value and opportunity

Disclaimer: This is not investment advice, only the personal opinion of an anonymous blogger. PLEASE DO YOU OWN RESEARCH !!!!

Background:

Ahlsell is a Swedish company that distributes building / renovation related products mainly to craftsmen in the Nordic Region. In 2012, the company was taken private by private equity house CVC.

In 2016, Ahlsell was IPOed again by CVC at SEK 46 per share. They sold 1/3 of their shares in the IPO and then down to 25,1% just some weeks ago.

Then more or less out of the blue a few days ago, CVC offered again to take Ahlsell private at 55 SEk/share which translates into a valuation slightly north of 2 bn EUR for the equity.

In their official offer document, the official reason for taking the company private again is written as follows:

However, as Ahlsell is now possibly moving into a different phase of its
business and economic cycle with a softer outlook for construction and industrial activity, and uncertainty in the overall domestic and global markets, Quimper is taking responsibility and offers to take Ahlsell private at a full and fair valuation for Ahlsell’s shareholders.

This sounds like a very noble cause.  Personally, I think it has more to do with the fact that they raised a 15,5 bn EUR monster fund in 2017 and now don’t know where to put their money into. Somewhere the partners must have decided to put the money into an asset they already know and that Ahlsell at SEK 55 is a good deal.

Looking at the stock chart we can see that the stock already suffered before the current downturn on the stock market:

Although the SEK 55 offer is ~32% premium over the last price, the stock has been trading higher or at the offer the first 7 months of the year. So this is clearly a quite opportunistic offer from CVC.

I already had Ahlsell on my extended watch list. The business model is quite similar to Thermador and the company brought down debt significantly since the IPO. The valuation was cheap and there is clearly more growth potential in consolidating the Nordic markt despite potential headwinds. However I did not have time to look deeper into them as I normally don’t like Private Equity IPOs very much.

Timing / main conditions:

It looks like CVC wants to execute this offer quite quickly by mid-February 2019.

SETTLEMENT
Settlement will be initiated as soon as Quimper announces that the conditions for the Offer have been fulfilled or Quimper otherwise decides to complete the Offer. If such announcement takes place 13 February 2019, at the latest, settlement is expected to be initiated around 19 February 2019. Settlement will be effected by distribution of a transaction note to those who have accepted the Offer. If the
holding is registered in the name of a nominee, settlement will be provided for by the nominee.

CVC has set a 90% threshold for acceptance, however they reserve the right to lower this threshold.

Risks / Opportunity

Personally, I don’t think there is a lot of execution risk. CVC knows the company by heart. They still own 25% and management has been appointed by CVC. There are no anti competition issues and I am not sure if an activist investor wants to jump into this one. A lot of existing shareholders will be happy that they can exit with relatively minimal losses.

On the other hand it is also very unlikely that anyone else would bid more as CVC can effectively block any counterbid with their 25% share holding. So SEK 55 per share is clearly the maximum.

There is of course always the risk that something happens and the bid falls through but in my personal opinion is that in this situation the risk is very low, less than 5%.

Assuming that the stock price would drop to 40 SEK, the downside from the current price would be (40-52.4)/52.4 = -23,6%. Based on my assessment for the probability, the expected loss would be around -1,2%.

This compares to a potential upside of around (2,6/55)= 4.7% (before taxes & trading cost). Not much, on the other hand it looks like a pretty decent yield considering the relatively short expected time frame.

It might sound like a lame excuse, but if the bid would somehow fail and the price would drop back to SEK 40, then I would consider Ahlsell as an attractive investment on its own. The last quarterly report was quite positive.

Additional considerations

For me, in the current situation, such a rather short-term special situation is also a kind of “timing hedge”: Although I see many risks for 2019 and beyond, I am currently also tempted to deploy all my remaining cash quickly as some of the stocks I own and/or follow have become very cheap. Looking back, it was always wise to not move quickly in such situations but deploy money slowly over time.

The money that I invest in Ahlsell will be “locked away” at least until mid-February and protect me against too spontaneous buying.

Summary: 

All in all, I think the CVC offer at 55 SEk and a stock price of ~52,4 SEK at the time of writing offers a very fair return risk profile for a relatively short period of time.

I therefore allocated ~2,5% of the portfolio’s cash into Ahlsell at 52,4 SEK. I might add to this if the stock price comes back at or below this level.

P.S.: Please save yourself and me your “pennies in front of a steamroller” comments. These kind of special situations should ONLY be done on a regular basis and with good risk managment in place in order to be able to harvest the potential upside of these situations in the long run, independent of the individual outcomes.

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