value and opportunity

Disclaimer: This is not investment advice. Please do your  own research !!!!

German Startups Group – Sell

As mentioned in the comments of the original post, I sold out the complete position today at an average price of ~1,71 EUR per share.

When I established the position in December 2019, the case was simple:

My assumption was that the intrinsic value of the portfolio was higher than the ~ 1,40 EUR share price, that the management would continue to liquidate the portfolio  and that there would be a catalyst in form of share repurchases.

From an incentive perspective, the CEO had a big incentive to move the share price above 1,80 EUR so that the management fees would kick back in.

Implicitly however there was always the risk, that the CEO would hesitate to reduce the asset base as this would reduce the AUM and management fees accordingly, but the risk/return profile looked OK for me.

The company actually did well, especially the Exozet sale was above my expectations so  despite Covid-19, the stock did pretty OK.

Yesterday however they announced a complete “pivot”. If I understood correctly, they are merging with an (unknown) Private Equity shop to become a listed Private Equity company. The Private Equity company will merge with GSG and receive at least 51 mn shares for doing so. In a “best case” scenario, depending on the AuM in the private equity fund to be raised, the PE guys will get up to 153 mn shares.

The reason why I got nervous is that there was absolutely no information available on this PE company at the time of releasing the adhoc news. The value of a PE company/Team is its track record and they didn’t name any of the persons involved. There is a newly created homepage of SGT capital which only lists a Cayman postbox address and again no names.

The mentioned implicit valuations of GSG between 2,35 EUR to 4,04 EUR are pretty much “hot air” at this stage without having information on the merged entity.

Just to be clear: I am not saying that this is a bad deal. There is just not enough information to assess it. (see edit below)

As the old investment case has now completely disappeared and one of my mental models is “if you panic then panic first”, I sold all shares in the morning at an average share price of 1,71 EUR/ share. resulting in a +17,6% return on my blended purchase price of 1,45 EUR/share.

Edit: 

I just had the chance to read the Auditor’s assessment that was published this afternoon. Main point of interest to me:

• SGT capital has just been founded but a Term sheet with GSG had already been signed in February
• The main persons are managers of a PE company called XIO which seems to have an “interesting past” to put it mildly.
• XIO seems to have done a total of 3 deals (!!) financed by unknown (Chinese) investors. The deals as such seem to have been profitable but 3 deals is not a track record (by coincidence, the FBI just released an article yesterday that PE and Hedgefunds are prime vehicles for money laundering, just saying…..)
• the existing 411 mn USD commitment for the new PE fund is on an MoU basis only, so it is very soft. As a special “nice touch” the auditors doing the valuation weren’t even allowed to see the MoU for “confidentiality reasons” (guys, c’mon, that’s why you have NDAs !!!)
• The “Business” plan just assumes a certain amount of AuM and a fixed management fee. Interestingly, the to be merged company is not entitled to any carry. I guess this accrues directly to the managers (and Gerlinger as future minority shareholder of the carry vehicle)
• The business plan assumes additional “consulting fees” to the purchased companies which is these days a pretty problematic concept
• Interestingly, the new PE company seems to have no Due Dilligence costs besides travel. Anyone familiar with Private Equity knows that this is extremely unrealistic. You need to pay a lot of money for industry experts and consultants or higher a lot of expensive people to really dig into companies which doesn’t show up in the business plan
• The discount rate used for the target business plan is 8,05% which is a joke considering that there don’t seem to be hard commitments
• Their final calculation result in a “value” of 148 mn EUR for this company which doesn’t even have a fixed commitment and is not entitled to the real “juice”, the carry.

So I have to change my initial assessment from above to the following:

• The business plan and the valuation of the target based on an undisclosed MoU is a joke, the transaction as such extremely shady
• The reverse merger without the explicit condition that this magic PE company has actually closed their fund is a joke and a real bad deal for shareholders
• maybe the deal is much better for GSG CEO Gerlinger personally, depending what percentage he obtains for the potentially much more lucrative carry vehicle, but this is not disclosed. My guess is that his exchange ratio could be better. It would help if he would actually publish his interest in the new carry vehicle.

Therefore I am super happy that I followed my first instinct and sold my full position in the morning.

I think I was really really lucky to get out of this with a profit……

Miko BV – Sell

Miko is one of my oldest holdings having purchased it 7 years ago. The company has performed Ok but not great, at the time of writing, The shareprice peaked in May 2017 at around 130 EUR and has declined since then to the current level of ~90 EUR. Although they coudl improve topline every year, profit declined in 2018 from 2017 from  ~9 EUR per share to 7,44 EUR. 2019 saw a further decline to 5,71 EUR per share.

From a strategic perspective I was already concerned with the plastic packaging pillar as there is a clear move towards alterative packaging solutions and I haven’t seen Miko actively reacting to this. French competitor Groupe Guillin for instance has invested in paper packaging which I think is very reasonable.

Following COvid-19 however, now the second pillar, the Coffee business is struggling as well. Miko mostly caters to offices and the hospitality sector. Especially the business sector might be hit harder than initially thought if the trend for hoem office stays.

It was not an easy decision, but I exited Miko fully at an average 92 EUR per share, resulting in a total gain of ~63,6% incl. dividends over 7 years.