Author Archives: memyselfandi007

Celesio Merger arbitrage “Post mortem”

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So roughly 10 days after the first failed attempt, Haniel today announced that they have an agreement with both, McKesson and Elliott and that Haniel will sell for 23,50 EUR per share to McKesson.

What happened in between ? Elliott, after the failed attempt further increased its stake to 32% (including convertibles).

In a second step, Elliott sold its stake for an undisclosed price to Haniel, which then in turn sold the 75% plus stake to McKesson at the initial 23,50 EUR.

This structure achieved the following goals:

– Elliott got more than 23,50 EUR
– McKesson does not have to pay more than 23,50 EUR

The “Looser” is clearly Haniel, which will have proceeds lower than 23,50 EUR per share. A friend of mine argued that most likely Haniel paid 24,50 EUR which would roughly equal the initial 23 EUR per share. If this is that case, then we would have the paradox outcome, that the majority owner got the lowest price, the minority a little bit more and the Hedgefund the most.

This is something to keep in mind for potential future merger arbitrage deals: The minority shareholders might not get the same deal as the activist shareholder, at least in the cases where a majority shareholder is selling. In this case, the minority holders got a 50 cent better price than the initial bid, but I could imagine scenarios where there is also the risk of a lower bid.

Interestingly, the stocks jumped today over 25 EUR, I guess some people are already speculating on a compensation payment following the Profit & loss transfer agreement which is the logical next step after the purchase.

Personally, I don’t think that there is a lot of upside, but who knows ? In any case, I think Elliott played that one pretty well for themselves. In any case, this is a hard blow to JP Morgan as M&A advisor to Haniel.

There could be open questions if the whole deal could be interpreted as “acting in concert” between Elliott, Haniel and McKesson. In this case, the bid for all shareholders would need to be increased to the price paid from Haniel to Elliott. I have no idea how likely that is and would not bet on this either.

Compagnie Du Bois Sauvage (BE0005576476])- See’s Candy in a Belgian wrapper ?

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While researching Ackermans & Van Haaren, I stumbled over another smaller diversified Belgian holding company called Compagnie Du Bois Sauvage (CBS).

The company doesn’t look too exciting with the following “standard” metrics:

P/B 0.92
P/E 16.6 (mostly meaningless for Holdcos)
Div. Yield 3.3%
Market Cap 340 mn EUR

The company presents itself as a holding company, active in Real estate and strategic participation plus a so-called “treasury” division.

The strange name of the company (wild forest) is explained on the website as well as the origins.

However it is much more interesting what they are doing now, especially the strategic holdings. The company divides the participations into the following pillars:

-financial
-industrial
-food
-other

Financial:

This segment consists only out of 2 investments:

1) A 26.41 stake in a tiny Belgian Credit insurance company and

2) much more interesting a 12% stake in one of Germany’s oldest and most succesful private banks, Berenberg .


According to the CBS report, Berenberg has around 300 mn EUR equity and earned on average around 20% return on equity over the last 3 years, which is very very good. They seemed to have bought the stake in 2002 from an US shareholder.

I tried to reconcile the numbers in CBS annual report with the official annual report of Berenberg but it did not match. I think Berenberg reports only their bank, not the complete Group

Nevertheless a very interesting and high quality asset

Industrial

CBS discloses the following stakes:

– a 1.56% stake in listed Belgian metal group Umicore

– a 29% stake in listed Belgian automotive supplier Recticel

– 29% in an unlisted US plastics company called Noel

Nothing special here, very diversified but in my opinion without a clear focus or strategy.

Food – Neuhaus Chocolate & Pralines

This is in my opinion the “highlight” . The main company in this segment is Neuhaus, a famous Belgian chocolate manufacturer where CBS owns 100% of the company . According to Wikpedia, Neuhaus has actually invented the “praliné” as we know it.

Neuhaus was actually a separate listed company until 2006 and then taken private by CBS.

