Quick update: Osram Special situation

Disclaimer: This is not investment advice. PLEASE DO YOU OWN RESEARCH.

Ouch, another day, another problem. Yesterday, one of my Special situation stocks Osram lost around -7%.

What happened: The largest shareholder  Allianz Global Investors (AGI) announced that they do not support the offer as they consider the price of 35 EUR per share as too low.

A few observations from my side:

  1. AGI had purchased more Osram shares in the past few months. Beginning in July they announced that they crossed the 10% threshold
  2. However in their press release they talk about >9% stake so they have sold shares in the past 4 weeks, clearly at a price of lower than 35 EUR. So while AGI is critisizing Osram managment for not believing in their company, AGI (or parts of them) also seems to have some problems in believing their own investment thesis.
  3. The press release reads like a marketing pitch for their “active management approach” with high fees which clearly is under threat from passive startegies
  4. They state that “at the moment they would not accept the offer” which in my opinion is not a super hard statement and we are relatively early in the acceptance period
  5. Although AGI states that that they are investors since the initial listing (which is natural if you had owned Siemens shares which they surely had), in various articles it has been mentioned that AGI’s average purchase price is much higher than the 35 EUR offered as they seemd to have increased their position significantly when the stock still went up.
  6. As the basis for their current opinion they use an “independent fairness opinion”. Why do they need that ?

In summary I would say that to a large extent this looks like a marketing move from AllianzGI to establish them as a “very active” manager and to be able to somehow justify their 1,7% TER for their funds.

 

What to do now ?

One of my readers recommended that now would be the time to “short the hell out of it” another thinks that this is now already over (and no, this is my own idea). Some readers commented that “this obviously did not go the way that I expected” and that “this is already over”.

Just to set the record strait: In my initial post I clearly mentioned that this could happen:

Major risk is in my opinion politics (loss of jobs), chances to the upside could come from activists pushing for a higher price. In the meantime there could be clearly hick-ups (not reaching the 70% because of activist involvement) but Bain and Carlyle are pros.

Of course now more of the existing shareholders could think: Well, maybe there is more than 35 EUR in this. On the other hand, with the increased discount, more arbs will be interested and if they buy they will certainly tender.

I think it is also fair to assume that Bain and Carlyle foresee something like this and have contingency plans.

In summary (and I could be very wrong of course), in my opinion nothing has changed: We have a somehow weak statement from a 9% shareholder that he might not accept. As a consequence, the spread got wider, i.e. pricing in the potentially larger risk. The acceptance period runs for another 4 weeks and the sponsors of the bid clearly will have some counter measures prepared.

So in my opinion it doesn’t make sense to sell at this stage and at this price..

 

24 comments

  • The original news source:

    https://ams.com/-/ams-takeover-proposal-for-osram

    4.2 bn bridge financing plus 1.5 bn equity. ~74% debt. AMS market cap is around 4 bn. Big move but underwritten by HSBC & UBS.

    • quite surprised to see how wide this is trading (espe considering few people were short), clearly people very cautious around this AMS offer

      • After the late Bump in the share price i sold at 35,40 per share.

        • GNP-GlobalNosePicking

          Braaaavoooo !!!! x)

        • What’s the reason you sell now If i may ask? Don’t you think the bid of 38,5 will hold?
          I would think AGI will agree with this and if anything there’s a (small) chance of a higher bid by Bain and Carlyle.

        • Congratulation to a quick 7% and you mentioned a potential higher bid – so all well deserved!
          But I think you are selling too early… a sin almost all value investors are falling for. 😉

    • no the equity injection (if approved) will serve to refinance the loans (it is not on top) so it is 100% debt / cash

  • https://www.presseportal.de/pm/106148/4345912

    €38.5!!
    Underestimated that crap AMS company…

  • Around 10 percent of the shares are hold by index funds. These can not tender shares. So together with allianz roughly 20 percent of the shares will be untendered.
    Only upside would be if ams steps in. But in the current market enviroment I doubt that ams wants to takeover Osram.

  • – they needed the fairness because there was obviously some internal frictions
    The position is managed by several PMs
    This being said AGI isnt in the business of scaring people off for 1 euro and then fold tender last minute a la Elliott
    >>> this tells me they are very serious about not tendering if their TP isn’t reached (or close to)
    Their in price is around 39/40 eur share

    – question is: absent their stake, what odds do you have of reaching 70pct acceptances when there is also 10% of index holders?

    – i dont get the point about consortium “being pros” – where does that play into
    Having somewhat disciplined approach to investments, hurdle rates and a financing comditional to 70pct
    I.e any bump here would come out of their equity therefore impacting their IRR

    Who knows if the bid – ask is something that can be bridged here?

    – acceptance period running during Aug is also not v helpful

    – as for arbs, in light of the risk and downside they are not in there so do not count on them to deliver the deal
    You are left with a bunch of long onlys who have a 5y view way above 35 eur / share

    – looking at your current upside vs downside this is still a SHORT in my humble opinion

    • – Fairness opinion: No they don’t need this. It is a “cover my ass” move. They just could have said “We believe the shares are worth more” but they don’t seem to have the balls for this.

      – AGI has a 9% stake not a 10% stake. Remember that they have sold already 1% in the last 4 weeks. Toether with the first point, I am pretty sure that if no one joins them, they will tender.

      – Sponsors: These guys have encountered situations like this before. So I guess they are not “shell shocked”

      – And no, current shareholders are not only “longs”. A lot of Investment banks have already disclosed increased positions and they ususally front for the arbs/sponsors for insatcne:
      Barclays
      https://www.dgap.de/dgap/News/pvr/osram-licht-veroeffentlichung-gemaess-abs-wphg-mit-dem-ziel-der-europaweiten-verbreitung/?newsID=1179939
      and others

      . if the spread stays like this, the arbs will definitely come in. The anualized return is super attractive and they can improve the odds just by investing which is the beauty of this situation. Remember this is not a hostile deal.

      • Maybe I’m a perennial optimist but a small price bump could make everybody happy: AGI will show their investors they work for their fees while Bain and Carlyle still save the deal. One would assume they are buying it very opportunistically with shares at an all time low just before the deal announcement and that if they up their price by 5% surely it wouldn’t impact their projected returns that much.

        Not saying it is very likely and the resulting poker game will probably be a long and protracted battle, shares will drop in the meantime, scary for shareholders but it is a scenario that you didn’t mention at all in your post.

  • Why don’t you simply stay away from these riskier arb situations, where the underlying asset is not an investment by itself? I find the risk/reward way too skewed and things could go wrong for a myriad of reasons in proposed takeovers.

    • I think i have discussed this “skew” quite often in the Blog. A Single transaction indeed looks skewed but a long series of many transactions can create a nice risk/return profile if you get the odds right.

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