Monthly Archives: November 2012

Update: Porsche SE Holding (ISIN DE000PAH0038)

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In June 2011 and July 2011, I looked at Porsche Holding SE.

To summarize the German language posts in a few points:

– Porsche is basically a holding company for 32% of Volkswagen at a discount
– they do not have any operational business left
– at that point in time (end of June 2011), the then prevailing calculated discount of ~33% wasn’t that exciting, considering the legal risks, corporate governance etc.

So what happened in the meantime ?

Volkswagen “cleaned” up the structure to a certain extent that the rest of the operating business was transferred to Volkswagen against 4.5 bn cash (and one share for tax reasons).

Then, a few days ago, Chris Hohn from TCI presented Porsche as one of his best ideas. As Chris Hohn in my opinion is one of the few guys one should really pay attention to, let’s look quickly at his main arguments (via Marketfolly):

Long Porsche

– Concerns about the impact of the litigation surrounding Porsche’s Volkswagen (VW) short in 2008 have depressed the price
– Hohn thinks the market has overreacted and Porsche will settle for less than is expected
– Porsche trades at a 40% discount to NAV
– It’s stock has traded sideways for many years
– Porsche owns 32% of VW
– VW is also cheap so there is a double discount
– VW is perceived as a budget brand but a substantial amount of its earnings come from the premium market where there is more pricing power: Audi and Porsche
– VW and Porsche have good emerging market exposure
– VW grew its volume even during the financial crisis
– It is steadily destroying other European carmakers

Hohn believes there’s 4 big ways to win by investing in Porsche:

1. VW appreciates
2. The discount to NAV narrows as the litigation is resolved
3. The discount narrows due to a higher dividend
4. A merger of Porsche and VW

Personally, I don’t buy the argument of Volkswagen as undervalued. For me, Volkswagen is much more like an accident waiting to happen, but anyway, based on his analysis, the discount is now 40%. According to his latest report, he seems to be short Fiat, so maybe he has set this up as a kind of “pair trade”.

However, let’s try to verify the discount first, starting with the last available half-year accounts:

30.06.2012  
At Equity Part 29.8 VOW + Porsche Holding
other receivables etc 4.1  
 
short-term assets 0.3  
Cash 0.5  
 
Total assets 34.7  
 
Hybrid debt 0.3  
Financial debt 5.9  
Other liabilities 6.7 Option VW
     
Net Assets 21.8  
Per share 71.2  
Market Price 54  
 
P/B 0.76  
“Discount” 24.1%

Now we can transform this into a “market value” balance sheet including the reported transaction:

Current  
At Equity Part 22.8 VOW at market
other receivables etc 4.1  
 
short term assets 0.3  
Cash 3 +4.5 minus 2 debt
 
Total assets 30.2  
 
Hybrid debt 0  
other liabilities 3.9  
Other liabilities 0 Option exercised
Plc loan 0.3 Formerly cons.
Net Assets 26.0  
Per share 85.0  
Market Price 54.0  
 
P/B 0.64  
“Discount” 36.4%

So we end up with a discount of ~36% based on a share price of EUR 54.

In my opinion, a 36% discount is nice but not a screaming buy for the following reasons:

– without a clear catalyst, a holding Co. will always trade at a certain discount. Even transparent Holdings like GBL trade at something like 15-20% discount
– additionally, the traded Porsche shares are non-voting pref shares, so an additional discount might be applied here
– the discoutn does also have to take into account potential litigation payments

So without a clear catalyst, I don’t think Porsche is a “must” buy but rather “fairly” valued. So let’s look at Chris Hohn’s catalysts:

1. VW appreciates
2. The discount to NAV narrows as the litigation is resolved
3. The discount narrows due to a higher dividend
4. A merger of Porsche and VW

I have to admit, I don’t buy any of these.

