Boss score harvest Bouygues family – back to Bouygues SA (FR0000120503)
After looking at one of the main subsidiaries Colas in the last post, let’s have a quick look back at Bouygues, the holding company itself.
Sum of part valuation
As I have mentioned in the initial post, Bouygues has 3 listed subsidiaries, Colas, TF1 and Alstom as well as 3 unlisted major subs which are Bouygues Construction, Bouygues real estate and Bouygues Telecom.
To get a feeling for a “sum of parts” valuation, we should start with the listed subs and then make assumption for the unlisted ones.
Let’s look at the listed subs:
So together they are worth 6.4 bn EUR. Bouygues itself has a market cap of 6.0 bn EUR and net debt as of June 30th 2012 of 6 bn. If we assume that the 1 bn debt at Colas is only seasonal we can estimate the current EV of Bouygues SA at around 11 bn EUR.
Now comes the tricky part: What is a fair valuation for the unlisted businesses ? I tried to keep it simple and used the following approach:
a) Use 6 month EBITDAs per business, double them to get 12 month EBITDA.
b) use reasonable estimates for “fair” EV/EBITDAS for those businesses. I used 7 for construction and real estate (in line with Vinci, Bilfinger etc.) and 6.5 for Telecom (same as Vodafone).
|EBITDA 6M||12m||EV/EBITDA multiple||EV|
This results in ~ 12.0 bn EUR value for the unlisted businesses.
Put together, we do have a simple “sum of parts” value of 18.4 bn EUR against an EV of 11 bn , which would imply an upside of 67% to fair value.
Remark: This is a quick and dirty exercise. I am sure there are other parts which might increase the EV, but I have also left out
Potential catalysts ?
As I had mentioned in the first post, Bouygues already executed a tender offer for 10% of its own shares last year at EUR 30 which didn’t help much. Interestingly, in 1998, French raider Bollore already tried once to take over Bouygues. This story (in French) describes a little bit what happened back then.
France is not short of “financiers” who might look already at Bouygues. Bollore also has a lot more firepower than back then. His listed vehicle, Bollore SA is now worth 5.2 bn EUR with its stock price at all-time-high. So One should not be surprised if at some point in time one of those guys show up as major shareholder
What I find interesting there is the fact that on top of the 22% or so of the Bouygues family, another 23% is held by employees.
In a Q&A document from the last general meeting they showed share ownership and voting rights:
|% share capital||% voting rights|
The high ownership of employees is explained in the annual report:
3 • EMPLOYEE SHARE
At 31 December 2011, Group employees owned 23.33% of the share capital of Bouygues and 28.09% of the voting rights through a number of employee share ownership funds. The share ownership fund created in 1968 invests in Bouygues shares bought on the market. At 31 December 2011, this fund held 4.55% of the share capital and 6.01% of the voting rights.
The Group’s share ownership plan is funded by voluntary contributions from employees and additional contributions paid by the company. These are
invested in Bouygues shares by direct purchase made on the market. At 31 December 2011, this fund held 8.92% of the share capital and 11.10%
of the voting rights.
Following the capital increases carried out in 2007, 2009 and 2010, the leveraged share ownership plans known as Bouygues Partage, Bouygues Confiance 4, Bouygues Partage 2 – five years, Bouygues Partage 2 – ten years and Bouygues Confiance 5, held 9.62% of the share capital and
10.67% of the voting rights at 31 December 2011.
The Bouygues Immobilier share ownership fund held 0.24% of the share capital and 0.31% of the voting rights at 31 December 2011.
So we have a couple of vehicles which invest on behalf of the employees but are most likely controlled by the company itself. So effectively, Bouygues controls > 50<% of the outstanding shares. I have no idea if and how employees can access those shares, but for the time being one could assume that a direct takeover might not be possible.
Finally a remark on the difference of number of shares and voting rights. There seems to be a special “double voting” right for some of the shares:
2.5 Double voting rights (Article 12 of the by-laws)
This provision has been in force since 1 January 1972. It is based on a measure introduced in the by-laws by the Annual General Meeting of 31 December 1969. Double voting rights are allocated to all fully paid-up shares that are proved to have been registered in the name of the same holder for at least two years.
This clearly looks like a “poison pill” against any potential (French) raider, but I am sure this is standard fare for any of the big French players anyway.
By the way, I found the Q&A document quite interesting. Good answers to tough questions. That leads us to the main issue of Bouygues:
From the Q&A above, this sentence is quite revealing:
‐ Would you ever consider spinning off Bouygues Telecom?
