Monthly Archives: March 2012

Draeger – Results of repurchase offer for Genußscheine & Warrant


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”…


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.

Updates: As Creation, Hornbach & Frosta

A very busy day:

AS Creation

As Creation reported a significantly lower profit for 2011 plus a dividend reduction. The stock price remeined relatively flat, which in my opnion is driven by the “Russian option”. For the normal business it is clear that risiong costs are an issue and pricing power is limited.


Frosta, which is sold a couple of weeks ago, reported also relatively weak numbers. Very similar to AS Creation, costs rose faster than prices.


Core Value stock Hornbach however showed very strong preliminary numbers today. Increasing same store sales, increasing market share and increasing profits. It is still a joke, why such a business tardes at book value and a single digit P/E.

Record Profit Margins – follow up German companies

Following up on Tim’s comment, I had a quick look at German HDAX companies. Unfortunately, only a subset of 2011 figures are currrently available.

What I did was the following: For those companeis where 2011 net margins were available, I calculated the 10 year average net margin. I then subtracted this from the 2011 margins to see if 2011 was better or worse than the average.

name avg 10 Y margin 2011 NI margin Current vs. average
FUCHS PETROLUB AG -PFD 6.0% -0.3% -6.3%
PUMA SE 10.6% 7.6% -3.0%
BEIERSDORF AG 7.3% 4.4% -2.9%
SALZGITTER AG 4.7% 2.4% -2.3%
KRONES AG 3.2% 1.8% -1.5%
RWE AG 5.1% 3.6% -1.4%
QIAGEN N.V. 15.4% 14.2% -1.2%
HOCHTIEF AG 0.5% -0.7% -1.2%
ADIDAS AG 4.8% 5.0% 0.2%
HENKEL AG & CO KGAA VORZUG 7.6% 8.0% 0.4%
AURUBIS AG 2.1% 2.6% 0.5%
BECHTLE AG 2.6% 3.1% 0.5%
BILFINGER BERGER SE 1.9% 2.7% 0.8%
DEUTSCHE TELEKOM AG-REG -1.9% -1.0% 0.8%
COMMERZBANK AG -0.5% 0.7% 1.1%
GILDEMEISTER AG 1.3% 2.7% 1.4%
CONTINENTAL AG 2.3% 4.1% 1.8%
CARL ZEISS MEDITEC AG – BR 6.7% 8.9% 2.1%
BAYER AG-REG 4.5% 6.8% 2.3%
SGL CARBON SE 2.5% 4.8% 2.3%
LEONI AG 1.8% 4.2% 2.4%
SOFTWARE AG 13.6% 16.2% 2.6%
FRAPORT AG 7.5% 10.1% 2.7%
BASF SE 5.5% 8.4% 2.9%
DUERR AG -0.5% 3.2% 3.7%
SIEMENS AG-REG 4.5% 8.6% 4.1%
PSI AG -0.2% 4.3% 4.5%
DEUTZ AG -0.1% 4.5% 4.6%
HUGO BOSS-PFD 8.9% 13.8% 4.9%
K+S AG-REG 6.9% 12.8% 5.9%
VOLKSWAGEN AG-PFD 3.2% 9.7% 6.4%
SAP AG 16.7% 24.1% 7.5%
DRILLISCH AG 2.0% 12.0% 10.0%
AIXTRON SE 3.1% 13.2% 10.1%
MORPHOSYS AG -7.6% 7.9% 15.5%

So from the 42 companies with relevant data, only 11 are below average, whereas 31 are above the 10 year average net income margin in 2011.

On average, 2011 profit Margins were 6.4% of sales for those companies against 3.9% for the last 10 years. If we would assume constant P/Es, than a return to “normal” would mean a drop in earnings on average by -39% or implcitly an over-valuation of those companies of 39% (keeping everything else constant).

I will try to update as sson as more results are published, but if one believes in reversion to the mean, some of those comapneis should be avoided.

