Dom Security – Nice offer but now what ?
Dom Security was a French small cap that I discovered 2 years ago. My thesis back then was that the underlying business was attractive, that profits will recover and that I will own this “Boring” stock for a long time.
Well, almost exactly 2 years after I have invested, Dom Security came out with some news a few days ago.
The good part: EUR 75 Tender offer (10%)
Dom is planning a tender offer (share buy back) offer for 10% of the outstanding shares at a price of EUR 75 per share. Free float is currently around 30%.
The official period for the offer will start on July 13th and last untill July 26th. 75 EUR per share represents more than 100% gain since the initial investment (less for my overall position as I increased my position at higher prices).
The not so good part: Merger with Groupe SFPI
The offer is only a first step in reorganizing the group. As mentioned in my first part, the CEO owns another stock listed company, Group SFPI which owns 70% of Dom Security.
It seems that in a second step, after the tender offer, they plan to merge Group SFPI and Dom Security:
L’OPAS s’inscrit dans le cadre d’un projet de réorganisation du groupe SFPI devant conduire à la fusion-absorption de DOM SECURITY par GROUPE SFPI, le principe de ce projet de fusion ayant été approuvé le 20 juin 2018 par les conseils d’administration des deux sociétés, sur la base d’une parité indicative de 20 actions Groupe SFPI pour une action DOM SECURITY.
This means that the “indicative” exchange ratio would be 20 Group SFPI shares for one Dom Security share. At the time of writing, SFPI trades at 3,40 EUR/share, resulting in a valuation of 68 EUR/share.
Dom Security 2017 annual report
A small recap of the annual report. Sales increased by low single digits and profit remained more or less stable against 2016. Under the hood however it was interesting to see that Western Europe (France, UK) did very well as well as “Southern Europe” but actually “Northern Europe” (Germany and Switzerland had been struggling. Although Germany is still the most profitable market with 74% gross margins, it is surprising to see that despite the “red-hot” real estate market in Germany, sales went down by -3%.
I didn’t find any explanation for this and it is a little bit odd.
Groupe SFPI SA
With around 90 mn shares, SFPI is valued at around 310 mn EUR compared to Dom Security with ~170 mn EUR.
As SFPI owns currently only 70% of Dom, all other “non DOM” business activities are valued with (310-120)=190 mn EUR.
What one gets is the following:
- (504-170) = 334 mn EUR sales
- (25-(0,7*11)) =17.5 mn Net income after minorities. Thereof 6 mn “one-off” divestment profit.
- (50-20)=30 mn EUR additional net cash
So on a normalized basis, SFPI ex Dom is valued at 160/11.5= 13.9x 2017 earnings, which is more or less the same as Dom.
SFPI’s other businesses are divided into another building/construction related business called MAC that manufactures windows, blinds and garage doors. The business is less profitable than DOM but showing significant improvements in 2017 (Operating income +50%).
The remainder is a quite interesting industrial services business. 2/3 of SFPI’s sales are in France which I think is interesting as I am still positive about France going forward.
Although SFPI ex DOM is lower margin business, there seems to be potential. Interestingly, compared to DOM, the stock of SFPI has clearly underperformed over the last 5 years:
What now ?
To be honest, I would have preferred to keep my DOM shares for (much) longer. On the other hand, Groupe SFPI doesn’t look so bad either. The CEO is the same and I consider him to be very good and I also think that France still is the most interesting market in Europe to be in from a fundamental side.
At the current price of EUR 69 per DOM share, the tender offer seems not to be fully priced in. Depending on the acceptance ratio (min 1/3) and the SFPI share price, DOM should be worth slightly more than the 69 EUR at the moment.
So I actually increased my position from the current 5,4% to 6% at 69 EUR. I plan to tender everything at 75 EUR and then, assuming a 1/3 acceptance remain with a 4% position of SFPI after the merger happened.
The reason to slightly increase the position was also driven by an already high cash position (13%) and very few alternatives.
The results are out:
Acceptance rate is 38%,
So the shares that I additionally purchased at 69 created a small loss of of 20 cents per share pre transaction cost (0.38*75+0.62*65)
For the record: So far it’s not possible to tender shares. I have written to DOM and received the following answer:
Thank you for your email.
We have been informed of this problem last night by an other shareholder. We are working with euronext and our advisors to find where is the problem. I will come back to you and give your contact information to the person in charge of the operation for the regulator.
Sorry for the problem
20, rue de l’Arc de Triomphe l 75017 PARIS I France
+33 (0)1 46 22 09 00
+33 (0)6 72 38 53 20
I don’t understand your calculation.
For me the calculation looks as follows:
1/3 of the shares can be tendered at 75 EUR
2/3 will be merged into SFPI at 20:1
Initially, when I wrote my post, SFPI was at 3,40 EUR. Then the calculation would be:
2/3 x 68 + 1/3 x 75 = 70,33 EUR per share.
At the current price of 3,26 EUR per share for SFPI , the result would be 68,5 EUR per share, so fair value.
(3*69-75)/2 = 66 per share
undisturbed price pre-announcement is 59 per share.
Am I missing something here?