted at all. You can look at stocks if they are cheap, or bonds if they seem to be a better choice. In 2008 for example, it was relatively clear that the risk/return of subordinated financial bonds were much better than owning stocks. However as a typical stock portfolio manager you were not allowed to buy bonds.

In my opinion, this is also one of the underappreciated competitive advantages of Warrent Buffet’s Berkshire set up. Despite the whole “moat” thing, his structure allows him for instance to go to “pref shares + options” type of trades as well a selling options, buying distressed debt etc.

2. Instrument restrictions

Many money managers are further restricted with regard to instruments they can buy. So either they can buy only stocks or only bonds or only convertible bonds, but few can freely decide what instrument tob uy.

The best current example for this are currently in my opinion the now closed former open ended German real estate funds. I do not know any institiutional mandate which would allow this kind of investment.

The German Insurance regulation for example explixitely does not allow insurance companies to invest in open ended funds which have stopped taking back shares, meaning that if you owned them before they have closed, Insurance companies were forced to sellt hem.

So being abletoinvest in any instrument as aprivate investor,in my opinion opens up a lotof very attractive risk / return scenarios.

3. Reputational risks

As I mentioned in point 1., a lot of the activities in institutional asset management is based on “cover your ass” strategies. For every portfolio manager it is much easier to talk to his bosses, clients or to attractive persons on cocktail parties about “great” companies one owns and manages. If thegreat company turns out to be a not so great investment, this gets attributed very rarely to the money manager.

It is much harder to explain why one owns subordinated bonds of banks under Government control, shares in now closed investment funds or “obscure” Italian companies, where everyone knows from “Bild” that Italy goes down the drain. Many people think that those “special situations” are much riskier than the “great and easy to explain” investments andthis is exactly why they are often much more interesting from a risk return point of view.

4. Size & Control of funds and liquidity premium

As an institutional money manager, one has the following two problems if one wants to exploit illiquidity premiums:

a) you do not control in and outflows of money. So if you think a relatively illiquid market segment is an interesting opportunity and you invest, suddenly the clients wants out and you have to liquidate your positions at great losses. So even if you have a long time horizon as an institutional money manager personally, your time horizon in reality might be much shorter. This is by the way the second “institutional” feature which is in my oninion very important to understand Warren Buffet’s success.

b) many times, size is an issue. Even with my “modest” 10mn EUR virtual portfolio, I find it hard to enter and exit into smaller but interesting situations. For a 1 billion portfolio, it just doesn’t make a lot of sense to research a potential 1mn EUR investment which leaves a lot of ideas unexplored.

So summarizing this whole post, I would conclude the following:

For individual investors, the freedom to invest in any asset class, in any type of instrument, regardless of name, country of domicile and size creates a significant competitive adavantage to institutional money managers.

Combined with the control of the funds and a long time horizon, in my opinion this is almost unbeatable by any traditional money manager. Only money managers who manage to overcome those limitations (Berkshire, Private Equity funds, Hedge funds, family offices) can come close.

IMPORTANT: It is not a guarantee to outperform. There are many bad investments, value traps, frauds and semi-frauds out there, but mostly they can be avoided through thorough due dilligence and common sense.

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