Efficient markets – WestLB Genußschein edition

As a quick follow up to the previous post, a quick reminder how innefficient the markets in those securities can be:

WestLB came out with their press release at 11 am CET yesterday. As discussed in the last post, the release started with a very small loss on a consolidated level. If the consolidated loss would have been mirrored in the local GAAP accounts, this would have meant a payout for the Genußscheine of around 95%.

However further down in the release they mentioned “casually” that the nominal repayment will only be 85.1% due to a higher local GAAP loss.

Interstingly, between 11:02 and 11:11 yesterday, aroudn 380 k of the Genußscheine were traded at 91%, which was clearly an inefficient price if one would have read the whole press release.

Unfortunately, I did not have the time to react on this, but some lucky guy found some lazy guy who didn’t fully read the release.

This is something which can be observed with a lot of these bonds. Information only gets priced in after a certain time lag. Something to look out for.

Quick news: WestLB results 2011 are out

Yesterday, West LB released its consolidated 2011 results.

On a Group level, the show a slightly negative result after tax. As discussed in the post about the Genußscheine, the relevant result for the finalpayout is however the “AG result”, which is the single company result of the holding company.

They don’t explicitly state the local GAAP result of the holding company, but they tell us the following:

Die Kapitalquoten im Konzern wurden durch das negative Jahresergebnis der WestLB AG auf HGB-Basis belastet. Die Kernkapitalquote betrug am Jahresende 8,8% (i. V. 11,4%), die Eigenmittelquote 13,8% (i. V. 15,9%). Die stillen Einlagen und das Genussrechtskapital der Bank nehmen gemäß den Emissionsbedingungen am handelsrechtlichen Bilanzverlust teil. Der Rückzahlungsanspruch beträgt nunmehr 85,1% für die Genussscheine und 82,9% für die Hybrid Tier 1 Anleihen aus dem Jahr 2005. Zudem unterbleibt für diese Instrumente vertragsgemäß die Zinszahlung für das Jahr 2011.

That means the payout for the Genußschein will be 85.1% plus the 2012 interest of around 2.9% or a total of 88%. This is a little less than in my base scenario, but still a relatively nice gain of around +42% for 10 months with a relativ small amount of risk involved..

Unfortunately, i don’t see too many similar opportunities at the moment.

James Montier on record profit margins

James Montier has issued a very interesting reasearch piece on why profit margins are so high.

This is something which is also bugging me all the time. The Chart on page 2 is especially interesting:

He then continues deriving the sources of profit margins and comes to an interesting conclusion: That the increase in Government spending is the major source of current margins !!!

This is quite interesting. In practice, I think his theory has some minor issues, for instance he implies that US corporate profits are only produced within the US, which for many big companies (Apple, McDonalds) is clearly an oversimplification.

If I look at companies like Volkswagen for instance, a lot of the high margins come from the booming BRIC countries, however also those times will end.

I also find it intersting to think about how his theory works in practice. If one looks at Apple for example, one could clearly see that one part of the high margins are also low production costs in Asia which means lost jobs and higher unemployment (and lower wages) in the US.

However, as the unemployed (and other US citizens) get direct and indirect paymants from the government, in theory this enables them to buy Iphones without having a job. So indirectly the US Government pays for Iphones.

Another point which is missing in Montier’s model are the current low interst rates. Based on average debt ratios, this might add a point or two in corporate profit margins as well.

As always, one has to be careful not to fall into the “confirmation bias” trap, but I find it highly likely that current record profit margins are driven by a unique combination of high Government spending, low interest rates and booming BRIC countries which most likely will not last.

Apple and the value of paying a dividend

Yesterday, the most important news was the fact that Apple announced to start paying a dividend and additionallyto buy back shares in an amount of up to 10 bn USD.