1. With regard to Volkswagen, I have to admit that I find it really hard to understand how much they are actually earn. Both with the MAN and Porsche acquisition, they booked so many special effects that the balance sheet is more or less incomprehensible. Alone the treatment of the “Porsche option” would be worth 2 extra posts and reminds me of a certain US energy company now bankrupt…

2. Ok, if they pay nothing, than the discount might shrink a little bit, but personally I think a 25% discount on NAV might be justified in any case

3. Unlikely. Volkswagen just revealed a 50 bn investment program over 3 years

4. Nope. Just as a reminder: Volkswagen for unknown reasons keeps their subsidiary Audi AG listed since many many years despite they could legally squeeze out any time. I do not see the big advantage of a merger.

Summary:

I still don’t think that Porsche is such a great investment. There might be a certain upside if the litigation ends quickly and without large payments. If one believes in Volkswagen as a great investment, it might be interesting as well.

However on a relative basis I don’t think that there is a lot of upside in the Porsche shares, as I don’t see a quick “real” catalyst and a certain structural discount (20-30%) is justified due to holding structure and non-voting status of the traded shares.

Behavioural bias: “Averaging down” vs. “averaging up”

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Sometimes it makes sense to reflect why one has done something and why not.

Following my “boss Score harvest” project, I invested in two new UK stocks this year, Dart Group beginning of June and Cranswick in Mid June.

In September I increased the Cranswick position to a full position, for Dart however I was hesitant and could not decide to increase .

One doesn’t need to be a genius in order to find out that increasing the Dart position would have been better:

Since mid of September, Dart made 50%, against more or less flat performance for Cranswick. If I look back to September, I think one of the “true” reasons why I didn’t increase Dart was that I would have to “average” up on Dart, as the stock was already 20% up against my purchase price.

For some reason I am much more hesitant to buy at higher prices. So for Cranswick, it was easier to increase the position because I could slightly decrease my average purchase price. Somehow I seem to prefer lowering the percentage loss on a loss position (“averaging down” than to lower the percentage profit of a gain position (“averaging up”).

I am not sure if this fits into the standard behavioural biases, maybe it is a special form of “anchoring”.

This behavioural bias, not increasing the Dart stake cost me around 1% of portfolio performance so far and now I am even more hesitant to buy. It is also in direct contradiction to the fact that “momentum” combined with Value seems to generate strong results in the long run as demonstrated by O’Shaugnessey’s “what works on Wall Street”.

Lessons (hopefully) learned:

In the future I need to have a better formulated plan for scaling into a position in order to avoid this “behavioural bias”. Either a clear timeline or some clear fundamental triggers where I then execute regardless if the position has already increased to a certain extent or not.

Some reader recommendations: M6, Bongrain, Banknordik

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First of all, thank you to anyone who recommends investments on the blog. It is always great to get new ideas. So let’s quickly check some of them if they would be interesting from my point of view:

Bongrain (ISIN FR0000120107)

Bongrain is a company I have been looking into quite often over the last view years. For some reason it always appears to be cheap.
Currently it trades at quite low multiples:

P/B 0.6
P/S 0.2
P/E Trailing 15, P/E 2012 ~8
Div. yield 2.7%.

However, despite the significant discount to book, Bongrain does not score well in my Boss Score. My model only calculates a fair value close to current prices.

The reason is mainly that ROE is simply relatively low. Over 10 years they managed 8.5% ROE over the last 5 years only 6.5%. They were always profitable but profitability is not really stable. L.D.C for instance shows better ROEs with less volatility. There would be clearly some “mean reversion” potential but I think that there are more interesting stocks in France at the moment.

For my investment philosophy, it is vital that a company earns at least its Cost of capital to make it a worthwhile investment. Bongrain seems to struggle with that. Unless there are dramatic changes in management or shareholder structure, I would prefer L.D.C. against Bongrain, but maybe I manage to have a more detailed look at Bongrain at some point in time.

