Monthly Archives: June 2013

Sporadic links

A very comprehensive post from Prof. Damodaran about equity value, firm value and enterprise value

Very interesting: Buffet’s Berkshire is buying a Life Insurance company from Hartford

Interview with the boss of Apollo, Josh Harris, about opportunities in Europe and distressed investing.

Two great posts about book value and earnings power.

Must read: Jason Zweig’s 30 year anniversary of his “intelligent investor” column

Book review: Les Schwab Pride in Performance: Keep It Going

This book was a recommendation of the editor of Poor Charlie’s Almanack and is the Autobiography of legendary US Tire sales guru Les Schwab.

Les Schwab created one of the biggest independent Tire Dealerships in the US from scratch. The book is a mixture of Autobiography, short stories and lots and lots of business wisdom.

The story of Les Schwab is to a certain point very similar with Sam Walton (Walmart). A no BS guy starts with a small shop in a rural area in the US and then branches out all over the country.

However, the biggest difference with Wal Mart is the fact, that from the beginning, Les Schwab shared almost 50% of his profits with the employees. Although he seems to have been one tough cookie, he didn’t want to keep all the profit but actively included employees in the profit-sharing to align them and the interest of the company.

The system is quite simple: Overall, a little less than 50% of the profits of each store is shared with employees. When a new shop opens, employees have to keep their profits in the store, until the store has positive net worth. If they then want to take out money, the head office takes out the same amount of money. If someone retires, the stake will be bought out by the company.

This employee profit-sharing system with clear communication, target setting etc. seems to have been one of the major “competitive” advantages for Les Schwab within an extremely competitive market.

Compared to stock or option programs,this program has the advantage that it better aligns the long-term goals of employes and company. For further promotions for instance, the amount of money that an employee has kept in the company is an important factor. Compare this with stock option programs for listed companies…..

I have never been to a LEs Schwab tire station but this picture seems to be the reality:

This is a quote from the same blog:

For those of you not from the Great Northwest, Les Schwab is the bomb-dot-com for all things automotive. They don’t require an appointment, they come running out to greet you like you’ve just returned from a tour in ‘Nam, they have complimentary popcorn and espresso, and every year they give away a shit ton of free beef if you spend over $500. Free. Beef. There is so much majesty in those two words that I am in overwhelming awe. Oh, Les Schwab. . .you had me at rump roast.

Back to the book: He describes in great detail, how he was able to expand the business despite the fact that he had to deal with those tire producers which run their own tire centers and how he improved the business step by step.-

The special thing about this book is the fact that Les Schwab has written it without the help of an editor directly for his employees. What it lacks in “polish”, it makes up with very interesting insights from the unfiltered perspective of a succesful hands-on entrepreneur.

It is fascinating to see how Les Schwab thinks about motivation and management. On top, there are a lot of gems in the book. For instance why it makes a lot of sense to run one giant warehouse despite large distances. In one chapter, he describes how he was approached several times by Private Equity buyers. In a few lines he describes the private equity business better than I have ever read before.

From a “theoretical” perspective it is interesting to see that competitive advantages exist which are outside the “typical competitive” advantages (barrier to entry, size, network effects). Great management and employee motivation in combination can create a “moat” even in a business with low barriers to entry.


All in all, I think this is an outstanding book for anyone remotely interested in how business are run or should be run. One of the best business books / Autobiographies that I had ever read. HIGHLY RECOMMENDED !!!!

For anyone interested, there is an interesting article about Les Schwab to be found here which was written in 1997, 10 years after he wrote his book.

A quick look at the Solarworld restructuring (XS0641270045, 6 3/8 2016)

Although I would not even touch Solarworld with a 10 foot pole, it is still interesting to see how they try to restructure their debt without going into the “ESUG” process.

Solarworld is one of the largest German manufacturers and distributors of Solar modules. In order to fund their expansion, they took on a lot of debt.

Roughly ~400 mn are loans and 550 mn are traded bonds which currently trade around 30% of nominal.

