Uniper/E.On Spin-off: Take one ugly duck and transform it into ….. 2 really ugly ducks ?
Monday, Sep 12th will be the first trading day for Uniper, the E.On spin-off. E.On shareholders will get one Uniper share for each 10 E.On shares they are holding.
Just to recap: Uniper will contain all the (unwanted) power generation assets of E.on, so all the “fossil fuel” power plants, the Russian assets and the Swedish nuclear plants plus some other stuff. The German Nuclear assets (and the corresponding liabilities) will remain at E.on due to the reasons I mentioned in the last post.
Uniper is clearly an ugly Duck, maybe the “most ugliest spin-off” I have seen since I started the blog. If we look into the most recent investor presentation, it is clear that you have a problem when the 3 listed growth projects are a German Hard Coal Power plant, q Russian power plant closed due to an accident which will reopen in 2018 and some strange dealings around the North Stream gas pipeline (page 9.). It doesn’t help either that Uniper had to take a 3,8 bn EUR pre tax write down in the first 6 months of 2016.That makes the duck still uglier.
Unfortunately, also E.On will not turn into the beautiful swan as the will carry the (significant) nuclear liabilities. I think they wanted to have E.On emerging as the beautiful swan, but now they got two ugly ducks instead of one.
Back to the spin-off:
Similar to Siemens/Osram 3 years ago, for one day Uniper will be part of the DAX, which will be calculated with 31 instead of 30 stocks on Monday, but then they will drop out of the DAX on Tuesday.
Any index fund will therefore need to sell the stock on Monday, they will not care about the price level as long as they can sell at the price which is used for calculating the index. Vanguard and Blackrock own almost 10% of E.on which is mostly index money, on top of that also Deutsche, Lyxor and Deka have significant index fund stakes in E.On. My rough guess would be that ~15% of E.On are held by index funds.
The potential effect of this can be nicely seen at the first 2 days of trading at Osram back in 2013:
The stock started trading on the first day at 23 EUR and ended on the second day at 28 EUR, a nice 22% increase with around 25% of all stocks traded on the first day. Much of that was (in my opinion) driven from price insensitive selling of index funds on day one.
The question of course is: Will this happen again ? The E.On CEO himself expects volatile prices on Monday.
They do have all incentives that Uniper doesn’t fall too much as the are keeping slightly less than half of Uniper and would have to write down the stake if the value falls far below their book value which in my understanding is around 12 bn EUR.
Clearly many arbitrage funds have seen Osram (and Lanxess) and will be prepared, on the other hand Uniper is such an ugly duck that there are little other long-term investors and those Arbitrage funds will earn some serious money. too.
Valuation attempt 1: Book Value multiple
One of the big questions is: What should Uniper be worth ? “Conventional” power plants powered by Hydrocarbon don’t trade that rich.
Drax UK, a coal based power plant trades at ~0,7x book value, the Polish coal based utilities trade at 0,4 times book value, CEZ from Czech Republic at 0,9x. It is always difficult to separate Power generation and distribution for listed utilities. Distribution is better and fetches higher multiples, generation is the part that no one wants. As a “gut valuation” I would say that 0,7x book value could be a “fair” value for something like Uniper.
With shareholders equity of 11 bn EUR and 365,96 mn shares, that would be 30,24 EUR book value per share or a “fair” value of 21,17 EUR per share at 0,7x book value.
Valuation attempt 2: EV/EBITDA multiplee
Uniper will carry around 3,6 bn net debt after the spin-off. If we assume EBITDA of 2 bn p.a. as a reasonable number, then a valuation of 5-6x EV/EBITDA would justify a range of 17,49 EUR to 23,33 EUR per share with the mid-point at around 20,50 EUR.
Interestingly (and without making it up), my 2 gut feeling valuations have resulted at the same ball park for the fair value per share which I find very surprising.
So what to do now ?
Uniper is clearly not a long-term investment, I have used the word ugly a couple of times and that’s what it is.
On the other hand, within Spin-offs, the ugly parts often start undervalued and then perform much better than the sexier part. This was also the case in the Metso Spin-off (Valmet) in early 2014. Metso, the sexy part gained 22,7% since spin-off, “ugly” Valmet however more than doubled (+111%) within 2,5 years.
But it could be an interesting short-term special situation, similar to Osram. If they start trading significantly below my fair value estimate (<15 EUR per share) I will allocate 1-2% as a special situation depending on the price.
In any case I will not hold this for a longer period of time. Time to get the Popcorn ready for Monday morning…….
If someone wonders why I would buy Uniper after “bashing” E.On (and Einhorn) for the last 12 months: I do distinguish completely between special situations and long term holdings. A stock could be a really bad long term holding but an interesting short term special situation. Uniper could be the typical “Cigar Butt” with one last puff in it. I think it is however important not to mix up the categories. If such an investment doesn’t work out, you have to take the loss quickly. It doesn’t make sense to argue a short-term special situation gone wrong into a great long term investment.-
After a lot of input via the comments & Email, I also lower my buying threshold for Monday. The fair value range seems to be rather in the 9-12 EUR range. So buying prices would be rather in the single digit rangelike 7-8 EUR. Let’s wait and see, this will be VERY interesting.