Exor SpA: Buying a Reinsurance company doesn’t mean that you’re the “next Bershire”

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.

exor_logo_dec_2013

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.

marchionne824

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.

 

 

 

 

 

 

15 comments

  • saureusfrance

    Nice. In France there is a similar holdings company named FFP (holdings of Peugeot), it is worth a look.

  • Fair points. But just because they bought a reinsurer they don’t want to be a baby Berkshire. The Agnelli track record goes for over 100 years but I agree, John Elkann can look back to 2008 when he took the helm. Unlike Berkshire he has not been shy to sell things. And selling he did quite successfully (e.g. Cushman & Wakefield). You quote Greenwood and your points are valid. But I can recommend the annual shareholder letters of John Elkann. In one he stated his investment criteria:

    I am a big believer of what Darwin discovered in the Galapagos, proving that the species most responsive
    to change will survive over apparently stronger or more intelligent competitors.
    In seeking to embrace change we will continue to look for investments that meet the four criteria we
    described last year. We cannot promise results, especially like the ones achieved so far, but what I can
    promise is that:
    1) We will invest only when we understand
    2) We will choose based on talent
    3) We will decide based on value
    4) We will focus on the long-term
    Thinking about the decade ahead I recalled a particularly inspiring quote, often attributed to Mark
    Twain.
    “Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones
    you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your
    sails. Explore. Dream. Discover.”

    • thank you for the comment. However my main point is that he may not fully understand Reinsurance. That’s my subjective impression when I read the reasons for buying Parnter Re.

  • I believe Capital Expenditure means CAPEX

  • Value Investor

    The difference in gross debt is due to the fact that the first one is in $ and the second in €

  • Nice analysis. I remember, that Mohnish Pabrai has (or had) a huge part of his portfolio in FCA, which I never understood. He had better picks in the past. Maybe I’m biased as a German (I just say ‘Fehler in allen Teilen’ or ‘Daimler-Chrysler’) but Ferrari is the only positive thing I could see in FCA. And Ferrari (the stock) itself is quite expensive now after the spin off.

  • Seems like “Berkshire Hathaway” is everywere. A list of the Berkshires/Buffetts of every country would be interesting. Berkshire of GB, Berkshire of Japan, Berkshire of Germany?

  • Time to look at the UK MMI.
    Valuations are starting to compress and a volatility window is about to open up at the end of the week. That could offer interesting entry points.
    Best,
    Tony

  • I mostly agree with your analysis here, but CNH is definitely not a tier 2 business. Their tractors are probably just as good as Deere’s (the top dog in agricultural machinery). The Trucks division is a different story (no scale), but it will likely be sold as soon as Sergio finds a smart transaction for them.

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