M6 Metropole Television

M6 looks great from a free cashflow perspective and ROE, ROA and ROIC. The company has net cash (~2-3 EUR per share). In my model, it scores Ok, but due to the fact that it already trades at 2.2x book, the upside is limited.

Additionally, M6 is one of the shares where stated EPS do not correspond well with my own calculated “total return”. Especially in 2010, my model actually shows a loss:

EPS BV per share Dividend Tot Return Delta EPS
31.12.2007 1.29 6.07 0.95    
31.12.2008 1.07 6.17 1.00 1.05 -2.4%
31.12.2009 1.08 6.37 0.85 1.20 11.7%
31.12.2010 1.22 5.32 0.85 -0.19 -141.7%
30.12.2011 1.17 5.50 1.00 1.03 -13.9%

Instead of the expected increase in Book value based on the stated EPS, book value per share decreased in this year significantly. One would have to check what the reason is for this, but it doesn’t seem to be the result of a share repurchase.

In general, I do have also reservation against TV stations. There is a clear underlying shift going on, away from traditional media to internet media. I do not have a really good insight how far this would go but one can see the “classical” patterns which were mentioned in the book “The innovators dilemma”:

– there seem to be a series of “disruptive innovations” rather than a sustaining innovation
– traditional companies struggle hard, after ignoring this they now seem to overpay for access
– truly disruptive innovations are quite unpredictable and established companies have only a very small chance to prosper in such an environment

In those cases, in my opinion, it would be very dangerous to rely on past numbers and assume mean reversion. For the time being I would be very uncomfortable with “traditional” media company, unless it would be a “hard asset play”.

So again, M6 would not be one of my favourite French stocks at the moment.

Banknordik

Banknordik came up in the Gronlandsbanken analysis as the only other bank being active in Greenland.

Banknordik interestingly is the major bank in the Faeroe Islands, another one of those “Denmark related” islands.

Other than Groenlandsbanken, Banknordik seems to do 50% of their business in Denmark and only 50% in Faeroer. They seem to have taken over parts of a no bankrupt Danish bank But nevertheless, the stock looks appealing to me as I start to “warm up” for “specialist” financial stocks.

Banknordik looks like a very interesting stock and might be a “complimentary” position to Groenlandsbanken. So I will definitely look deeper into that one.

Weekly links

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Good French Stock blog with an interesting French Squeeze out, Banque Tarnaud (via Red). Banque Tarnaud was in my Top 25 France Boss Score but I didn’t manage to have a look at it.

The Interactive Investor on Dart Group

Cassandra with a contrarian short gold – long Japanese bond or Cotton trade idea

Stable Boy is not a big fan of JC Penney any more

Damodoran on lockup expirations and stock prices (Facebook)

Chris Hohn likes Porsche. I guess I will have to update my Porsche analysis from 18 months ago.

A few more thoughts on TNT Express – Implied probability of deal happening is only 19%

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Yesterday’s post was of course only a first step towards a potential “special situation” investment.

In order to decide if this is actually an interesting investment, one would need to come up with

A) some more considerations with regard to timing
B) at least a rough idea about intrinsic value

With regard to timing, I think it makes sense to look at Rhoen Klinikum, where there was a similar situation:

On April 26th, Fresenius offered 22,50 EUR per share from an “undisturbed” level of 14.76 EUR the day before. Then, when doubts came up, the stock went down to around 16 EUR before once again climbing to around 20 EUR, before then the deal fell apart. Interestingly, the current share price seems to have a floor at the previous undisturbed level.

For TNT Express, the truly “undisturbed” price the day before the offer was 6,34 EUR, so the current price is around 10% higher than that level.

Just as a side remark:

There were a couple of articles which said that there is now a 50/50 chance of the deal happening, like here.

However at current prices(6.95 EUR) we can relatively easily calculate the implied probability of the deal happening:

Undisturbed price: 6.34 EUR
Current prcie: 6.95 EUR
Offer price: 9,50 EUR

So the implied probabality of the deal happening can be calculated the following way:

(6.95-6.34) / (9.50-6.34) = 19.3%.

