Monthly Archives: April 2013

How to raise capital – Deutsche Bank edition

In a surprise move, yesterday after the close of the stock market, Deutsche Bank announced that the increase their capital by ~2.8 bn.

For this they used the possibility of selling up to 10% of new shares without granting rights to the old shareholders.

So this would be the perfect case for the “formula” I mentioned yesterday:

Equilibrium Price = (price pre-cap raising announcement x # shares + price cap raising x # shares) / total # shares

The closing price of Deutsch Bank was 33.60 EUR. The price for the new shares 32.90 EUR. Outstanding shares were 929 mn, new shares 90 mn.

So the “Equilibrium Price” should have been:

(33.60 * 929 + 32.90 * 90)/ 1019 = 33.53 EUR per share.

Reality check: The stock actually opened around 33.50 but is now up +7.5% at ~35.40 EUR.

Learning experience:

The stock market is full of surprises. For some reason, the capital market considers it as extremely positive that Deutsche Bank increases its share count by 10%. I don’t know why.

And: Don’t rely on formulas…….

Bad research KPN edition (and why my readers are a lot smarter than professional analysts)

This is “research” directly from Bloomberg:

KPN NA: 2.74 TARGET: 2.20-2.40
April 25, 2013
We recommend shorting KPN on the share issue announcement. The equilibrium price is Eur 2.04/share and the stock price should trend toward this level in the near future.
Equilibrium Price = (price pre-cap raising announcement x # shares + price cap raising x # shares) / total # shares.
The shares were trading at around 4.0 pre-announcement and there were 1.431 bn shares outs.
The company is issuing 2.84bn shares at 1.06. This works out 2.04/share. Let’s imagine that thanks to the cap raising the
fundamentals are slightly better now than they were before, and we set our target at 2.20-2.40, or 10-20% lower than the current price. The stock should be sold/shorted.

Let’s look at their “formula”:

Equilibrium Price = (price pre-cap raising announcement x # shares + price cap raising x # shares) / total # shares

“Wow, they are professionals and have a formula, this must be right” was my first thought and I briefly thought that I have made a mistake. Although I had a nagging feeling that the formula (or the application of it) was not right.

Enter readers JM and Martin in the comments of the last KPN post:

26. April 2013 um 09:57 | #8 Antwort | Zitat | Bearbeiten
ok…I join the game. When the capital increase was announced the share price was Euro 3,1…so 3,1+1,06+1,06/3 = 1,74. If the dust settles this share price is my personal target…more I do not expect .

26. April 2013 um 10:35 | #9 Antwort | Zitat | Bearbeiten
The day BEFORE the capital increase was announced, the stock price was 4.10 EUR.

26. April 2013 um 10:55 | #10 Zitat | Bearbeiten
price today 1,56
discount 24,7%
As there were cost for KPN real economic discount is somewhat lower.

Martin and JM (by the way, thank you for your many helpful comments) are using the very same formula, however with one big difference: They compare the result with the stock price AFTER the rights have been split of.

So the question is: Who is right ? The “professional” reasearch on Bloomberg or the comments on my amateur blog ?

Well, if you are a KPN shareholder before and KPN would sell the new shares directly to new shareholders at 1.03 EUR per share, then of course the old shareholders would be massively diluted.

In reality however, no one is able to by the shares directly at 1.03. You can only access those cheap new shares by buying the subscription rights which have been giving to the old shareholders as compensation for the dilution.

So the big mistake made by the “professional” analyst was that he somehow forgot to account for the subscription right. as the subscription right was worth 1 EUR pr share, suddenly an overvalued share according to the “professional” is an undervalued share.

How can a “professional” be so stupid ?

My guess is that the “analyst” mixed u a rights issue with an issue of shares without rights. Companies usually can issue a certain amount of shares (usually max. 10%) directly to new shareholders without any rights to old shareholders.

In those cases, the announcement is usually made shortly before the trading day starts and then the formula above is applied to the price the day before and the price for the new shares.

