Monthly Archives: February 2013

Deeply discounted rights issue watch: KPN NV (NL0000009082)

I had briefly covered deeply discounted rights issue as a potential “special situation” opportunity a couple of weeks ago.

Now, with KPN, we have an interesting non-financial candidate. This is what KPN issued today:

Dutch telecoms group KPN confirmed a €4bn rights issue to shore up its capital position after heavy expenses on bandwidth that have led to dividend cuts and lower profit margins.

The company announced the move along with its 2012 annual results, which showed a 3.5 per cent drop in revenues and a 12 per cent fall in earnings from the year before.

As one might expect, the stock tanked some 16% or so. Currently, at around 3.45 EUR per share, KPN has a market Cap of only 5 bn EUR, so raising 4 bn via a rights issue might require a large discount on potential new shares.

The “wild card” in this game will be Mexican Billionaire Carlos Slim who owns currently 27.5% of the company. If he fully participates as lead investor and even taking up more than his share, then the “forced selling” aspect might not be too relevant.

If for some reason, he would refuse to participate, the situation will become very interesting.

Just for fun, let’s look how the performance was for Unicredit. I would distinguish the following events / time periods:

– 4 weeks before announcement
– announcement day
– period between announcement and price setting (for new shares)
– price setting day
– period between price setting and start trading of subscription rights
– trading period
– 4 weeks after end of trading period

First the relevant dates:

Announcement first trade date 14.11.2011
Price setting of rights issue 04.01.2012
First trade date subscr. rights 09.01.2012
Subscription trading until 01.02.2012
Discount 43%
New share 2 new for 1 old

Now the relative performance:

Performance UCG MIB Relative
– 4 weeks before announcement -18.35% -4.98% -13.37%
– Date of announcement -6.18% -1.99% -4.19%
– announcement until price setting -14.40% 2.95% -17.35%
– day of price setting -17.27% -3.65% -13.62%
– price setting to start trading -26.46% -4.45% -22.01%
– trading period 73.75% 12.94% 60.81%
– 4 weeks after trading period 0.05% 2.82% -2.77%
– 6 months after trading period -32.25% -11.39% -20.86%
– 12 months after trading period 12.53% 9.53% 3.00%

In the Unicredit example, clearly the period where the subscription rights were traded showed the best relative performance of the shares. Interestingly, on the announcement day, the price drop was much less in percentage points than KPN. This might have to do with the short selling ban which was in place (at least to my knowledge) when Unicredit announced the rights issue.

Again for fun, a quick look at Banco Popular’s rights issue from the end of last year.

Again the dates first:

Announcement first trade date 01.10.2012
Price setting of rights issue 10.11.2012
First trade date subscr. rights 14.11.2012
Subscription trading until 28.11.2012
New share 3 new for 1 old

and then relative performance to the IBEX:

Performance POP IBEX Relative
– 4 weeks before announcement -3.95% 5.11% -9.06%
– Date of announcement -6.17% 0.98% -7.15%
– announcement until price setting -29.95% -1.71% -28.24%
– day of price setting 4.56% -0.90% 5.46%
– price setting to start trading -8.86% 1.39% -10.25%
– trading period 8.12% 2.16% 5.96%
– 4 weeks after trading period -6.71% 3.74% -10.45%

One can see a similar pattern first, with the stock losing 4 weeks before announcement, as well as on the announcement date until the final price setting. However of the date of price setting, the stock jumped, until loosing only a little bit until starting of the trading period.

Then however, the gains within this period were relatively low compared to Unicredit. Overall it looks a lot less volatile than Unicredit, so maybe less forced selling here.

Back to KPN:

Other than Unicredit and Banco Popular, KPN had outperformed the AEX almost +11% in the last 4 weeks, so today’s large drop might compensate for this (unjustified) outperformance.

If the other two stocks are any guide, one could still expect lower prices until the price for the new shares will be set.

The stock price of KPN look really really ugly long term:

But make no mistake, any company which needs to go into deeply discounted rights issues is in trouble. This is “distressed” territory.

(…to be continued….)

Energiedienst Holding AG (ISIN CH0039651184) and German electricity prices

I started my small 2013 utilites project with E.On 2 weeks ago. Instead of working through the list of German utilities I wanted to focus on Swiss listed Energiedienst Holding AG first.