Out of curiosity, I did not follow my normal “Armchair investing” approach but did some real research. Neuhaus positions itself at the very high end of Chocolate and praline manufacturers. When i went into one of the biggest downtown department store in Munich, i was surprised that they actually charge 5 EUR for a 100 g chocolate bar and up to 75 EUR for a 1 Kilo representative praline selection. I bought myself a 250 gram pack for 17 EUR which looked like this:

I am not an expert chocolate, but someone else is, Warren Buffet. That is what he said about See’s Candy: (from 1998):

It is a good business. Think about it a little. Most people do not buy boxed chocolate to consume themselves, they buy them as gifts— somebody’s birthday or more likely it is a holiday. Valentine’s Day is the single biggest day of the year. Christmas is the biggest season by far. Women buy for Christmas and they plan ahead and buy over a two or three week period. Men buy on Valentine’s Day. They are driving home; we run ads on the Radio. Guilt, guilt, guilt—guys are veering off the highway right and left. They won’t dare go home without a box of Chocolates by the time we get through with them on our radio ads. So that Valentine’s Day is the biggest day.

Can you imagine going home on Valentine’s Day—our See’s Candy is now $11 a pound thanks to my brilliance. And let’s say there is candy available at $6 a pound. Do you really want to walk in on Valentine’s Day and hand—she has all these positive images of See’s Candy over the years—and say, “Honey, this year I took the low bid.” And hand her a box of candy. It just isn’t going to work. So in a sense, there is untapped pricing power—it is not price dependent.

Neuhaus is doing pretty much the same but with a twist: Their increase in sales seems to come to a large extent from Airport duty free stores. So instead of the Californian car driver you have the European business man or tourist but the principle is the same.

The biggest difference in my opinion is only the price. While See’s currently charges 18 USD per pound, Neuhaus actually gets away charging more than twice with 33 EUR (~40 USD).

It seems to be that for one, “Belgian Chocolate” allows them to charge premium prices. On a recent inland flight I quickly checked an Airport store in Munich, and indeed, Neuhaus together with Lindt was sold at very high prices at a premium location. The third brand was Feodora, the premium brand from Hachez, a privately owned German chocolate manufacturer.

Out of fun, I created a table of the developement of Neuhaus from the CBS annual report. The turn around and growth since acquisition is impressive:

Neuhaus 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
                     
Sales   64.52 70.88 83.9 96.25 102.25 105.7 119.9 133.47 149.27
Net   0.505 1.34 3.33 6.95 8.94 10.31 10.95 11.63 12.02
Equity   25.98 26.5 29.55 36.37 45.18 50.89 57.6 53.24 58.79
                     
Net margin   0.78% 1.89% 3.97% 7.22% 8.74% 9.75% 9.13% 8.71% 8.05%
ROE     5.1% 11.9% 21.1% 21.9% 21.5% 20.2% 21.0% 21.5%
                     
CAGR Sales     9.9% 18.4% 14.7% 6.2% 3.4% 13.4% 11.3% 11.8%
CAGR Earnings     165.3% 148.5% 108.7% 28.6% 15.3% 6.2% 6.2% 3.4%

Not only did they achieve a great turnaround, but Sales doubled and ROEs have been constantly at 21-22% p.a.since 2007. This resulted in a 10 times increase in earnings over this period.

If we look for instance to market leader Lindt from Switzerland, we can see that Lindt has a slight advantage in margins, but Neuhaus in growing more and has a better (and more stable) ROEs .

Lindt 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
                     
Sales p.s.   9,151 10,255 11,721 13,210 11,389 11,126 11,309 10,944 11,765
Net incom p.s.   684 788 947 1,123 1,158 851 1,061 1,084 1,198
Equity   3,638 4,421 5,224 6,195 6,519 7,168 7,410 7,095 7,695
                     
Net margin   7.47% 7.69% 8.08% 8.50% 10.16% 7.65% 9.38% 9.91% 10.19%
ROE     19.6% 19.6% 19.7% 18.2% 12.4% 14.6% 14.9% 16.2%
                     
CAGR Sales     12.1% 14.3% 12.7% -13.8% -2.3% 1.6% -3.2% 7.5%
CAGR Earnings     15.3% 20.2% 18.6% 3.1% -26.5% 24.6% 2.2% 10.5%

Don’t forget that the market is valuing Lindt at a 30x P/E, I think a 25x P/E for Neuhaus would not be unrealistic, as the business looks like a nice high ROE compounder.

In a M&A transaction, I could imagine even a higher multiple for such a premium brand from a strategic buyer.

Valuation:

Interestingly, CBS discloses NAVs on bi-annual basis, the last value being 270 EUR per share at June 30th 2013.