A few days ago, they announced, that some institution from Qatar will help the company plus the founder will inject as well some money.

However, this is all contingent on a proposed restructuring plan where both, the creditor banks and the bond holders of the two traded Bonds (XS0478864225, 400 mn 6 1/8% 21.01.2017 and XS0641270045, 100 mn 6 3/8, 13.07.2016) have to agree in separate meetings.

Just to make sure: This is for educational purposes only….

So let’s look into the restructuring memorandum to see how this proposal looks like:

The concept is basically to exchange the old bonds into new bonds with a lower nominal value plus some shares and a small cash component.

After the transaction, current shareholders will have only 5% of the new equity, the other 95% will be held by debt holders. Part of those new shares will be then sold to the founder and the Qataris and bondholders will get the resulting cash.

Lets look at the 2016 bond: For 1000 EUR current nominal value, bondholders will receive

57.84 EUR cash (5.78%)
7.31 “new” share
439.9 EUR nominal new bond

So here the problem starts:

1) What is the value of the new shares ?
2) What is the market value of the new bonds

1) New shares:
Here we have some possibilities to approach this. First one could use the price which is going to be paid by the founder and Qatar.

Current number of shares is 111.7 mn. After a reverse split of 150:1, this translates into 0.74 mn restructured shares for current shareholders. Then ~14.2 mn new shares will be issued, making it ~14.95 mn “new” shares in total.

The founder will buy 19.5% of the new shares for 9.75 mn EUR, Qatar pays 36.25 mn for 29%. interestingly, this translates if I have calculated correctly in different prices. 3.34 EUR per share for the founder and 8.36 EUR for Qatar.

A second possibility is to use the current share price pre dilution as a guid. However, If we look at the current price of 0.40 EUR, we can see that if I buy 150 old shares for 0.40 EUR, then I pay 60 EUR for a new share. This indicates that current shareholders do not understand how the restructuring works…

Personally, I would rather go for the lower end of the “range” between founder and Qatar. Interestingly, in one of the documents it is said, if the deal with the founder and Qatar does not happen, one would get 16.46 new shares and no cash.

So the new shares in my opinion should be valued at 7.31* 3.34= 24,45 EUR per 1000 nominal or 2.45% of current nominal.

2) New bond

So the question remains: What is the value of the new bond ? The details of the new bond can be found here.

The bond is quite complicated. The coupon is EURIBOR based, but the basis is at minimum 1% plus 5% margin. So currently this would be 6%. However, the coupons can be deferred until maturity, but then the interest rate increases.

The new bond is secured, although this is not too much different to the current bond. The current bond had “negative pledge” clauses. In some respect, the negative pledge is even stronger, because this includes all future assets as well, whereas the new “pledge” only includes current assets. Plus, they carved out the Qatar assets.

Additionally, the new bond will pay down part of the principal early. The schedule is:

1. 39.11 EUR per (new) 439 EUR principal after closing in July
2. 29.20 EUR June 2014
3. 21.43 EUR June 2015
4. 28.13 EUR June 2016

I have seen someone discounting this payments at 10% for calculating the value of the old bond, but I think this is wrong. You might do this after the restructuring happened, but before, those payments are at the same risk as the old bond.

Honestly, I find this bond too hard to value at the current stage. Based on the old bond price and the assumption for the cash and share distributions mentioned above, the implicit valuation of the new bond ~22% of the old bond or 22/44= 50% of the new bond nominal. At the current stage, with the restructuring not even implemented, this looks OK.

Comparison to Praktiker & IVG

Maybe one quick note because I have covered both Praktiker and IVG as well: The big difference here is the fact, that in the current capital structure, we have only a very small amount of secured creditors in the capital structure. So Senior holders got away quite well. For IVG and Praktiker, this is not the case. Especially for Praktiker, one should assume a recovery which is much lower than what we see here.


