Monthly Archives: July 2013

Quick check: CIR Spa (ISIN IT0000080447) – HoldCo sum of part play with “special situation” catalyst ?

This is an idea I read recently on the beyondproxy blog/site.

As my first attempt at this post somehow disappeared, I will now just copy the introduction from the beyond proxy post:

CIR Group is a company whose story is an intricate all-Italian tale of family ownership, corruption and dirty politics. This unique combination of factors seems to be frightening investors away from the company thereby causing its shares to become substantially undervalued. Within the next two quarters however, the Italian courts will decide on a legal dispute that will put an end to the tale and, most likely, a higher valuation on the stock.

CIR is structured as a holding company. It owns controlling interest in four businesses (Sorgenia, Espresso, Sogefi and KOS) and has substantial investments in alternative assets such as hedge funds and other financial instruments. Its liabilities consist mainly of €300mm of publicly traded bonds and €564 million of legal reserves.

and this is the “kicker”:

CIR carries a €564 million liability that has been booked as “Borrowings”. In reality, this is not borrowed money – it is a legal reserve for an infamous legal proceeding that has been making headlines in Italy for the past twenty years: the so-called ‘Lodo Mondadori’.

The author (a Italian grad student by the way) then values the company with a simple sum of part model, using share prices for the listed subsidiaries (Espresso, SOGEFI) and NAVs (P/B=1) for the unlisted shares (utility Sorgenia, hospital KOS). As a result, the author sees an upside of at least 20% in any case or up to 135% in case of a positive outcome of the “Berlusconi situation”

I think this is a good starting point, but I would adjust the approach slightly:

1. add control premiums to the participations
2. adjust NAVs for unlisted participations if appropriate (and comparables are available)
3. deduct finally a control premium for the CIR share

One could ask: Why add control premiums and then deduct them again ? Well, clearly, being a minority shareholder in the middle of an Italian shareholding chain is not the best position to be in. The main effect of this approach is to deduct a control premium from the expected Berlusconi settlement. This should be done as one does not know what happens with the money. I assume it will not be paid out as a dividend.


1. For a control premiums in both cases I assume 30%
2. For the unlisted utility, I will use a P/B valuation not at nAV but at 0.5 times NAV. This is in line with similar Italian utilities like Iren (0.58) and Enel (0.6). I use 0.5 because the others are even profitable, Sorgenia is not.

First step: Sum of parts ex “Berlusconi”

CIR Spa 12/2012          
    mn EUR MTM Control premium MTM + prem
Participations 1,192        
– Sorgenia   197.7 186 30% 241.8
– Espresso   341.7 178 30% 231.6
– Sogefi   106.9 172 30% 223.7
– KOS   99.2 99.2   69
– CIR Investimenti   421 421   421
– others   25.5 25.5   25.5
Receivables (group) 320   320   320
Cash, securities 291   291   291
other 67   67   67
Total 1,870   1,760   1,891
LT debt -299   -299   -299
“Berlusconi liability” -564   -564   -564
Other -68   -68   -68
Total -931   -931   -931
NAV 939   829   960
shares 793.3   793.3   793.3
NAV per share 1.18   1.05   1.21

This rather simple table shows how i moved from the current “carrying values” in the HoldCo balance sheet of CIR Spa Holding to my mark-to-market valuation BEFORE applying the overall control discount. Remark: Using consolidated numbers for a company consisting of mostly 50% participations does not make a lot of sense.

Step 2: Berlusconi scenarios and control discount

before tax After Tax Per sh NAV Upside -30% control Upside
Base case       1.21 27% 0.85 -11%
Berlusconi min 150.0 97.5 0.12 1.33 40% 0.93 -2%
berlusconi max 564.0 366.6 0.46 1.67 76% 1.17 23%
Belusconi Mid 357.0 232.1 0.29 1.50 58% 1.05 11%
last news -15% 479.4 311.6 0.39 1.60 69% 1.12 18%

Here you can see the base case (as is) and 4 potential scenarios for the payment, assuming that 150 mn before tax is the minimum. The upside is calculated based on a current share price of 0.95 EUR per CIR SpA share

We can see that after applying the -30% control discount on the sum of part, without the Berlsuconi settlement, the shares look rather expensive. The max. upside with around +28% is rather limited at this price.

So it looks like that some of the expected Berlusconi payments are already priced in. At that price, I don’t think CIR SpA is attractive if one applies a 30% control discount.

Legal disputes /court cases as special situationss

In general, legal disputes are often quite interesting special situations. This is a quote from the 1951 edition of Ben Graham’s 1951 edition of “security analysis” (via CS Investing):

Class D Litigated Matters.