Nevertheless it is really embarrassing for any institution that such a mistake slipped through and this report gets actually published on Bloomberg

Applying the formula to a rights issue

The “formula” rests on 3 critical assumptions:

1) The price of the shares on the day before the announcement is exactly the right (and efficient) price. There was no information out there before about the capital increase

2) Nothing happened in between

3) the additional capital will not create any additional value

I think all three assumptions are quite difficult to hold for the KPN rights issue. Talk about the issue started already in September last year, so at the time of the announcement (Feb. 5th), the stock price reflected already a part of that.

Also, the time period between announcement and pricing of the issue is quite long with 6-7 weeks.


It is amazing, how bad some of the “professional” research actually is. In that case the analyst used a formula without accounting for the subscription rights. However this also shows that in those situations, the price discovery might be not fully efficient.

I wouldn’t put too much faith into the “formula”, as the application towards rights issues really stretches the implied assumptions.

Book review: Antifragile – Nassim Taleb

In his third popular book (after “Fooled by Randomness” and “black Swan”), Taleb now introduces a new concept called “antifragilty”. As in the first two books, in his opinion on the big scale, the world is shaped by “black swans”, totally unpredictable events.

Something that gets hurt by those Black Swans is fragile. Someone/Something that is not hurt by Black Swans is robust. Antifragile finally is something/someone that gains from the chaos a Black Swan event is creating.

So far so good, however if one would have expected some implications for an investment strategy, one gets almost completely disappointed. At some points, financial markets are mentioned, but not very often.

Instead, the book is more a “Paleo” style nutrition and work out guide than a finance or investment book. Taleb shares his never ending wisdom with the readers, on topics like why the Greek philosophers were idiots (or not so smart as Taleb) to all kind of medical advice and why you shouldn’t eat oranges because the are much sweeter than 3000 years ago (hint: the only way is to eat the stuff a cave man would have had access to…).

From time to time he looks at two fictional characters called Nemo and Fat Tony. If we assume that Nemo is his alter ago, we know now at least that Taleb made a “low 2 digit million” amount of money when he bet against the financial crisis.

Don’t get me wrong, there is some good “common sense” wisdom in the book, for instance that one should not take medical studies to seriously, but in total I found the book pretty much a waste of time.

Maybe I am not intelligent enough to appreciate Taleb’s genius, but for a pure mortal like me the book looks like the attempt, to cash in on the same idea for the third time.

In the view passages about investing, Taleb promoted very vaguely a style he calls the “barbel” style: Invest most of your money in “safe” assets (whatever that is) and a small part in risky stuff with lots of optionality. Although he mentions that financial options is not what he means because they are mostly overpriced.

I think this kind of “advice” shows the major issue with Taleb: He is by heart a trader, not an investor. Otherwise he migth have mentioned that “Buffet style” long term compounding plus margin of safety is a much easier way to become “antifragile”. But that wouldn’t sell as many books and create invitations to speaker events and hobnobbing at the Davos Forums.

Unless you are a big Taleb fan and you need his advice on how and what to eat and work out, don’t buy the book. Save your time and money for something more interesting.

KPN rights issue: Final terms

I have covered KPN as a potential “deeply discounted risghts issue” special situation in the past.

Today, KPN announced the final terms for their rights issue (bold marks mine):

2 for 1 rights issue of 2,838,732,182 new ordinary shares at an issue price of EUR 1.06 for each ordinary share
• Issue price represents a 35.1% discount to the theoretical ex-rights price, based on the closing price of KPN’s ordinary shares on NYSE Euronext in Amsterdam at 24 April 2013
AMX has committed to subscribe for the Rights pro rata to its current participation in the issued share capital (excluding treasury shares) of 29.77%
Record Date for Offering is set at 25 April 2013 at 5.40 pm CET
Exercise Period runs from 9.00 am CET on 26 April 2013 until 3.00 pm CET on 14 May 2013• Rump Offering (if any) is expected to take place on 15 May 2013

What I find very remarkable is that there is only a very short time period between announcement of the terms and the start of the trading of the rights. Basically they announced today and trading starts tomorrow.

For the portfolio, I will start with a 1% investment as a rather “short term” special situation based on current prices of around 2.61 EUR per share. Lets wait and see how that one works out.