Solarworld will be an interesting case if and how voluntary restructurings work in Germany. The case is very different from Praktiker and IVG but nevertheless interesting.

If the restructuring is successful, I think the new bonds might be worth another look. This is due to the fact that they are very complex and to a certain extent the “fulcrum” security, i.e. the most senior part of the capital structure.

Apart from a short of the “old” the Solarworld share (which unfortunately cannot be borrowed), the current situation does not look attractive to me.

Spin off watch: Osram Licht AG

In a couple of days something happens which is very rare in Germany: Siemens AG is spinning of its subsidiary Osram to its shareholders.

For a German company, this is highly unusual, especially with a subsidiary of this size. And in fact, Siemens unsuccessfully tried to sell Osram for years as a “classical” IPO for cash. Siemens has a history with IPOs of subsidiaries. They IPOed their subisidiary Infineon in 2000 at the height of the interent bubble for 35 EUR, a price never seen again:

Maybe that’s the reason why no one wanted to pay cash for Osram ?

A good description of Osram can be found here in Wikipedia.

The English language IPO prospectus for Osram can be found here.

Some thoughts on this spin off:

+ Siemens is maybe the most bureaucratic company on this planet. So “releasing” Osram from that should be worth something

+ Timing: The timing looks bad from Siemens perspective. They wanted too much when Osram was highly profitable and now it seems that they don’t really care anymore or want to get rd of it before the have to invest into the new LED technology

+ Business
Although the business is very competitive, especially the LED part is growing strongly and Osram seems to be competitive here.

There is a whole lot of information about the business in the prospectus, I would summarize it as follows

– the business in general is cyclical and capital-intensive
– 2009 and 2010 were “special years because of EU regulation for the old light bulbs
new competitors seem to be able to enter in new technologies (LEDs) without much problem or even economics of scale from their core chip businesses (Samsung, LG)
– old bulbs were replacement businesses, new LEDs last a lot longer and are more like project business
– however technological change is quicker than in the past, “disruptive changes” are a reality
– the change to new technology requires lots of investments and results will suffer (and maybe the main reason why Siemens wants to get out now)

Major issue with this spin off:

Management compensation: High base salaries, insignificant share ownership of managers. This is was the prospectus says:

Shareholdings of Managing Board Members
The members of the Managing Board do not, apart from Siemens AG shares, directly or indirectly, hold any Shares or options on Shares of the Company as of the date of this prospectus. The members of the Managing Board in total hold 6,292 shares in Siemens AG for which 629 shares in OSRAM Licht AG will be issued upon the Spin-off becoming effective.


Siemens AG has granted the current members of the Managing Board of OSRAM Licht AG (as well as other executives of the future OSRAM Group) in the first quarter of the Fiscal Year 2013 a transaction bonus. After the Spin-off takes effect, OSRAM Licht Shares in a value of at least 50% and a aximum of 200% of the target amount established individually for each member of the Managing Board will be granted. The target amount is €2,500,000 for Wolfgang Dehen and €1,000,000 for Dr. Klaus Patzak as well as €250,000 for Dr. Peter Laier

One of the success factors of spin offs is that Managers are well aligned with share holders. I don’t think that is the case here despite the “spin off gift”.

Other observations:

Pension plan: 500 mn EUR have been injected in 2012 (contributed by Siemens), overall size of 2 bn is quite large.

Competitor Philips

Although I didn’t want this to turn into a fully fledged business analysis, I couldn’t help looking quickly into Philips’ 2012 annual report. although Philips Lighting is significantly larger than Osram (8 bn sales vs. 5 bn EUR), the bottom line of Philips Lighting was already negative in 2011 and even more in 2012. As Osram, they are reorganising the business. Their program is calles “Accelerate” vs.”push” at Osram. Funny that those great programs all sound so alike. Interestingly, Osram was slightly more profitable than Philips Lighting, both in 2010 and 2011. SO size alone doesn’t seem to be the big advantage.

It seems that both, Philips and Osram have to fight hard against the new competitors in the LED market.