Energiedienst is a slightly unusual stock. It is listed on the Swiss stock exchange, but its balance sheet is in EUR. The company basically runs a number of big Hydro power plants along the Rhine River plus some smaller Hydro Power plants in Southern Germany and Switzerland as this map shows:

Market cap: 1.3 bn Swiss Francs
P/B 1.1
P/E 12.0
Dividend yield 2.3%

From a simple valuation point of view, Energiedienst does not look overly attractive, however one should mention that they do have net cash which is quite uncommon for utilities.

The company is majority owned by German ENBW (67%) plus a company called “Services Industriels de Genève (SIG)” which bought a 15% stake in 2011 from ENBW (remark: ENBW itself is in quite big trouble because of the Nuclear exit in Germany).

Business model

In addition to the Hydro plants, Energiedienst owns a distribution network with around 750 tsd clients in Switzerland and Southwestern Germany. The focus is clearly Germany with more than 80% of sales there. Energiedienst produces around 25% of its energy itself, the rest is bought in the market.

The interesting point is that their own electricity production is almost 100% Hydro power. Hydro power, in contrast to power from fossil fuel, is more or less a pure fixed cost business. You build the hydro plant, depreciate and that’s it. If electricity prices go up, you earn more, if they go down you earn less. You don’t have to worry about oil or coal prices. On the flip side, hydro power depends on the amount of water available, so in dry years you can produce less or more in wet years which introduces some uncertainty.

But in any case, a Hydro Power “pure play” is more or less a “bet” on electricity prices. In order to check this theory, I let’s look at EDHN’s share price (in EUR) against 1 year forward prices for German electricity (as a comparison, I plotted E.on as well):

edhn eon 12m strom

I find it fascinating that over the past 2.5 years, Energiedienst more or less directly followed German power prices. We can see that E.on is much more volatile and most likely exposed to general stock market fluctuations.

Just for the complete picture a history of German wholesale electricity prices since 2007:

electricity since 2007

It is interesting to see that German power prices seem to be at the lowest level since the beginning of this time series in 2007. After the surprise phase out of nuclear power after Fukushima and the corresponding propaganda from E.on & Co, one might have expected exploding electricity prices. But it looks like that the new supply of alternative energy plus maybe reduction in consumption led to a dramatic decrease in electricity prices.

Digging deeper, I found for instance this German publication from 2011 which confirms the point, that the subsidized renewable energy will lower electricity prices in general. So for a renewable hydro player like Energiedienst, the subsidies to solar and wind have the “perverse” effect of lowering the profit of this very cheap type of electricity significantly.

The “trick” is that the electricity distributors have to buy the renewable electricity at fixed subsidized prices, but have to sell it at current market prices into the German electricity exchanges. The difference then gets charged to consumers. According to the paper, the electricity price clears at the level of the most expensive supplier. The mechanism for the renewable providers however introduces practically a big source of potentially extremely cheap electricity as it gets sold at market prices no matter how low they might be and “unelastic” to the actual demand.

Due to the low interest rates, subsidized wind parks and solar plants are still attractive investments despite the price for electricity being at multi year lows and demand being rather weak.

So the low prices are not a result of low demand, but mostly of subsidized renewable energy which will be sold as long as the price is higher than zero.

Zero hedge just had a post in its usual style, claiming that the falling energy prices are a harbinger for falling stock prices. That is correct for utilities but other than that it is just a result of the mechanism described above.


The current system for renewable energy in Germany (selling renewable electricity into the market at any price with the consumer paying the difference) is hell for “traditional” utilities including hydro power.

The German utilities have maybe underestimated the extent of renewable production, otherwise they could have done the exactly same thing themselves. Now howver, the are in a kind of “death grip” between having to run their expensive black coal and gas plants for peaks and the articificially low electricity prices. Combined with unfavourable natural gas delivery contracts, especially for E.on the air will remain quite thin.

So unless something changes significantly, German utilities (including Energiedienst) will need a long long time to adjust capacity and change their business models.

Warren Buffet seems to be much more clever: If you can’t beat them, join them. I think this is the reason why his US utility is investing so much into Solar and Wind.

Performance January 2013 – The importance of being patient

In December I said the following:

To be honest, I don’t think that the current portfolio has an equal upside potential like in the beginning of last year, mostly due to the lack of really interesting special situation investments. For instance, the upside of athe Draeger Genußschein was much higher when it trades at~2.5 times the pref shares than the current 4.5 times.