Anyone who thinks that there is really a 50/50 chance of the deal happening should buy now as the expected share price under this assumption should be 7.92 EUR (6.34 + (9.5-6.34)/2).

Going back to timing: What we haven’t seen here is a upmove of the stock like we have seen with Rhoen. So far we only saw the price going doen and the implied probability of the deal happening decreasing.

B) intrinsic value

This is somwhow difficult. The 9,50 EUR is a “private market” value, maybe including a premium for synergies.

TNT Express since its spin off has yet to prove that they can achieve margins like their competitors. Based on Q3 numbers, they are curently heading to something like 220 mn “operating income” or EBITDA for 2012 which equals an “operating margin” of only 3%.

UPS for example has an operating margin of 11.4%, FedEx of 7.8%. Deutsche Post has an ~9% EBIT Margin in the Express segment. So TNT has definitely some room to improve.

If we assume 8% operating margin, TNT would show ~600 mn EBITDA. Current EV is 3.5 bn, potential EV/EBITDA ~6.

This is much lower than UPS (10x EV/EBITDA) but higher than Fedex (4.9x). Deutsche Post is at 5 times EV/EBITDA.

So at current prices and assuming quite a turn around, TNT Express is not really cheap. So any investment would be a pure “Merger arbitrage” or “control premium” inevstment which might or not work out.

No action yet.

Edit: During writing this post, the share price jumped some 3.5% compared to yesterday, is this the first leg of the rebound ?…..

Spin off meets Merger Arbitrage: TNT Express (ISIN NL0009739424)

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TNT Express is the express parcel service spun off from PostNL in 2011. I have looked at the stock a couple of times as a spin off situation.

In February 2012, UPS announced it’s bid to buy TNT Express. In march they increased the bid to finally 9.50 EUR.

In the meantime it looks like that there is a lot of unexpected resistence from the European monopoly regulator.

The share now trades below 7 EUR, interestingly this is only a little higher than the “undisturbed” price in January/February which was between 6.10 -6.50 EUR. Since then, for instance Deutsche Post for gained some 15% from February, Österreichische Post even some 20%:

Since February, the correlation to the overall market is very very low, almost close to zero.

So basically, the market now does not believe at all in the takeover, as TNT Express is trading very close (or even below) to its “undisturbed” price. In the meantime they made some progress with regard to the merger, among others they sold their Airline which was one of the preconditions to get the deal approved.

All in all I am somehow “tempted” by this. It is a Spin-off situation which in itself is interesting. Additionally, the “option” that the UPS deal closes is only partially priced in. If the deal falls through, I think similar to Rhoen, there might be other groups interested in the business.

The risk is of course that some (very slow) hedge funds might sell if the deal finally falls thorugh but I assume that the 2.55 EUR difference to the bid price implies that most of the “Clever” merger arbitrage players are already out.

As a first summary, I will watch this and maybe start a 1% position in the next few days for my “special situation” bucket.

Weekly links

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Is it already the right time to short 3D printing stocks ?

Or rather short cloud computing, like Kerrisdale Capital does with ServiceNow ?

Bronte thinks Great Northern Iron is the proof that stupid investors do still exist….

Two very good posts about the Leucadia / Jeffries Merger: Cove Street Capital and the Brooklyn Investor

Great article about hedge fund strategies:“The end of arbitrage” (via Stableboy)

Highly recommended: NYT business story about ZARA / Inditex

Bouygues Q3 update

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The Q3 numbers of Bouygues are a first test for my Bouygues investment case.

If I update my simple sum of part valuation, we can see the following:

Market values listed companies:

  16.11 initial
Colas 96.55% 3.56 3.34
Alstom 29.40% 2.42 2.47
Tf1 43.59% 0.667 0.58
       
Total listed   6.65 6.39

So the listed subs have slightly increased in value.