So we can easily use the template from the annual report and plug in own values:

What about a Holding Discount ?

I have written about how I look at Holding Comanies. In CBS case, I am neutral. I like that they are able to strike really good deals (Neuhaus, Behrenberg) and hold them for the long term. On the other hand, some of the activities look like trying to kill time. Positive: transparent and conservative NAV calculation. Overall I would not necessarily require a big discount here, maybe 10-15% or so.

Compared to GBL/Pargesa for instance we do not have a double holding structure and the main assets cannot be invested directly. So definitely a lower discount here. Compared to CIR, there is also only little leverage in the company.

SO let’s look at the sum of part valuation now:

% Value Comment
Neuhaus Chocolate 100.00% 300.00 PE 25(2012)
Behrenberg 12.00% 54.00 at 1.5 times book
Umicore 1.56% 60.53 At market
Recticel 28.89% 47.67 at market
Noel Group 29.37% 4.64 PE 10
Other   20.00 as disclosed
       
Codic Real Estate 23.81% 24.52 at book
other reals estate   60 as disclosed
cash etc.   20  
       
Sum   591.36  
Net debt   -80  
NAV   511.36  
       
shares our   1.6  
NAV per share   319.60  
Holding Discount   271.66 -15%
Upside   25.19% at EUR 217

What we see is that before applying the holding discount, the stock would have an upside of around 50% which would be OK for me. After applying the discount, the potential upside shrinks to 25%.

Other Info:

The guy behind CBS is Guy Paquot, a well-known Belgian investor. He owns close ~47% of the company.

According to this article, he comes from a rich family and was knighted in 2000 by the Belgian King. He stepped down in 2010 and is no official director anymore, but I guess he still influences the company to a large extent as the dominating shareholder

The Fortis situation

There is one dark chapter in CBOs history: As part of their activities they also invest into Belgian stocks. In 2008 however, they seemed to have received insider information about the upcoming nationalization of Fortis and were able to sell the stock before.

Because of this episode, the CEO actually was imprisoned for a few days and Guy Paquot came back from “retirement”.

It seems to be that one member of the supervisory board of CBS was also in the supervisory board of Fortis and passed the information. In 2008, it was speculated that the fine might be 40 mn or more.

The company settled the dispute finally in last November for a 8.5 mn EUR payment without committing to any wrong doing.

Stock price

Interestingly, the November settlement seems to have been some sort of catalyst, as the stock gained almost 30% in the aftermath.

The stock seems to have bounced off from the 2011 level of 230 EUR but overall I would say the chart looks ok.

Summary:

Compagnie du Bois Sauvage is an quite unusual stock. Among a strange combination of businesses, there is a prime asset hidden which I think is comparable to Buffet’s famous “See’s Candy” which accounts currently for 60% of the value of the company under my assumptions. If Neuhaus keeps growing at this pace for 2-3 more years, the percentage of Neuhaus could be even bigger.

My own valuation shows an upside of around 25% from current prices after a 15% holding discount which is too low for me to buy . So although I like the company and the two great assets (Neuhaus, Behrenberg), the current price is not attractive enough for me +. For me, A stock price of 185 UR would be required or maybe profits (and valuations) of the two prime assets increase enough to justify an investment.

P.S: I started looking at the company and writing this post already in November 2013, when the stock was around 190 EUR. This is the reason why the post is so long despite the missing upside.

How to value IFRS 19 pension liabilities – Part 1: Introduction & Discount Rates

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I have written already a few times about pension liabilities,for instance here and here.

With IFRS 1, pension liabilities have become a bigger topic, as now pension liabilities are “on balance sheet” and changes are recorded in the comprehensive income statement. As I have already written, for some companies this had quite drastic effects, like Lufthansa and ThyssenKrupp which saw large parts of their equity disappear.

As I had a lot discussions about pension liabilities lately, I think it is a good idea trying to summarize some important issues for analyzing pension liabilities.

However one cautious remark: I am not a pension actuary. There might be incorrect or too simplified statements later on and I will not dive into the details of pension modelling. I will try to come up with simplified approaches in order to better understand and value pension liabilities.

How are these pension liabilities created ?