There are fairly numerous cases in which the value of a security depends largely on the outcome of litigation. This may involve a damage or subordination suit (e.g., International Hydro Electric, Inland Gas Co.); disputed income tax liability (e.g., Gold and Stock Telegraph, Pittsburgh Incline Plane); an appeal from a reorganization plan wiping out stock issues (e.g., St Louis Southwestern Ry., New Haven R.R.). In general, the market undervalues a litigated claim as an asset and overvalues it as a liability. Hence the students of these situations often have an opportunity to buy into them at less than their true value, to realize attractive profits—on the average—when the litigation is disposed of.

What kind of holding company is CIR SpA ?

A few months ago, I had a post about how I distinguish Holding companies:

For myself, I distinguish between 3 forms of holding companies:

A) Value adding HoldCos
B) Value neutral HoldCos
C) Value destroying HoldCos

Back then, we saw that even for a “value neutral” holding like Pargesa, a 30% discount applied. So implicitly I assume CIR SpA is value neutral as well. At least the reporting is quite transparent. In the past, CIR was involved in many typical Italian Feuds like Olivetti and Mondadori, but I haven’t read anything that they try to screw minority shareholders of their own group.

Although Benedetti Junior looks a little bit like someone who enjoys doing shady deals 😉

According to the last annual report, Benedetti Senior has ceded control of CIR SpA to his sons.


Although I like the unique aspect of this special situation, the potential upside is NOT attractive enough to justify an investment at current prices.

I will keep this on the radar but I would not invest above ~0.70 EUR. I would need 50% upside in order to justify the risk of the underlying companies which are clearly struggling.

Some links

Genius investor Eddie Lampert is still struggling with Sears

Home run investing via “on base” investing – Great interview with Zeke Ashton

Carson Block goes mainstream- warns on EM exposure of US companies

Good post about a column about private companies in the NYT (good blog by the way…)

If I would be 10-15 years younger, I would do ANYTHING to get this job at John Hempton’s Bronte

Nate from Oddball seems to become famous plus a new interesting “oddball” stock

Midyear performance review “Wexboy style”

Friday night IVG Bombshell

Friday night, 8 pm seems to be a good time to land a real bombshell. IVG distributed an Adhoc notice with some update information about the upcoming restructuring.

Among other stuff, the comment on potential recovery rates in a liquidation. This is the German original:

ergäbe folgende Befriedigungsquoten: ca. 96% bis ca. 100% für Objektfinanzierungen (Carve out debt), ca. 86% bis ca. 89% für den syndizierten Kredit von 2009 (Syn Loan II), ca. 46% bis ca. 55% für den syndizierten Kredit von 2007 (Syn Loan I) und ca. 27% bis ca. 41% für die Wandelanleihe. Die Gläubiger der Hybridanleihe und die Aktionäre der Gesellschaft würden in diesen Fällen voraussichtlich jeweils keine Befriedigung erhalten.

So nada/niente/rien for Hybrid and Equity and only 27%-41% for the convertible. This is significantly below the latest trade of around 58% as of today.

After all, my summary from May seems to be spot on:

the likelihood of IVG “surviving” long term in my opinion is very small or even zero. So equity and hybrid should be avoided

I am really glad that I sold out:

Overall, for the portfolio I would for the time being sell down the position at current rates and eat the loss. I am pretty sure that I am too early but as I know that I am a rather bad short term speculator, I want to play this safe.

This is by no means over yet but it doesn’t look good.

Interestingly, Third Avenue seemed to have bought into IVG earlier this year. That’s what they say in their last shareholder letter:

Our analysis determined that the IVG Convertible Bond swere most likely the “fulcrum” security in the capital structure. In other words, holders of the IVG Convertible Bonds are likely to participate in a debt-for-equity restructuring, and the subordinated securities(preferred and common) would retain little or no value. IVG Convertible Bonds mature in 2017, but holders have an option to put the bonds to the company in 2014. The Fund purchased approximately 5% of the outstanding IVG Convertible Bonds at an average cost of sixty-eight cents on the dollar. As a larger holder,we anticipate having a seat at the table with the company

Man, that sounds really stupid. Even I had found out that the “fulcrum” security were the loans. it seems to be that Marty Whitman’s successors got a little bit sloppy.

So let’s get some Popcorn and watch what will happen on Monday.

Missed opportunities: Osram, Praktiker, Powerland


Good idea, bad execution is my summary for this one. The main mistake was clearly some kind of “anchoring”, because I wanted to see a price below 23 in order to buy. ANother question would be if you should, as a true value investor, do such “trades” at all.

Clearly, I am not yet convinced of Osram’s long term potential, but to me it was clear that this looked very similar to Lanxess’ first day on the stock market. A friend told me that “if you miss the limit by a few cents, then the margin of safety was too small anyway”. That is a good point. On the other hand, I think one can also add “alpha” if one does those kind of trades consequently (like the KPN trade), if the odds are in one’s favour.

I mean this is the whole idea of “special situation” investing. It might not be a pure “Margin of safety trade” each time, but if the chances are 55:45 on average instead of 50/50, over time this strategy will also produce good results.

For the time being, I will however remain on the sidelines with Osram.