Contrary to many news stories, the announced dividend plus the share repurchase program will not lower the 100 bn USD cash pile as the free cash flow of Apple is currently way above the amounts they plan to distribute.

Nevertheless the Apple shares gained above the market gains yesterday, so the news was received positive by investors (good collection of stories here at Abormal Returns)

Let’s have a quick look at the theory of how to value such annoncements in general.

Efficient market

In a truly efficient market, a decision to distribute a dividend would not matter at all. Every investor would value the company purely based on free cashflows at company level, adjust correctly for any retained cash on the balance sheet and being indifferent if the money is distributed or not.

Potential positive impacts:

In many articles about the Apple price move, commentators mentioned the following reasons why paying (or increasing) a dividend should be positive for shareholders

a) Management shows more confidence in future cash flow generation
b) Management has less money to spend on (stupid) acquisitions, especially for former high growth companies (see e.g. HP)
c) Investors have a preference for current income
d) Unadjusted P/Es go down for cash rich companies, which then leads to a further increase in stock prices

Negative impacts

e) Dividends get taxed at the level of the shareholder
f) management has run out of growth options, paying a dividend signals “peak growth”

In the conference call, Tim Cook started the call with emphasizing the potential growth opportunities of Apple, clearly targeting point f) in the list above.

Personally, I think with especially with Apple c) and d) does not apply either. No one is buying Apple now because of the dividend and everyone knows the amount of the cash pile. I think argument b) could have some merit, especially when you look at HP when Leo Apotheker took over and directly overspent on an acquisition.

However, as I do not own Apple and don’t want to buy or short it for the time being either, I wanted to focus on some general aspects of dividend payouts.

Well managed companies (Compounders, steady growers)

For a well managed company with significant growth opportunities which is managed on a long term basis, I couldn’t care less about dividend payouts. Soo in my opnion, for really well managed companies with growth potential, the “efficient market” thesis holds

Indebted companies

Companies, which are for some reasons relatively heavily indebted but have a solid business model, should in most cases not start to pay dividends before they have significantly reduced their debt burden. Paying back debt and reducing cost of capital can be in many cases much more value enhancing than starting to pay dividends too early. So in suchh cases, an increase in dividend could be a bad sign.

Badly managed but cheap companies

Here the case is clear: As long as the cash stays on the balance sheet of a badly managed company, there is always the risk that the cash could dissapear any time, either through stupid acquisitions, over-investment or even fraud (Chinese RTOs anyone ?). In such cases, the announcement to pay significant dividends out of retained cash would definitely be value enhancing by reducing implicit risk.

Declining companies

The best documented example of a declining company is WB’s very own Berkshire Hathaway. This was the classic case of a company which would have kept investing in its declining business until they would have been bankrupt. In such cases, the commitment of paying out or maintaining large dividends instead of reinvesting is definitely a plus.

Announcement of Dividends vs. buy backs

In my very simple view, the announcement of a dividend and a stock buy back are very different. Whereas for the dividends, any non-payment would be highly difficult, buy backs often get announced but only partially executed. Additionally, a buy back is always a one time item whereas a dividend implcitly assumes a certain continuity in payments. So I would put much more weight on dividend announcements than stock buy back announcements.

In some case, one will really have to look deeply into companies to judge if a dividend announcement is positive or not. For instance if a higly indebted shrinking company increases its divdends, is this good or bad ? Or if a highly indebted company shrinking stops paying dividends to pay off debt, what is the net result of this ?

Nevertheless I want to summarize the impact of dividend and stock buy back announcements as follows:

Announcements of increased dividends and/or stock buy backys are most value enhancing for

+ badly managed companies with high a cash pile
+ shrinking companies with high free cash flows and a relatively low debt burden

For well managed and growing company, such announcements should not impact the value significantly.

Especially if analyzing “cheap” and “contrarian” companies, one could use the payout ratio also as an indicator for the required return on capital. A higher payout ratio should lead to a lower required ROC and vice versa.

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