Most companies have some sort of pension program for their employees. Fundamentally, there are 2 different ways to offer pension benefits:

1) Defined contribution plans
Here, the company only promises to invest (directly or indirectly) a certain amount on behalf of the employee on a regular basis. The employee retains the risk of the investment outcome. In those cases, there is no pension liability recorded.

2) Defined benefit plans / obligations (DBO)
In these cases, the employer promises the employee a certain payment per month after he has retired, depending on certain factors such as length of employment, salary, inflation etc. The risk of not being able to pay this is retained by the employer, the company has therefore to book a liability for the estimated (and discounted) potential cash outflows in the future. One might ask, why any employer is choosing this model anyway. There are two reasons. First, for instance in Germany, only DBO plans are tax-deductible. Secondly, DBO plan allows the company two retain the money in the company. Defined contribution plans have to be invested into “external” assets.

Funded vs. unfunded DBOs

In many jurisdictions, the employer can either set up a dedicated fund and invest into financial assets which hopefully cover future obligations, or he can keep the money in the company and fund operational assets.

Accounting wise, the liabilities are in both cases the same, but for funded plans, only the net amount (liabilities – fair value of assets) has to be shown on the balance sheet. Fro more “gory” accounting details, KPMG has a comprehensive guide here.

What are pensions liabilities economically ?

I have written about that before: Pension liabilities are economically senior debt. Why ? Not paying out due amounts for pensions will cause a bankruptcy filing in many jurisdiction. There is no legal way to delay or lower payments, a lesson which was learned the hard way for instance at General Motors. In many jurisdictions, unfunded pension liabilities do not have priority on assets, so one should assume that they are “pari passu” to senior debt, adding them to Enterprise Value.

In jurisdictions like the UK, where pension trustees can claim payments if there is a deficit, one could argue that pension liabilities are “more senior” than senior debt which is quite important as we see later.

So where is the problem ?

If a company issues a senior bond, we know exactly how much money the company has to pay both, in interest and principal. With pension, it is very different. We can only estimate future payments, as the amount paid out depends on a couple of assumptions such as:

– how will salaries develop for active employees (pension contributions are usually a percentage of monthly salaries)
– how long will active employees work for the company ?
– how long will pensioners actually live ?
– what inflation will we experience (in most plans, payouts are linked to inflation) ?

So in a first step, a clever actuary has to estimate those parameters and then, in a second step he/she will generate a future cashflow pattern. Finally, in a third step, the actuary or accountant will then discount those payments using a certain rate to come up with the net present value which is the required value.

Despite that there is no clear rule how to set many of the parameters, there is one big issue with those liabilities: The are really long term. Depending on the plan and the participants, payments will have to be made 50 years or more into the future. So slight changes in parameters, especially for inflation and discount rates will have a large effect on the value of the liability.

Discount rates – technical aspects & Yield curves

IFRS requires to discount the projected outflows with a single “high-grade corporate bond rate”. In practice, most companies use the yields of available, long term AA rated corporate bonds.

Discounting with a single yield however is only a proxy and works best for “bullet maturity” cash flows. Pension liabilities do not have a bullet maturity, but look much more like an amortizing loan. For such cash flows, the correct way is to use appropriate zero yields from a full yield curve. In practice one would bootstrap zero yields from the yield curve on an annual basis and the discount the annual cash flows with the respective rate.

If the interest rate curve is flat, there is not a big difference in this approach. If the yield curve however is steep, there can be a BIG DIFFERENCE.

Lets look at the following example, extracted from the 2012/2103 ThyssenKrupp annual report. I took the projected cash outflows of Thyssenkrupp for the first 10 years and discounted them with both, the official discount rate and an assumed zero curve (year 5-10 were anonly given as a total):

Cashout IFRS rate Zero rates AA NPV stated NPV zero
2013/2014 -546 3.5% 0.25% -527.54 -544.64
2014/2015 -526 3.5% 0.45% -491.03 -521.30
2015/2016 -528 3.5% 0.69% -476.23 -517.22
2016/2017 -520 3.5% 1.03% -453.15 -499.12
2017/2018 -517 3.5% 1.24% -435.30 -486.10
2018/2019 -498 3.5% 1.6% -405.45 -453.12
2019/2020 -498 3.5% 1.8% -391.74 -439.89
2020/2021 -498 3.5% 2.01% -378.49 -425.05
2022/2023 -498 3.5% 2.21% -365.69 -409.39
2023/2024 -498 3.5% 2.43% -353.33 -392.02
           
Total -5129     -4,278 -4,688
Difference:         -409.91
in%         9.58%

So for those first 10 years, the NPV based on the simple approach is -9.5% lower (and the liability underestimated) than using the correct approach with zero yields. This is clearly a necessary adjustment to be made. The adjustment is of course subject to yield curve steepness and cash flow profile, but as a rule of thumb, a general 10% upwards adjustment might not be unreasonable in any case.