Well, I was obviously very wrong on that one. The portfolio gained gained 8.6% in January, the largest single month gain in the 25 months of the portfolio’s history. The Draegerwerke Genußschein alone gained 25%, other top performers were Tonnelerie (+19%), KAS Bank (+17%) and Dart & Cranswick 15% despite the strong Euro.

The outperformance again the Benchmark (4.9% outperformance) can be almost fully explained by the typical January small cap effect which has been covered quite well by Mebane Faber. The German small cap index SDAX for example gained 10% in January.

Portfolio as of January 31st

Name Weight Perf. Incl. Div
Hornbach Baumarkt 4.3% 9.5%
AS Creation Tapeten 4.0% 29.0%
WMF VZ 3.5% 57.0%
Tonnellerie Frere Paris 5.4% 56.2%
Vetropack 4.4% 4.6%
Total Produce 5.8% 55.9%
Installux 2.9% 6.7%
Poujoulat 0.9% 6.4%
Dart Group 3.8% 100.7%
Cranswick 5.1% 12.9%
April SA 3.4% 39.0%
SOL Spa 2.4% 6.8%
Gronlandsbanken 1.1% 24.4%
KAS Bank NV 5.1% 27.5%
SIAS 6.1% 59.5%
Bouygues 2.7% 8.7%
Drägerwerk Genüsse D 10.6% 142.9%
IVG Wandler 4.5% 13.7%
DEPFA LT2 2015 2.8% 56.6%
HT1 Funding 4.6% 44.9%
EMAK SPA 4.2% 23.1%
Rhoen Klinikum 2.2% 3.0%
Short: Focus Media Group -0.9% -2.7%
Short: Prada -1.0% -10.8%
Short Lyxor Cac40 -1.2% -8.5%
Short Ishares FTSE MIB -2.2% -13.7%
Terminverkauf CHF EUR 0.3% 7.4%
Tagesgeldkonto 2% 10.0%  
Value 47.0%  
Opportunity 48.1%  
Short+ Hedges -5.1%  
Cash 10.0%  

The only change to year-end is Sol Spa which was bought in the beginning of January. Cash is now exactly at my target level of 10%. that means any addition will trigger automatically a sale of another position.

Comment: The importance of being patient

A few days ago, the longterm value blog had a great post about patience in investing.

He mentions one of the cardinal sins in current markets:

I’m writing this, of course, to focus myself. One of the hardest things to do is…. to do nothing. The instinctive reaction to a rising market is to pile on, add shares, up your leverage. But really that’s the absolute worst thing you can do. Don’t kid yourself.

Clearly, jumping into the market because you missed out the rally, especially in risky “high beta” stocks will most likely end in tears.

However another potentially big mistake should also not be underestimated: Taking profits too early. Most investors (including myself) get nervous if their stocks climb quickly 20-30%. What you then often hear is something like “It never hurts taking a profit” or “No one ever got bankrupt by taking a profit” or something similar.

The truth is: In order to generate above average returns, taking profits too early hurts badly. Statistically, the vast majority of investment ideas will be rather average, some will be bad, but some of them and usually only a small amount will be really really succesful.

If I look at my portfolio, most the outperfomance of ~23% over the last 25 months can be attributed to only a few positions especially Draegerwerk, Aire KgAa, Dart Group which have all doubled.

In all cases, it was and is always tempting to sell out and “take the profit” quickly. For Draegerwerk and Aire, I started selling too early, however I was lucky to start only with small amounts. Looking back over my 25 year investment “carreer”, I made many mistakes. However the most costly ones in the end were selling companies like Fuchs, Rational or Fielmann much to early.

Fuchs AG Vz. for example was one of the stocks I bought during the 2008/2009 around 12 EUR (adjusted for the split) and happily took the profit end of 2009 at 20 EUR, feeling like an investment genius. However, with the stock now at 58 EUR (plus a few Euros dividends in between), it looks pretty stupid. I knew that Fuchs was an outstanding company. Even worse, if I would have kept those shares the gains would have been tax free as they would have not been subject to the “Abgeltungssteuer” introduced in January 2009.

So looking back, “taking the profit” on a share like Fuchs (much) too early was maybe one of the biggest and most expensive mistakes in my investment career.

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