Now looking at the unlisted, I will simply assume 9 Month EBITDA will equal 75% of total EBITDA:

9 month EBITDA 12M est EV Multiple EV
Bouygues Constr. 432 576 7 4,032
Bouygues Real estate 117 156 7 1,092
Bouygues Telecom 802 1,069 6.5 6,951
 
        12,075

Compared to the 6 month numbers I used last time, Telco is slightly below 6M run rates, construction and real estate perfom better.

Both, listed and unlisted subsidiaries in theory look better than at the time of my initial analysis. Net debt has slightly increased to 5.8 bn form 5 bn, mainly due to a 2 bn purchase of mobile licenses in France.

Putting this together, the updated fair value of Bouygues equity at “sum of parts” would be 6,65 bn + 12.075 bn -5.8 bn = 10.9 bn or around 35 EUR per share. From my point of view I see no fundamental reason why the shares have dropped quite substantially. I guess this is more “market psychology” following the announcement of France Telecom to cut their dividend.

However the stock chart looks really ugly now, although I am not a stock chart expert, there doesn’t seem to be any “technical” support on the downside and momentum is clearly negative:

Fundamentally the company seems to be “on track” at least compared to my investment case. So I will use today’s low prices to “fill up” again the current 2.2% position to 2.5% weight, further purchases will follow if the stock goes below 17 EUR (and fundamentals remain stable).

Gronlandsbanken AB (ISIN DK0010230630) – Sleepy eskimo bank or moat company with natural resource option ?

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Sometimes the only reason why I research a stock is because I find it interesting for some reason, not because it will be a good investment or so.

Gronlandsbanken AB is such a stock. Although it showed up in my Top 25 Scandinavian stocks, normally I would discard that because it is a bank. With Gronlandbanken however, the fact that this is the only listed stock of a company from Greenland got me interested.

Before looking into the bank, a few facts about Greenland from Wikipedia:

– Greenland has arond 60 tsd inhabitants spread over 2 mn square kilometers, however only 400 k square kilomoters are not permanent ice (Germany has ~350 k Square kilometers)

– politically, Greenland is mostly independent since 1979, however strong ties to its former “Colonial master” Denmark remain, among others the offical currency which is the Danish Krone
– total GDP is estimated to be around ~2 bn USD
– However, basically 50% of the countries GDP are transfer payments from Denmark
– Greenland left the EU in the 80ties but still enjoys free trade and other preferred treatments via Denmark
– most people basically work for the Government, the second largest sector is fishing
– Last but not least, Greenland could become one of the prime beneficiaries of climate change, as its vast natural resources could become much easier to access

The Bank:

Grondlandsbanken has been founded in 1967. In 1997 it merged with the only other bank in Greenland, Nuna Bank and is therefore the only bank based in Greenland. However it doesn’t seem to be the only bank with branches in Greenland as this post shows:

Banking
There are 2 banks in Nuuk, Greenland Bank and BankNordik. However, the latter has no cash function. There are ATMs in both banks in Nuuk, and cash in advance and Visa Card can be used in all stores and the like.

Anyway, it looks like competition is currently quite limited in Greenland in the banking sector.

Gronlandsbanken valuation looks Ok, but not very exciting:

Market cap: 830 mn DKK (~110 mn EUR)
P/E Trailing ~14
P/B 1.0
Dividend yield 6.5%

Around 65% of the shares are held by large shareholders, among them with 14% the Government of Greenland. So “free float” is around 30-35% or 35-40 mn EUR only.

Interestingly, value shop Sparinvest has a 0.44% stake . Another value fund which I didn’t encounter yet, Nielsen Global Value holds 5% as well. For them it seems to be a quite significant position with 5% portfolio weight according to the latest fact sheet.

Thankfully, no sell-side analyst has discovered the stock yet.