Key take away: If the yield curve is steep as it is now, with a 0% floor on the short end, one should adjust pension liabilities upward no matter what one assumes as the final discount rate. Currently, a 10% general upwards adjustment for the yield curve effect looks like an appropriate adjustment. If interest rise on the long end but stay at 0% in the short, even larger adjustments are justified.

In the next post I will take a deeper look on which discount rates to use anyway and inflation.

Some links

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Must read: Howard Marks on skill, luck and inefficient markets

Deep value investing: Buying a house in Detrait for 500 USD

Great interview on Japanese economic myths

Technical but interesting story, how a 95% market share software program (Quark XPress) was killed by the competing product.

Interestingly, packaging seems to be as important as branding. Another argument that Brand does not equal Moat.

Finally a new and promising value investment blog: Odd lot Investing. Great post about compound and decay rates for instance.

Celesio – why merger arbitrage is hard business

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Let’s start with a few quotes from yesterday’s post:

a) It is almost 100% assured that the bid goes through, there is now a “floor” under the stock price at 23,50 EUR

and

I have written above that this was a “Low risk” bet. In reality, I do not know if it was high risk and I was very very lucky or if it was indeed low risk. In statistics, one would call this a “beta error”, assuming that one was right but in reality the probabilities were very different. For me the best way to handle this is to do only small “bets”, keep track of assumptions and outcomes. Systematic “beta errors” in investing in my opinion are very dangerous as this will inevitable lead to some disastrous outcomes in the long run (Bill Miller).

Very rarely, one gets such a direct feedback from the market. McKesson said yesterday around 7 pm that they did not reach the 75% threshold and dropped the bid.

So this was clearly no a low risk M&A arbitrage situation but a high risk one and I was very very lucky to exit just in time.

McKesson themselves seems to be surprised as well:

“This is fresh news to us. We obviously had the support of the management team, we had the support of the family, which obviously was a significant holder, we had the support of Elliott, which was one of the vocal players in this process,” he said. “The best I can speculate is that people either forgot the tender date or they somehow believed that there is more on the other side of this.”

Let’s quickly check the facts:

In their 9th notification, dated January 9th, 2 pm, McKesson reported the following:

As of the Notification Reference Date, based on the regular conversion price, the aggregate number of Celesio-Shares held by the Bidder and/or persons acting jointly with it plus the number of Celesio-Shares for which the Takeover Offer has been accepted plus the number of voting Celesio-Shares which can be acquired through instruments pursuant to section 25a WpHG amounts to 106,213,544 Celesio-Shares; this corresponds to approximately 62.44% of the currently issued share capital and the currently existing voting rights in Celesio. In relation to the acceptance threshold in section 13.1 of the offer document the aggregate number amounts to 107,617,021 Celesio-Shares, which corresponds to approximately 52.94% of the share capital and the voting rights in Celesio on a fully diluted basis.

This was a significant increase against the 44,88% (fully diluted) a day before.

How much did Elliott own ?

This is from their official “recection” notice as of December 23rd:

Elliott Associates, L.P. and Elliott International, L.P. together with affiliated entities (“Elliott”), which own or have an interest economically equivalent to over 25% of Celesio AG (1)
(1) Calculated in accordance with Section 25a of the German Securities Trading Act (Wertpapierhandelsgesetz/WpHG), in connection with Sections 21, 22 and 25 WpHG

Elliott did report surpassing the 25% threshold in late November 2013.

If I read this correctly, they owned 25.1% on a non-diluted basis.

So let’s do quickly the math with what we have available:

  Undiluted Diluted
McK 107,617,021 62.44% 52.94%
Elliott 42,803,603 25.16% 21.06%
Total   87.60% 74.00%
       
Celesio      
Shares undiluted 170,100,000    
Shares diluted 203,281,113  

So this is interesting: Even with Elliott tendering its full stake, McK was still short 1% to their threshold on a diluted basis.

