value and opportunity

Following my Old Mutual “sum of parts” valuation I saw the following Ira Sohn presentation of Exor Spa, the Agnelli family holding (FiatChysler, CNH etc.) as a potential  “Sum of part” value investment.

To summarize the presentation  in my own words:

• Exor Spa is basically a “Berkshire like” company at a “Graham” valuation
• Exor is managed by a “great capital allocator” and trades at a discount as people see it as an Italian company
• After the acquisition of Reinsurance Partner Re Exor should trade at similar valuations as Berkshire or Markel
• Big upside potential as FiatChrysler, Ferrari (and CNH) are severely undervalued (“Coiled springs”)

The study sees a potential upside of several times the current share price. They forecast a 150 EUR NAV per share (vs. ~50 EUR now and 30 EUR share prices), driven by a quadrupling in value of the FCA and the CNH stakes.

Headline check: Berkshire like ?

Looking at the “Headline facts”, one can quickly see a couple of points which are different to Berkshire

• Exor did buy Partner Re in a competitive bidding process  against a strategic buyer (Axis). Buffet/Berkshire would never do this
• with the exception of Ferrari, the big participations are all second tier players (Fiat, CNH, PartnerRe)
• The underlying business don’t seem to have significant moats with the exception of maybe Ferrari
• The Partner Re acquisition was to a large extent debt financed. This puts the holding at risk, for instance if a big Nat Cat event would happen. Exor only has a BBB+ rating (outlook negative). Berkshire would never finance so aggressively
• The shown track record is only 7 years (since 2009). This is much too short to come to any conclusions. It is coincidently the year where Fiat bought Chrysler for very little money. This was a brilliant move but maybe hard to repeat

 

The Partner Re transaction:

Those are the reasons given in the Exor annual report why they bought Partner Re:

a) Reinsurers have historically offered returns that exceed their cost of capital and the
MSCI World index. Over the past 20 years the reinsurance industry has delivered an
annualized Total Shareholder Return of ~11% vs. 6.5% returned for the MSCI World

Buffett has stated many times that the next 10 years (and maybe more) will be worse than the previous ten years for the Reinsurance industry and he has sold his Munich Re and Swiss Re shares. Past returns are never a very good arguments for such a significant transaction, especially if the fundamentals (interest rates, premiums) have deteriorated significantly.

b) Reinsurers usually generate strong cash flows, which they tend to distribute to
shareholders through dividends or buybacks, as they don’t need lots of capital
expenditure to operate (which is not the case for industrial businesses, as we know
well).

Uhhm wrong. Reinsurers need a lot of capital to operate. Their business model is to hold and provide capital and there is a regulator who tells you how much capital to hold. Especially if they want to grow, they need boat loads of capital. The distributions and buy backs  we see currently in the industry  are a function of a shrinking business volume.

c) It is reasonable to expect that this industry is one that will be needed for many decades to come. It will change and adapt, but ultimately it will be relatively difficult to disrupt (that’s less clearly the case with primary insurance companies). Whatever business models its clients might develop, they will still need an expert and flexible capital partner to help them manage their risks.

Very strange. What we see is that Reinsurance has already been disrupted significantly by all kinds of alternative capital. There is almost no barrier to entry, new players come all the time, it is quite easy to set up a Bermuda “reinsurance cum investment” vehicle. Additionally, the ongoing process of concentration in the primary insurance industry will significantly lower reinsurance capacity requirements as the primary insurers will become more diversified.

d) An investment in the financial services industry diversifies our portfolio. Following the acquisition, PartnerRe will become EXOR’s largest single holding representing ~37% of the overall Gross Asset Value on a pro-forma basis (as of December 31, 2015, taking into account FCA and Ferrari as separate companies).

Buying a 37% portfolio position on a leveraged basis and speaking of diversification sounds weird. Another reason that Exor clearly is no Berkshire. Buffett would never ever cite diversification as a driver for an investment, rather the opposite.

In their investor presentation, I also found it interesting that low-interest rates were considered a “cyclical” factor fro Partner Re  and not a “structural” one.

Overall I find their arguments for the Partner Re purchase as pretty weak, it is relatively clear that a large part of the motivation was wanting to be seen as some kind of Italian Berkshire.