EBITDA was ~250 mn for the first 6 months of the fiscal year 2013. If we assume ~500 mn for the year 2013 and ~500 mn net debt, then 105 mn shares at 30 EUR would mean an EV/EBITDA of ~7. If we add 500 mn of unfunded pension liabilities, we have EV/EBITDA of ~8. That is not really cheap but rather expensive for such a cyclical and capital intensive business.


For the time being, I think the Osram spin off doesn’t look very attractive at the prices (30-35 EUR per share) that were mentioned in the press. The most critical point is in my opinion that I don’t see a strong alignment of management and shareholders in this case.

This could be one of the cases where the first 1-2 years could look pretty bad. If at some point management would buy shares in significant numbers, this might be a sign to look at Osram again.

An unconventional idea would be actually to short the share right after the spinoff.

Sporadic links

Due to the nice weather, I cannot guarantee weekly links at the moment…..

The interesting case of EBIX, a US software company with potential fraud allegations

One of the early Chinese reverse merger frauds, China Medical Express is now sued by the SEC

And an interesting case of a beef/cow Ponzi scheme in Japan

Paul Krugman gets it wrong on Apple. Noone is forced to buy Iphones at high prices.

Why Bernanke is the wizard of Oz (Damodaran)

Chinese troubles

EDIT: Don’t miss this speech of value legend Michael Price

Deja Vu all over again: Why I don’t care about the “taper”

Funnily enough, exactly 1 year and one day ago I had a post about why I thought one should not pay any attention to the media circus regarding the Euro crisis.

This was the intro back then:

If you read any news source today, there is one common theme: “The EUR and the European union are doomed”.

Every economist, politician, bank boss, asset manager, talk show host (and their grandmothers) now know exactly what Target2 accounts are and why Europe is on a one way track into doom and bust. Additionally they usually mention that they always said so. Some of them offer additional advice for instance how helpful it would be if countries would go back to their own currencies, or adapt the gold standard etc. etc.

I do not claim to have any superior knowledge about how this will work out, but i want to point out some of the issues why I personally think that one should not take those “market pundits” too serious:

The very same in my opinion applies now to the Bernanke/Taper/end of QE discussion. Everyone is now a QE expert and knows exactly what will happen if it ends or if it continues.

I can only repeat what you can learn out of this events (funny, even the names are still the same…):

Lessons learned

The lessons of those episodes at least to me are clear:

1. No one really knows what is going to happen in the future, developments are never linear over a long period of time and disruptions (positive or negative) can happen more often than one imagines.

2. The “loudest” commentators are mostly people who make a living out of it (Roubini, Martin Wolf, Krugman etc.) or are talking their books (Bill Gross, El Erian, Kyle Bass etc.)

3. Crisis are always a catalyst for change. Structural changes take time and will not be recognized for a long long time

It’s funny that one of the loudest critics at the moment, Bill Gross from PIMCO is having a terrible month/year, under performing 88% of bond funds in 2013 with his Total Return flagship….

In the medium and long term, share prices do not care that much about QE but only about 2 things: Real Profits (and profit growth) against valuation. Forget all that shxx about liquidity driven stock markets, great rotation etc.

So the two important questions are: Will profits go up and down and is a stock expensive or cheap ? I do not have the answer, but interest rates are only a small part of that puzzle. Clearly, higher interest rates mean higher interest expenses for some companies, on the other hand, banks and insurance companies (and pension funds) profit from higher rates. So even this effect is not so crystal clear. Again, I do not know the answer, but whatever Bernanke does, it will be only a “catalyst” for underlying fundamentals. Not the other way round.

I am pretty sure that next year around this time there will be another “hot item” being used as an explanation for market movements. The reality is: No one really knows what really moves markets short term, but you have to fill a lot of Air time on television to explain it.

As a long term investor you should therefore concentrate on finding cheap securities where the profit is most likely not going down in the future. I fyou don’t find any, stay in cash. The rest should be viewed as pure entertainment.