Could it be that this whole thing was just an accident ? No super-clever play by Elliott but rather a stuoid one ? Were other people assuming like myself that the offer period would be extended ? I don’t know, but I think it would have been better if MCK had said something about the offer period.

Looking back at the Rhoen chart after the first bid failed, one can expect the stock price to be very very volatile:

Anyway, I will watch this from the side line and will be extra carefull with the next M&A arbitrage situation….

Celesio Merger Arbitrage – follow up (and exit)

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On Thursday, acquirer McKesson and Elliott agreed on a slightly increased offer 23.50 EUR (vs. 23 EUR) per share which Elliottt promptly accepted.

Interestingly,the stock trades now higher than the offer:

Apparently, during Wednesday some people already anticipated the increased offer. Technically, the acceptance period has not been extended and closed on Friday, January 9th according to the official statement. Honestly, I do not understand this. If I read §21 of the German take over law correctly, any late change in the offer automatically extends the offer period by 2 more weeks. I will need to double-check this.

The offer for the 2018 bond was also increased to 123.4 according to the amended bond offering document.

So what to do now with the price of he shares trading above the 23,50 EUR offer ?

Going back to the initial post, that’s how I valued the shares back then:

Now if we want to speculate on a top up, we have to make two assumptions: How likely is a top up and how large will it be ? In order to keep it simple, I would assume a 50/50 chance for a top up and as I like “round” numbers, I assume 5 EUR per share or a final offer at 28.

This leads us to the following expected value under those assumptions:

Exp. value Celesio share = (3.4% x 17) + (48.3% *23) + (48.3%*28)= 24.25 EUR or around 10.6% higher than the current share price.

So if we leave aside the rather bad mistake in calculating the upside potential, the price is now where I saw the “fair value” before, although I was totally wrong about the size of the “top up”. The reason that I still can make some money was that I bought below the initial bid price and the stock price did overshoot the offer.

Now we do have a very different situation compared to some weeks ago:

a) It is almost 100% assured that the bid goes through, there is now a “floor” under the stock price at 23,50 EUR
b) on the other hand it is a lot less likely that the bid will be further increased.

I can think of two reasons why the stock is currently trading above 23,50 EUR:

1) People are hoping that Elliott might have one last trick up in its sleeve to increase the offer within a relatively short time
2) Speculation that McK wants to quickly achieve a squeeze out and will buy more shares and/or have to pay some compensation for implementing the profit and loss transfer agreement (similar to MAN).

Overall, the “new” situation for me is harder to grasp and the time frame is more difficult to estimate. One should also expect, that Celesio will show most likely a lot of extra charges etc. in the next few quarters in order to both, build some buffer for Mckesson in the future and to discourage shareholders bidding up the remaining shares.

So for the portfolio, I will exit the position at current prices with a modest gain of around 6.5% for the shares and a little less for the bonds. Not spectacular but also not bad for a 4 week and relatively low risk investment.

One final remark on such M&A Arbitrage situations:

I have written above that this was a “Low risk” bet. In reality, I do not know if it was high risk and I was very very lucky or if it was indeed low risk. In statistics, one would call this a “beta error”, assuming that one was right but in reality the probabilities were very different. For me the best way to handle this is to do only small “bets”, keep track of assumptions and outcomes. Systematic “beta errors” in investing in my opinion are very dangerous as this will inevitable lead to some disastrous outcomes in the long run (Bill Miller).

Ackermans & Van Haaren – Mini Berkshire from Belgium ?

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Ackerman’s and Van Haaren is a diversified Belgian company which was on my research pile for quite some time. Bloomberg describes the company as follows:

Ackermans & van Haaren NV is an industrial holding company. The Company’s holdings are in the contracting-dredging environmental services, financial services, staffing services, and private equity investing.

Looking onto their participations overview on the (very informative) homepage, one can easily see that this is a quite diversified company. From oil palms in Asia (SIPEF) to old age homes, port service companies, real estate investments and an Indian cement company are among the 30 or more participations.

The largest investments are however a 78.75% Stakes in Delen Investments and Private Bank J. van Breda and a 50% stake in DEME, a marine engineering Group.