Valuation:

I made a quick & dirty spreadsheet to come up with a “sum of parts” valuation. I found it not easy to calculate because the reported numbers are not always clear. For instance in the Q1 report that I used as a basis, on page 4 gross debt is given as 4.976 mn EUR, later on in page 9 for instance the gross debt is lower at around 4.369 mn (adding short & long-term). They don’t really explain the difference. Its also not clear for me what kind of values the use for their NAV calculation. Their cash definition seems to include “Hold to maturity” bonds which also is quite unusual. For the valuation, I use their cash definition ant the lower gross debt.

Exor sum of parts 15.06.
	Current value EUR	Adjustemts	Adjusted	Per share
FiatChrysler	2.168.388.330		2.168.388.330	9,00
CNH	2.350.173.200		2.350.173.200	9,75
Ferrari	1.368.301.891		1.368.301.891	5,68
FCA convertible	490.523.248		490.523.248	2,04
Juve	150.018.646		150.018.646	0,62
Welltec	103.000.000		103.000.000	0,43
Treasury shares	158.255.261		158.255.261	0,66
Partner Re	5.856.255.546	-1.464.063.886	4.392.191.659	24,30
The Economist	413.300.000	-41.330.000	371.970.000	1,71
Almacantar	467.000.000		467.000.000	1,94
Banca Leonardo	59.000.000	-11.800.000	47.200.000	0,24
No Co A	18.300.000		18.300.000	0,08
Others	15.300.000		15.300.000	0,06
Black Ant Value Fund	346.800.000	-34.680.000	312.120.000	1,44
Other funds	175.700.000	-17.570.000	158.130.000	0,73
Cash	173.000.000		173.000.000	0,72
Debt 31.03.2016	-4.369.700.000		-4.369.700.000	-18,13
NAV total	9.943.616.120		8.374.172.234	41,26
No share	241.000.000		241.000.000
NAV/Share	41,26		34,75
Current shareprice	30,26		30,26
“Discount”	36%		15%

 

Without any adjustments, my “NAV” would indicate a discount of ~36%. As in the Old mutual example, I think it is important to note that even with listed shares, there is no “true” value. If you are forced to sell, you would need to sell most likely at a discount, if someone wants to take over a company, you could justify a control premium.

With Exor we have the special case, that the Partner Re stake includes a significant control premium. Due to the size of the participation and the leverage, this has a signficant impact. Exor paid around 15% more than the Axis offer (which was all shares). If we assume for instance that Exor paid 25% too much for Partner Re, then the “discount” gets significantly smaller.

Together with some other minor adjustments, I would argue that the current discount is not that huge and clearly not enough to make this interesting in my case.

FCA & Ferrari & CNH & Sergio Marchionne

I know that a couple of “famous” value investors  have FCA & Ferrari & CNH in their portfolios. I personally have never looked deeply into them. From the outside, Sergio Marchionne looks like a smart guy, buying Chrysler for almost nothing in 2009 was clearly a fantastic move. Also the Ferrari spin-off looks smart.

But the auto industry itself does not look attractive and I don’t have to repeat W.B.’s argument about briliant managment and bad businesses.

Very capital-intensive and with big structural changes on the horizon (EV, self driving, Uber etc.) does make it a very difficult area. Maybe Ferrari could be interesting but I am not an expert in luxury vehicles either.

One interesting detail: Sergio Marchionne owns around 0,8%-0,9% in each of FCA, CNH and Ferrari, but no shares in Exor.

Summary:

Exor SPA for me is not a buy. At first, the discount to a sum-of-part valuation looks interesting, but taking into account the fact that they most likely overpaid for Partner Re (and even might not know fully what they bought), the discount looks rather “ordinary”.

I am not sure if  the Exor management is really value creating. As I outlined above, the stated reasons for their Partner Re acquisition makes me doubt that they will create a lot of value going forward. Yes, the track record since 2009 looks impressive but there were a couple of “lucky punches” as well.

On top of that I have no clue about the major industrial particpations (FCA, CNH), which, with the exception of Ferrari look like mediocre businesses in very tough industries.