IVG again (and again and again)

disclaimer: The discussed investment is very risky and not recommended for any investor. There are strong hints of insider trading and permanent loss of capital and permanent loss of principal is quite likely. The author owns the investment and is clearly biased towards a positive outcome

Thanks to a reader, I received some “research” about IVG directly out of London, HF and “predator” capital (highlights are mine):

IVG – Further Thoughts

I had the opportunity to talk to the company late on Friday. I remain public on the name and have not received private information…

As one would expect, the company would not give any details of proposals being discussed with stakeholders; however, the company admitted that it had considered a number of options for repaying the convertible and deleveraging the company (which became necessary when the synloan holders indicated they wouldn’t be able to refi in September 2014)… including a rights issue which wouldn’t work due to the size required and the status of the hybrid and a quickie disposal of the SQUAIRE which would have seen a very significant discount to book.

A couple of things became clear:

· The company views the equitisation of the convertible and the hybrid as being the necessary first step in a restructuring process
· The haircut may also have to apply to the syndicated loans – especially SynLoan 1 which is under-collateralised
· The company’s fervent hope is to avoid any type of insolvency through a consensual agreement. Any type of restructuring under insolvency is currently considered a distant ‘Plan B’
· The company believes that significant value could be generated for equity investors through the continued management of the SQUAIRE and in the unencumbered caverns currently due to be delivered to Cavern Fund II in c. four years
· The company’s major shareholders are supporting the restructuring proposals – at least from their position on the Supervisory Board; that doesn’t mean that they will vote for restructuring at the AGM…
· Any new capital would require 75% approval at the new AGM
· The convertible bonds will require 100% vote of those attending a general meeting (quorum 50%); but that could be lowered to 75% under a new German Scheme
· It looks like Plan B may well be the more realistic proposition…

The German market is relatively short of ‘prime’ office space… prime would mean significant property located in the centre of major cities like Berlin, Frankfurt, Hamburg and Munich. IVG categorises most of its property as located in these cities. However, more properly it should be described as near one of these cities and very little of the investment portfolio could be described as prime… Prime properties still command premium rentals, non-prime properties face significant competition and rents are likely to fall on the renewal of tenancy agreements. The company states that €2.25bn is core/core+, €690mn is value add (needs work or on short tenancy) and €250mn is workout… in an insolvency the core/core+ valuations would come under pressure; the latter two categories may well be reflective of a going concern but I believe could well be significantly haircut in an insolvency… Furthermore I place little value in the €264mn ‘future caverns’ given the lack of interest from utilities; the fund valuations could come under pressure if EuroSelect 14 does indeed default; and tax assets are hard to transfer.

The company confirmed that:

· The debt on the SQUAIRE represent c. 60% LTV; the rental currently covers interest and the cover will improve. The company expects this debt to roll when it falls due at the end of the year
· The company also has a Core Financing: currently €570mn vs. assets valued at €800mn
· The Pegasus loan is currently €140mn and is secured on a variety of properties situated all over Germany and valued at €300mn
· SynLoan 1 is under-collateralised; I got the impression that less than 75% of the loan had collateral
· SynLoan 2 is over-collateralised but I have the impression that not by much… c. 90% LTV; obviously it benefits from the caverns disposals which should generate €300mn by the end of 2014

It would seem that it would be in the best interests of all of the stakeholders to keep the company a going concern, otherwise one can make a case that even the collateralised parts of the syndicated loans could be haircut.

Andrew Carrie ** 22nd April 2013 ** ** +44 20 7997 2066

In my opinion only 2 parts of that “research” is interesting:

Number 1:

The company views the equitisation of the convertible and the hybrid as being the necessary first step in a restructuring process

This is the same kind of b…s… I have heard in the first few Praktiker calls. The answer is simple: Nope. The first step is that equity gets wiped out, then Hybrid then senior. However it clearly shows that will go down the same path as Praktiker tried and ask the bondholders for deferral.

If for some reason, they would succeed, this would in my opinion kill the complete (high yield) corporate bond market. If it is suddenly possible to change the sequence in teh capital structure, why should then be corporate spreads where they are at the moment ?

Number 2:

This is the really interesting part:

SynLoan 1 is under-collateralised; I got the impression that less than 75% of the loan had collateral

In some boards people were arguing: If a collateralized loan is sold at 85%, this is the proof that the senior is worthless, as even the collateral for the first priority loans is not sufficient. To be honest, I was struggling with that one most.