The DEME stake itself shows that Ackermans is rather an active holding company. This year they surprised everyone by striking a deal with Vinci and traded their 50% stake in DEME (valued at 550 mn EUR) with a 60% stake in CFE, the listed Belgian company which owns the other 50% of DEME.

The stock itself is not really cheap:

P/B ~ 1.3
P/E 2013 ~15
Market cap: 2.8 bn

The stock gained nicely in 2013 and is trading at an ATH:

Why did I call them a potential “Mini Berkshire” in the beginning ? Well, that’s what they are showing in their latest Q3 presentation:

avh cagr

14.4% CAGR of book value is not bad over the last 10 years. Just for fun, I calculated Berkshires 10 Year CAGR from 2003-2012 based on the disclosure in the latest letter to shareholders:

Berkshire  
   
2003 21%
2004 10.5%
2005 6.4%
2006 18.4%
2007 11%
2008 -9.6%
2009 19.8%
2010 13%
2011 4.6%
2012 14.4%
   
10 year CAGR 10.60%

So at least for the last 10 years, AvH has clearly outperformed Buffet by almost 4% p.a. which is really a lot.

Step 1: “Quick and Dirty” sum of parts

When I look at a company like AvH, i generally try to do a quick and dirty “sum of part” analysis first. AvH makes it quite simple by providing a net cash figure at holding level which is required as the consolidated accounts include non-recourse debt as well.

The only thing I was not sure was the fact that the holding segment borrowed money from the private equity part in an amount of 120 mn EUR. I decided to play it save and deduct it from the private equity NAV.

So this is the “quick and dirty” result:

Value Method
DEME 550 Implicit valuation takeover
Van Laere 26 0.75 book
rent-a-port 5 at book
Maatschappi 20 At book
Sipef 130 market cap 482
Delen 522 1.5 book
van Breda 336 1.2 book
Extensa 80 0.8 book
Leaseinvest 108 Traded
Financiere duval 40 at book
AnimaCare 40 2x book
MAx Green 70 10x Earnings
Telemanod 30 10x Earnings
Sofinim 255 75% of NAV minus cash to holding
     
Net cash holding 148 Q3
     
     
Total 2,361

The result of this exercise is higher than stated book equity of around 2.05 bn EUR, but on the other hand, significantly lower than the 2.8 bn market value.

If I haven’t made a big mistake, then even if some of the holdings like Delen are worth more than I assumed, AvH looks as it is trading at a premium. Although I think the company is a good one and can create value, I would not want to pay a premium, so one can stop at this point and move on.

Summar:

Ackermans & Van Haaren seems to be an interesting company with diverse holdings and a good culture and some very good and interesting businesses. The track record over the last 10 Years looks impressive and is better than Berkshire. Nevertheless, the stock looks overvalued from a sum of parts point of view, offering no margin of safety.

Valmet Spin off – No action

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Yesterday, Valmet was spun off from Metso and trading for the first day.

The price action on the first day was quite interesting. The first trade was around 7,20 EUR, far above my threshold of 5 EUR, then the price went down to ~6,30 before rocketing up to 8 EUR. ending up at around 6,65 EUR. Today, the stock is trading at 6.80 EUR.

For me, this is too expensive, but it is still interesting, how volatile such a first day of a spin off really is. Intraday fluctuations of ~30% clealry show that this can’t be fully efficient and price discovery is not that easy. Trading Volume on the first day was around 45 mn EUR, or less than 5% of market cap.

It is interesting to see that at the first day for the Osram spin off, volatility was lower and the stock price ended higher than in the beginning:

Trading for Osram on the first day was around 25% of market cap. I guess, that Siemens had much more index investors than Metso. In this case it would have been better to buy Metso pre spin off

Annual Performance Review 2013

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Performance:

Performance for the month December was +1.2% vs. +1.3% for the benchmark, an underperfomrance of -0.1%. For the year, this resulted in +32.8% vs. +29.0% for the Benchmark (50% Eurstoxx 50, 30% Dax, 20% MDAX), an outperfomance of +3.8%.

Since inception (1.1.2011), the score is now +75.0% for the portfolio (20.5% p.a.) vs. 40.7% (10.4% p.a.) for the Benchmark.
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