Short cuts: Kabel Deutschland, Rhoen Klinikum, Greek GDP linker, Royal Imtech

Kabel Deutschland

Man, this looks like I got it really wrong. According to some press articles, now Liberty wants to buy Kabel as well for 85 EUR a share. So there seems to be a bidding war before even the first official bid has been announced.

The interesting point of this “red-hot” news is that Liberty has already once tried to buy the former Telekom Cable network in 2002 but this was not approved by the German Kartellamt.

How realistic is this ? I am not sure. Just in February, the German Kartellamt blocked the takeover of the smaller rival Telecolumbus by Kabel Deutschland itself because even the combination of KAbel Deutschland and the smaller rival was a problem for them.

So what is going on here ? I have no idea, but to a certain extent it looks like one of the best “stock promotions” ever. What kind of M&A process is this when everything “leaks” to the market ?

For some market participants, this doesn’t matter anyway. My “favourite bad research provider” Makor (yes, those guys who use the wrong formula to calculate fair prices after right issues) has the following recommendation viea Bloomberg:

We recommend initiating positions in Kabel shares, as we consider the shares trading about fair value in the context of a possible offer. However, given the strategic interests for the potential buyers (Vodafone, Liberty Media), a premium is probably justified and notwithstanding regulatory issues, a price above Eur 90/sh could easily be justified.

Wow, sometimes the stock market is so simple.

Rhoen Klinikum

Unfortunately, the “Rhoen surprise” did not last very long. Some more details were emerging . It looks like that the boss of the supervisory board (and the guy who wants to sell to Fresenius) decided, that the 5% votes of one of the blocking shareholders were not valid. The result will most likely be a court battle over up to 18 months. So lets wait and see what happens.

Greek GDP linkers

The most recent jump in the GDP linker seems to come from a “research piece” of Deutsche bank which several readers forwarded to me (thank you guys !!!).

Let’s look how the look at the nominal hurdle:

Based on the latest IMF forecasts, the 2011 level of GDP is expected to be re-attained in 2017. By fixing this point, we can then solve for the nominal growth rate required in order to exceed the nominal GDP threshold in a given year. We find that in order to exceed the threshold in 2022 (for warrant payment in 2023) would require a YoY nominal growth rate of 5.0%. A growth rate of 3.6% would be required to meet the threshold in 2024. If recovery to the 2011 level is achieved a year earlier than expected (in 2016) then the required growth rate for the first payment to be in 2023 falls to 4.2%, or rises to 6.3% assuming a year delay. These sensitivities are illustrated in the chart to the right.
Although it is far from certain, it seems reasonable to assume 2023 to be the year when payments commence on the warrants.

Ok, so the basic assumption is that the new IMF forecast from 2012 is now correct, after the initial forecast was completely wrong. Hmm, one might call this “positive thinking” if one wants to be nice.

Their final conclusion (after some “nonsense funky doodle” modeling) is as follows:

The combination of more stable macro-economic assumptions, and reduced default probability now mean that we find the current valuation of the warrants as being broadly justified (relative to the GGBs). Considering our constructive view, the additional beta of the warrants and also the additional ‘yield’, we now find the GDP warrants to be more attractive than the GGBs themselves as a means to take exposure to an eventual Greek recovery. We caveat that such a recovery remains uncertain and will likely be lengthy; implying that any anticipated outperformance of the warrants should be seen as a medium to long-term expectation.

So this conforms my view, that the GDP linker is more like a short-term “beta” play than an intrinsic value” investment as the Deutsche Bank “analysts” only take the IMF projection as fundamental basis and do not add anything new here.

Royal Imtech

Royal Imtech has released a quite bad Q1 report. It looks more and more that larger parts of the company are in real trouble and that the fraud might have been just the “top of the iceberg”. Time to take them of the “rights issue watch list”. As I am not a “fraud-turn around” investor, this seems to be the not the situations I am looking for.

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