value and opportunity

Genußscheine

Draeger released yesterday that they bought back 41.1% of the outstanding Genußschein. In one of my previous posts, I said the following:

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).

Now we are somewhere in between. The percentage is high enough so that Draeger does not need to do really nasty stuff, although the percentage is too low to see higher dividends on very short notice. Draeger will also be motivated to buy anything which comes on the market under 210 EUR, so going forward there is a nice “put” under the current market price.

For the patient investor, I think the Genußscheine will be still an intersting medium term investment. For the portfolio I will hold them unless I find something better, there is no need to sell.

Interestingly, in their latest Earnings release , Draeger actually showed “diluted” earnings for the first time. They call it “Earnings per share in the case of full distribution”…

Warrants

Early this week, a (at a first glance) very strange deal took place, where I had to look twice to really understand it. What happened is best explained in this IFR article:

Siemens had already seen the value in the convert market last month and looked to take advantage once again by attaching the warrants into pref shares, which were turned into a tradable warrant by Deutsche Bank, to a bond. Rather than take the normal approach of a Deutsche Bank SPV bond, some Bunds of a near tenor (2.5% February 2015s) were sourced and bundled – to create a German state exchangeable into Draegerwerk, without either party being involved.

The bonds of €79.6m principal trade at 106% of par and the March 2015 bonds were issued with a 2.5% coupon and packaged with the warrants for a total 134.631% of par to raise €107.17m. A placing in the illiquid prefs helped with the delta hedge for hedge funds that dominated the book of about 40 lines. As the warrants have an exercise price of €63.68, versus the €78.40 placing price, this was a true technical trade, but a few outrights were interested and were filled in full.

So basically Siemens did cash out the Warrants from Draeger which they got when they sold their JV stake to Draeger. They used this structure so that hedge funds could invest in this instrument and extract the option premium.