Almost exactly a year ago after I sold the Praktiker Bond, the Insolvency now seems to be unavoidable.

Looking back, the sale at ~44% in July looked like really bad timing in the beginning:

Clearly, this was a missed opportunity as well, as the price even doubled after I sold July 2012. But after the “restructuring”, the Praktiker bond in my opinion was a pure speculation, the odds were at most 50/50 or worse. Clearly, I did not forecast the bad weather, but overall this whole affair looked just too bad. So I do not regret this missed opportunity as the fundamental decision was clearly correct.

Just as a remark: I assume that the recovery for the bond will be very low, maybe even single digit percentage points. Everything valuable has been pledged away and I don’t think they will get any fresh money into the capital structure “below” the bond.


2 years ago, I looked at Powerland, a “German-Chinese” IPO. Already a superficial look at the company showed a lot of inconsistencies. Now it looks like that the game is over.

I am not sure why I didn’t short the company. This was clearly a case with a very big chance of being a fraud. There would have been even a second good chance when the CFO in November 2012 surprisingly left the company. So clearly a missed opportunity as I didn’t follow up on that one.

Update Osram Spin off & Lanxess

Valuation update:

That’s what I wrote 2 weeks ago:


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.

2 things changed here:

1) The price was 24 EUR as a first trade, 20% lower as discussed 2 weeks ago
2) The net debt number i used was not the most recent one but from 30.09.2012. The most recent one was 0.5 bn

So overall, the current evaluation looks like a lot more reasonable (2.4+0.5)/0.5 = 5.8 x EV/EBITDA if one assumes 500 mn EBITDA.


Just for fun, I looked up some info about the Lanxess IPO in 2004/2005. Interestingly, Bayer tried to IPO Lanxess against cash as well but then had to settle for a Spin-off.

On the first trading day, Lanxess went down -6.3% from an opening price of 15.75 EUR to 14.85 EUR. This was the lowest price ever for Lanxess.

In order to get not to excited about spin-off, one should remember the HypoReal Estate spin-off from Hypovereinsbank. We all kno how this ended.

Based on the now siginficantly reduced valuation, I feel tempted to go into Osram although with only a smaller alliocation (2-2.5%) of the portfolio as a spin off special situation. I will however wait until late afternoon to finally decide.

As of lunch time, only ~7.8 mn shares have been traded, I assume there is more to come. If the price goes significantly below 23 EUR, I will be on the buying side.

Performance June 2013

Performance June 2013:

Performance in June 2013 for the portfolio was -1.6% against -4.3% of the BM (50% Eurostoxx, 30% Dax, 20% MDAX). YTD, the portfolio is up +17.7% against 7.1% for the BM.

Interestingly, this was the first negative month for the portfolio after 18 consecutive positive months, for the BM the “run” were 12 months of positive returns. The positive aspect is the fact, that the draw down was a lot less than the benchmark, even adjusted for cash.

Graphically this looks as follows:

Positive contributors were EGIS (+6.6%), Rhoen (+6.5%). Loosers were SIAS (-15,1%), EMAK (-12,4%), AS Creation (-7,1%).

Portfolio transactions

As discussed, I closed the Kabel Deutschland short after the official offer of Vodafone. The result was a loss of ~-22% on this position.

Only new entry of the month was Thermador. In order to remain within my 20% allocation to France, I sold Bouygues at the same time, resulting in a profit (incl. dividend) of ~+11%.

Portfolio as of 30.06.2013

Name Weight Perf. Incl. Div
Hornbach Baumarkt 3.7% 2.4%
AS Creation Tapeten 4.0% 39.2%
Tonnellerie Frere Paris 5.8% 81.6%
Vetropack 4.1% 6.6%
Installux 2.7% 14.2%
Poujoulat 0.9% 11.4%
Dart Group 4.7% 167.3%
Cranswick 5.7% 37.0%
April SA 3.5% 12.5%
SOL Spa 2.7% 31.5%
Gronlandsbanken 2.2% 23.2%
G. Perrier 3.2% 18.8%
IGE & XAO 2.0% 4.8%
EGIS 2.8% 7.6%
Thermador 2.7% 1.5%
KAS Bank NV 4.7% 28.7%
SIAS 4.8% 36.7%
Drägerwerk Genüsse D 9.1% 180.1%
DEPFA LT2 2015 2.6% 58.3%
HT1 Funding 4.6% 56.2%
EMAK SPA 4.6% 45.1%
Rhoen Klinikum 2.3% 18.1%
Short: Prada -1.0% -15.3%
0 0.0% 0.0%
Short Lyxor Cac40 -1.1% -11.0%
Short Ishares FTSE MIB -1.8% -3.6%
Terminverkauf CHF EUR 0.2% 6.9%
Cash 20.4%  
Value 50.5%  
Opportunity 32.9%  
Short+ Hedges -3.7%  
Cash 20.4%  


Nothing really new.

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