The stock is up 56% YTD, however this is still less then 50% of the peak price back in 2007:

Not surprisingly, the stock has a very low beta of ~0.55 vs. the Danish stock index.

But why buy a bank at book value if you can get banks for 0.3 times book ?

Well, there are a few things which are “not normal”:

– Gronlandsbanken has an equity ratio of 17.3% (that’s right, not Tier 1 ratio or such crap)

– their net interest margin is around 4%-5%, Return on assets is around 1.7% If we compare this to the most profitable banks like HSBC (1.9% – 0.6% and Standard Chartered (2.4% and 0.9%) or DNB (1.4% -0.6%), we can see that Gronlandsbanken is at least twice as profitable as the most profitable European bank.

Due to the high ratio of equity, ROEs do not look spectacular, but still my model calculates ~15-16% total ROE with a relatively low volatility. According to my model, the fair value for such a company should be around 1.3 times higher than the current market price.

Especially interesting for me was the 2011 annual report from Gronlandsbanken.

The pages 8-16 are definitely the best summary of the economic situation in Greenland I have been able to find. Most interesting was the following passage:

Greenland at a Cross-Road
Looking forward the economy of Greenland will come to a cross-road because most likely the economy will follow one of the following paths:
1. If one or more of the major projects are built, enormous pressure will be exerted on the economy of Greenland with concurrent high rates of growth and pressure on inflation. Based on current analyses, a great deal of the required labour force will be from abroad.
2. If none of these major projects is built, the major challenge in Greenland will be to create jobs and to ensure economic growth.
Within a few years, we can be expecting either very high rates of growth or zero-growth, or perhaps even negative growth. On the other hand, it is harder to imagine a middle-of-the-road scenario with reasonable and sustainable rates of growth since there are few growth-drivers in the economy (except for metals and minerals).

So this is fundamentally a very interesting “Binary” situation with a clear “trigger”.

Some of those “projects” mentioned are relatively interesting as well:

– Oil: Uk Cairn Plc seems to have drilled for oil but has found nothing yet
– a public listed company called London Mining Plc is trying to develop a large iron ore mine
– ALCOA seems to be interested in building a large Aluminium plant
– there seems to be a “rare earth” project buy an Australian listed company called “Greenland Mineral and Energy”, the so called Kvanefjield deposit.

Additional interesting articles form the Web about the natural resources developement in Greenland

Natural resources and Oil in Greenland
Cairn’s drilling results in Greenland
Chinese interest in Greenland
Chinese workers to be “Imported” ?

So it seems to be that the Government in Greenland seems to “warm up” to the natural resources projects. Maybe this is the reason why Management is buying shares since end of October. The amounts are not huge but every other day one can see purchases.

Summary:

Although I wish I had discovered Gronlandsbanken some months ago, I still think it is a really interesting stock:

– as it is the only bank in Greenland, its margins are around twice as high as the best global banks and the balance sheet is rock solid. One could call this a natural moat
– even based on the current state, current valuation implies significant upside to fair value
– the Greenland resource story could add significant growth going forward, even with maybe other banks entering Greenland
– finally, Management has started to buy shares after surprisingly good Q3 numbers
– although there is no direct catalyst, an indirect catalyst could be if some of the projects proceed well and Greenland will move inte the spotlight. Gronlandsbanken is the easiest (and only) way to invest into Greenland without project specific risk

As a result, I will start with a 1% position in order to further track this interesting “opportunity” stock.

Underrated special situation – Deep-discounted rights issues

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In many books which deal more or less explicitly with “special situation” investing, for instance Joel Greenblatt’s “You can be a stock market genius” or seth Klarman’s “Margin of safety”, many so-called “Corporate actions” are mentioned as interesting value investing opportunities.
Some of the most well know corporate actions which might yield good investment opportunities are:

– Spin offs
– tender offers /Mergers
– distressed / bankruptcy 

However one type of corporate action which is rarely mentioned are rights issues and especially “deeply discounted” rights issues.