Even if we wanted to, conditions are by no means right at the moment. We are still waiting for the dust to settle in the telecoms market. Telecoms has a huge impact on our share price. The situation is complex — some might say absurd: the market valuations of the three incumbents, France Télécom, Vivendi and Bouygues (three CAC 40 heavyweights), have been dragged down by the arrival of the fourth licence holder. This is a political choice. The fourth operator has taken the mobile market by storm. Lastly, the outcome has been quite different from what one might have expected. I hope matters will become clearer in the months ahead. It is our job to prove that we are a modern, effective company that delivers good products about which customers are satisfied, and one which is spearheading innovation. We are making every effort to do this. At the same time, we are reducing our costs, and I hope the results of this will become tangible in the months ahead.
Bouygues was until lately, one of the 3 major French mobile carriers plus a smaller fixed line and broadband business. The trouble started when the French Government granted a fourth license to Iliad SA and basically ordered France Telekom to allow Iliad to use its infrastructure. Through this deal, Illiad could enter very aggressively, undercutting everyone in price.
Additionally, France increased the VAT on mobile services from 5,5% to the full 19.6% rate in 2011 which was not passed to consumers.
We can clearly see the effect of all this in the developement of the results in the last 4 years:
|Bouygues Telecom||6M 2012||2011||2010||2009||2008|
Profitability decreased significantly. A full reversion to the mean is unrealistic, as Iliad SA is most likely “here to stay”. The big question is if the first 6 month of 2012 are kind of the bottom or if profitablity decreases further.
In their half year annoncement, Bouygues predicted “only” 900 mn EBITDA for the phone subsidiary, however that might be quite pessimistic.
A quick look at the Alstom stake: Bouygues bought the stake in 2006 from the French government (remember: Bouygues being best man to Sarkozy…) after the French government saved Alstom from being bought by Siemens.
However the price paid in 2006 was almost 50 EUR. So mtm this was not a good deal yet, but Alstom itself seems to have developed fundamentally quite well in the last 5 years or so. If Bouygues would sell the Alstom stake to a strategic buyer, the price would be much higher than the current share price in my opinion. I think a lot of SWF would love to invest in such a infrastructure company.
Accoring to the annual report, similar to Alstom, the TF1 stake has been bought for a much higher price than the current share price. So in theory there might be the risk of write offs at some point in time as well. TF1 in my opnion is the most critical business, as I am not so convinced about the future of television, but the business is relatively small compared to the rest of the Bouygues group.
If we look at the share price, we can easily see that Bouygues is punished for its Telco business, it closely mirrors France Telecom:
compared with Vinci we can clearly see that the market gives zero credit for the construction / road business:
In my opinion, this is also the major advantage of Bouygues compared to Vivendi: Bouygues does have really stable businesses in its portfolio. Vivendi recently “decoupled” from Bouygues most likely because of the break up talks:
Putting it together, I find Bouygues seems to be quite attractive at current levels:
+ low valuation, both based on earnings, free cash flows (P/E ~8, FCF yield >= 10%) and sum of parts
+ good reversion to the mean potential (3-5 years)
+ shareholder friendly dividends (div. yield 8%) and share buybacks
+ family /employee owned, better acquisition and capital allocation track record than for instance Vivendi
+ market potentially ignores construction and road business, punishes too hard on mobile phone business
+ potential entry of some activist investors
On the negative side one should mention:
– continuing uncertainty about French mobile phone market (although the CEO announced more visibility in the coming months)
– potentially issues with construction activity if Eurocrises continues (although often large scale construction projects are used to boost the economy…)
– general issues about French taxation etc.
– carrying amounts of some share positions (TF1, Alstom) are higher than market values. This might lead to write downs at some point in time.
All in all, I find Bouygues very interesting and I will start with half a position from tomorrow on, averaging in over 5 trading days. In order to reduce a little bit the volatility of the Bouygues shares (Beta of 0.87 to the CAC), I will establish a CAC 40 short position in an amount of 50% of the Bouygues purchases.
My target price over the next 2-3 years would be something close to sum of parts which is around 30 EUR per share plus dividends, so all in all somthin like a 35/19= 84% return. In a good case, this could easily go higher if for instance the telco business really improves. In a bad case, One should be prepared to see lower share prices in the meantime, but I don’t think that the fundamental value will go much lower than the current share price.
Once that is done, I will decide if I add a Colas SA stake as well.