Well, this argument now doesn’t hold anymore. If in reality, the Synloan is only collaterallized at 75%, then a price of ~85% is in line with the current pricing of the convertible.

The uncollateralized part of the Synloan is “pari passu” with the convertible. So in case of the bankruptcy, synloan holders would get full repayment on the collateralized part (75%) plus pro rata repayment with the convertible which trades around 55%. The “fair value” of such a Synloan would therefore be 75% + (25%*0.55)= 87.5% and therefore absolutely consistent with current convertible prices.

If we assume that the buyers have quite high return requirements, then I think the fear of a zero recovery for the convertible gets even more unrealistic.


If only for this one piece of information, the “research” as superficial as it is has greatly increased my confidence in the IVG convertible, because suddenly the prices paid for the more senior but partly uncolateralised loans makes sense.

One should still expect a very bumpy ride with “Praktiker style” attempts to bail in the convertible holders before anyone else, but at current prices, the risk/return relationship looks very good to me.

Again a disclaimer: “Don’t do this at home” and I might be subject to confirmation bias.

Guest post: Book review – “Playing to win”

Thanks to reader N. for submitting this !!!

In this book-review I would like to recommend you the book: “Playing to Win” which is written by Lafley and Martin. The content of this book focuses on the transformation of Procter&Gamble (P&G) between 2000 and 2009, and discusses the approach to strategy that led to this transformation, leading to a doubling of sales, a quadrupling of profits, and an increased share price of more than 80 percent during that decade. And focus especially on how strategy really works. Most of the time it doesn’t and reasons vary. However, Lafley and Martin identify these familiar troublemakers, when leaders tend to approach strategy in one of the following ineffective ways:

(1) they define strategy as a vision,
(2) they define strategy as a plan,
(3) they deny that long-term (or even medium-term) strategy is possible,
(4) they define strategy as the optimization of the status quo, or
(5) they define strategy as following best practices.

Lafley and Martin suggest that a strategy “is a coordinated and integrated set of five choices: a winning aspiration, where to play, how to win, core capabilities, and management systems.” The authors argue that what really matters is winning, and that the play book discussed in this book, which provides five choices, a framework, and a process, is what is needed to win.

In subsequent chapters, the authors present the “strategic logic flow” framework, designed to direct thinking to the key analyses that inform any strategy, and the “reverse engineering” methodology, designed to make sense of conflicting strategic options. In the former, there are four dimensions to be considered: (1) the industry, (2) customers, (3) relative position, and (4) competition. In the latter, which contrasts with traditional approaches to generating buy-in, there exist seven steps that involve exploring different ways forward and a wider variety of possible strategic choices.

If strategy is a set of choices, how the author write it “that uniquely positions the given enterprise so as to create sustainable advantage and superior value relative to the competition,” and I believe it is, then quality of judgment is imperative, not only when making a specific choice but throughout a continuous and cohesive decision-making process.

As a conclusion of their book, A.G. Lafley and Roger Martin acknowledge, “All strategy entails risk. But operating in a slow-growing, fast-changing, intensely competitive world without a strategy to guide you is far riskier. Leaders lead, and a good place to start leading is in strategy development for your business. But they state also, and I think that this is most importantly, “no strategy lasts forever”. So one of the best takeaways from what the author writes in that book is that “strategy is a highly dynamic area, full of fads and fashions that come and go”, and that “copying ideas that ‘work’ for others is unlikely to be a winning strategy”, because “success can only be based on being different from (existing or potential) competitors”.

In addition, I appreciated the “Dos and Don’ts” sections at the end of each chapter, which clearly summarize the material from a practical context, as well as the strategic lessons learned side bars following these sections at the end of most of the chapters. At some level, I find the book a little bit to repetitive.

I don’t think that a brief review such as mine, can possibly do full justice to the scope of material that A.G. Lafley and Roger Martin provide in this volume at as they did in it in their book. Also, I hope that those who read this review will be better prepared to determine whether or not they wish to read the book. I truly can recommend this book because you will have at least some idea of how an enriched and enlightened understanding of what strategy really is and the book perfectly fits to “Competition Demystified” from Bruce Greenwald.

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