Let us quickly look at how a rights issue is defined according to Wikipedia:

A rights issue is an issue of rights to buy additional securities in a company made to the company’s existing security holders. When the rights are for equity securities, such as shares, in a public company, it is a way to raise capital under a seasoned equity offering. Rights issues are sometimes carried out as a shelf offering. With the issued rights, existing security-holders have the privilege to buy a specified number of new securities from the firm at a specified price within a specified time.[1] In a public company, a rights issue is a form of public offering (different from most other types of public offering, where shares are issued to the general public).

So we can break this down into 2 separate steps:

1. Existing shareholders get a “Right” to buy new shares at a specific price
2. However the shareholders do not have to subscribe the new shares. Instead they can simply choose to not subscribe or sell the subscription rights

Before we move on, Let’s look to the two alternative ways to raise equity without rights issues:

A) Direct Sale of new shares without rights issues
This is usually possible only up to a certain amount of the total equity. In Germany for instance a company can issue max. 10% of new equity without being forced to give rights to existing shareholders. In any case this has to be approved by the AGM.

B) (Deferred) Issuance of new shares via a Convertible bond
Many companies prefer convertible bonds to direct issues. I don’t know why but I guess it is less a stigma than new equity although new equity is only created when the share price is at or above the exercise price at maturity. So for the issuing company, it is more a cash raising exercise than an equity raising exercise. Usually, the same limits apply to convertible debt than for straight equity.

So if a company needs more new equity, the only other feasible alternative is a rights issue. But even within rights issues, one can usually distinguish between 3 different kinds of rights issues depending on the issue price:

1) “Normal” rights issue with a relatively small discount
Usually, a company will issue the new shares at a discount to the old shares in order to “Motivate” existing shareholders to take up the offer. If they do not participate, their ownership interest will be diluted. Usually “better” companies try to use smaller discounts, high discount would signal some sort of distress

2) Atypical rights issue with a premium
This is something one sees sometimes especially with distressed companies, where a strategic buyer is already lined up but wants to avoid paying a larger take over premium to existing shareholders

3) Finally the “deeply” discounted rights issue

Often, if a company does not have a majority shareholder, the amount of required capital is relatively high and there is some urgency, then companies offer the new shares at a very large discount to the previous share price.

But exactly why are “deeply discounted” rights issues an interesting special situation ?

After all this theory, lets move to an example I have already covered in the blog, the January 2012 rights issue of Unicredit In this case:

– Unicredit did not have a controlling shareholder. One of the major shareholders, the Lybian SWF even was not able to transact at that time
– the amount to be raised was huge (7.5 bn EUR)
– it was urgent as regulators made a lot of pressure

As discussed, in the case of Unicredit, before the actual issuance at the time of communication the stock price was around 6.50 EUR, the theoretical price of the subscription right was around 3.10 EUR. However even before the subscription right was issued, the stock fell by 50 %. At the worst day, one day before the subscription rights were actually split off, the share fell (including the right) almost down to the exercise price without any additional news on the first day of subscription right trading.

But why did this happen ? In my opinion there is an easy answer: Forced selling

Many of the initial Unicredit Investors did not want to participate or did not have the money to participate in the rights issue. As the subscription right was quite valuable, a simple “non-exercise” was not the answer. As history shows, selling the subscription right in the trading period always leads to a discount even against the underlying shares, in this case some investors thought it is more clever to sell the shares before, including the subscription rights. Sow what we saw is a big wave of unwilling or unable investors which wanted to avoid subscribing and paying for new shares which created an interesting “forced selling” special situation.

Summary: In my opinion, deeply discounted rights issues can create interesting “special situation” investment opportunities. Similar to Spin offs, not every discounted rights issue is a great investment, but some situations can indeed be interesting. On top of this, those situations often are not really correlated to market movements and play out in a relatively short time frame.

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