value and opportunity

Usually, I try to stay away from a “true” Merger Arbitrage as this is mostly a typical “shark tank” situation where as a small investor, the chances are pretty high to end up as shark food. However the situation when a first attempt fails and the price pulls back, it could be more interesting. In cases such as Rhoen Klinikum ,the interesting aspect is that suddenly the “true” value or “control price” of a business is revealed when a bid is made. With this information, one can more easily calculate the odds and expected returns.

The attempted take-over of R. Stahl by closely held German company Weidmüller was a special case anyway. In April 2014, German company Weidmüller made an “unfriendly” offer to all R. Stahl shareholders offering 47,50 EUR under the condition that 50% of shareholders accept the offer. Later, they increased the offer to 50 EUR, which was significantly higher than the “undisturbed” price of around 34 EUR.

The strange thing about the offer was the fact, that 51% of the company is held by the heirs of the founding family and further 10% is held by R. Stahl themselves. The families directly commented that they won’t sell and of course R. Stahl’s management was also not a big fan of this transaction, so the Treasury shares were out of question as well.

Not surprisingly, on July 4th, Weidmueller released that the offer has expired as only ~17% of shareholders have tendered their shares.

R. Stahl as a company

Let’s take a step back and look at R. Stahl as a company. In my opinion, R. Stahl is one of the typical “hidden Champions” of the German “Mittelstand”. They specialize in electrical installations within potential explosive environmenta (chemical plants, gas/oil etc.). The company is financed “rock solid” and has shown good growth in its core business for quite some time althoughresults did not fully trail rising sales.

I actually owned R. Stahl back in 2003 when it was a turn around case. I do have prove for this as I opened a discussion thread at “wallstret:online” back in 2003 when the stockprice was around 5 EUR per share and which is still active. I sold at 17 EUR and thought I was a genius and missing the next 100% in 2 years…

R Stahl does not look too expensive. Although P/E is around 19, EV/EBIT and EV/EBITDA look pretty cheap. EV/EBIT of 7,3 for instance is pretty cheap and is not even adjusted for the 10% treasury shares which should be deducted from EV. The latest quarter didn’t look that good as R. Stahl suffers to a certain extent from the lower Capex of its mein customers, oil and natural gas companies.

R. Stahl was actually on my watch list after the fell in the beginning of 2014 however the Weidmueller offer came before I could look more closely into the accounts.

Back to the failed Weidmueller offer

So the question is: Why did Weidmüller make this offer anyway? To be honest, I don’t know. I researched a little bit and it seems, according to some newspaper articles (for instance here), that Weidmüller had contacts to the family before and that maybe the families are not such a “solid block” at all. In this other article there is an interesting comment that chances were not so bad after all as family controlled companies are more open to sell to other family companies like Weidmüller. They also mention “Phoenix Contact” as another potential buyer.

The combination of Weidmueller and R. Stahl seems to make some sense as this interview with the Weidmüller CFO clearly shows. It was clearly not a cost cutting project but a growth project.

Interestingly, the stock price did not retreat to the “undisturbed” level, but is hovering around 41 EUR, clearly above the level before the offer.

Q1 numbers which were issued after the first Weidmüller offer did not look so good, so this is not an explanation for the still elevated stock price.

Is this interesting ?

A very simple way to look at this is making the following assumptions:

– something is happening within 1 year, either deal or ultimately no deal
– the “undisturbed” price is EUR 34.
– the control price is 50 EUR per share
– I want to make an expected return of 15% p.a.

Then I can solve for the implict required probability of a 50 EUR deal happening within 1 year:

41*1.15 = (Prob*50) + (1-Prob)*34 or (41*1.15-34)/16 = Prob

Based on those assumption, I would need to apply a 82% probability in order to have a 15% expected return on investment. I think this is much too high for my taste.

At the moment, I would assume that there is a 50/50 chance. With this assumption, I can calculate my required price level where the stock gets interesting.

This would be then the follwoing calculation:

0,5*34 + 0,5*50 = Price *1.15 = 36,52 EUR. So at 36,52 EUR per share I could get an expected return of 15% with odds at 50/50.

Now we can make another assumption: Let’s assume we are still at 50/50, but we assume that any acquirer has to pay more than 50 as the 50 were clearly not enough. So lets say 55 EUR. Then my target price would be around 38,69 EUR per share where I would be prepared to buy.

In reality, of course the outcome will not be so binary, but I think this framework is a good way to get a feeling for an intersting entry point. For me, the current price level of 41 EUR is a little bit to high, but I think this could be interesting around 38,50 EUR as a special “failed M&A” situation.

Activist angle

There is a further interesting angle. A smaller, but in expert circles well known investor (Scherzer) has released an “open letter” to the management and board during the offer period. There they critize that from the beginning Management and board were against the offer despite the fact that they are obliged to work for the benefit of all shareholders and not only the founding family. The letter contains some other interesting info, such as that the Head of the supervisory board had actually sold shares in the market before etc. etc.

The target of this letter is clearly to put pressure on the family in order to “Motivate” them making an offer to minority shareholders at the “eidmueller” price. I am not sure how the chances of success are here, but this could increase the odds towards an “event” as described above. I am not a lawyer, so I cannot fully judge if the potential legal issues mentioned in the letter with refusing the offer are enough to build a case against them but it clearly increases the leverage.

The question for me is: Does this move the “needle” far enough t justify an investment at the current price of 41 EUR ?

Summary:

Although the failed R. Stahl offer is clearly different from my succesful Rhoen investment, the situation itself is interesting. However for my taste, the current price of 41 EUR is a little bit to high compared to the undisturbed price of around 34 EUR in order to justify an investment. For me, this would get very interesting at a price of around 38-39 EUR at the curent stage. I will watch this one closely…..