Category Archives: Anlage Philosophie

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.

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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P/E, EV/EBITDA, EV/EBIT, P/FCF – When to use what ?

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This post was prompted by a minor change in the standard Bloomberg company description which I noticed over the last view months. If one uses the function “DES” Bloomberg provides on page 3 some standard ratios which are quite helpful in order to get a first view on a company. Within the screen there are 6 boxes, the upper left box showing currently the following ratios (example: National Oilwell Varco, NOV US):

Issue Data
~ Last Px USD/80.91
~ P/E 14.4
~ Dvd Ind Yld 1.3%
* P/B 1.60
~ P/S 1.5
~ Curr EV/T12M EBIT 8.6
~ Mkt Cap 34,637.6M
~ Curr EV 35,743.6M

Interestingly, a few weeks ago (??), one would get EV/EBITDA instead of EV/EBIT. I am not sure why they changed it, but it is a good starter in order to think about the differences between P/E, EV/EBITDA and EV/EBIT

The P/E ratio

The P/E ratio is clearly the most famous valuation ratio. A low P/E strategy still seems to work. In my opinion, the P/E ratio clearly has two major fundamental drawbacks as a “strong” criteria for me as a stock picker:

– it does not reflect net debt or net cash
– under IFRS, many items (Pensions, currency changes) are booked directly into equity. This is the reason why I prefer P/Comprehensive income

EV/EBITDA Ratio

The “classic” EV/EBITDA ratio is much better in capturing debt and net cash than the P/E. As I have explained in an earlier post, one should be careful with EV in certain cases (leases, pensions), but overall, EV is much better to compare highly leveraged companies with “conservative” companies

EBITDA, as the name says, is “Earnings before Interest, Taxes, Depriciation and Amortization”. Some people have called it “Earnings before everything else” but in theory, EBITDA should be a proxy for operating cashflow.

As I have written before, this metric has been used a lot by Private equity buyers in order to assess, how much debt could be pushed into a company unitl it chokes.

In the latest edition of O’Shaugnessey’s “What works on Wall Street”, EV/EBITDA is also one of the strongest single factors, much better than P/B and P/E.

The problem with EBITDA is that although it might approximate Operating Cashflow, it does not equal “free cashflow”. The “D” in EBITDA means depreciation. If you leave out depreciation, the effect will be that capital-intensive businesses which need a lot of capex (and depreciation) look suddenly quite good, although this cashflow never reaches the equity holder, because it is necessary to maintain the productive capital.

We can see this easily if we look at the DAX companies, sorted by EV/EBITDA:

EV/EBITDA T12M
Deutsche Lufthansa AG 3.26
RWE AG 3.51
K+S AG 4.33
Continental AG 4.78
E.ON SE 4.80
Deutsche Telekom AG 5.85
ThyssenKrupp AG 6.27
HeidelbergCement AG 6.82
Volkswagen AG 6.93
LANXESS AG 7.25
Bayerische Motoren Werke AG 7.26
Deutsche Post AG 8.19
Infineon Technologies AG 8.19
Fresenius SE & Co KGaA 8.74
BASF SE 8.82
Bayer AG 8.97
Linde AG 9.10
Merck KGaA 9.12
Fresenius Medical Care AG & Co KGaA 10.33
Siemens AG 11.05
Henkel AG & Co KGaA 11.46
Adidas AG 11.85
Daimler AG 11.86
Deutsche Boerse AG 13.64
SAP AG 13.93
Beiersdorf AG 15.59

The cheap stocks are those companies, which are REALLY capital-intensive. Clearly, RWE and EON need to continuously reinvest into their huge power stations or they will not be able to produce any electricity soon. On the other hand, Deutsch Börse is basically a market making software with some computers and a government license. Very few assets, small depreciation.

So the “difference” between low EV/EBITDA and HIGH EV/EBITDA is not necessarily “cheapness” but different levels of capital intensity

EV/EBIT

This is why many “professionals” prefer EV/EBIT to EV/EBITDA. EBIT already deduces depreciation and should therefore be a better proxy for Free cashflow than EBITDA.

Let’s look at the Dax companies sorted by EV/EBIT:

EV/T12M EBIT EV/EBITDA T12M P/E
SDF GY Equity 5.7 4.3 7.7
CON GY Equity 7.5 4.8 13.4
EOAN GY Equity 7.5 4.8 11.0
RWE GY Equity 7.9 3.5 22.4
FRE GY Equity 11.2 8.7 17.9
HEI GY Equity 11.2 6.8 34.2
TKA GY Equity 11.3 6.3 N.A.
DPW GY Equity 12.3 8.2 16.3
BAYN GY Equity 12.7 9.0 24.7
BAS GY Equity 13.0 8.8 14.9
FME GY Equity 13.4 10.3 19.8
HEN3 GY Equity 13.6 11.5 22.7
LXS GY Equity 13.6 7.3 24.5
BMW GY Equity 13.9 7.3 10.2
DTE GY Equity 14.3 5.8 N.A.
DB1 GY Equity 15.8 13.6 19.8
VOW3 GY Equity 16.0 6.9 10.4
SIE GY Equity 16.2 11.0 17.0
LHA GY Equity 16.2 3.3 8.7
MRK GY Equity 16.6 9.1 25.6
LIN GY Equity 16.7 9.1 19.4
SAP GY Equity 17.0 13.9 22.1
BEI GY Equity 18.3 15.6 32.2
ADS GY Equity 18.6 11.9 31.8
DAI GY Equity 19.2 11.9 8.5
IFX GY Equity 22.5 8.2 28.6
 
avg 13.9 8.5 19.3

I have added also EV/EBITDA and P/E in this table. It is interesting that P/Es look rather random when we sort by EV/EBIT. Especially Lufthansa looks now really expensive as well as Daimler and Infineon. On the other hand, a relatively expensive looking stock like Fresenius now looks rather cheap. A company like Beiersdorf looks expensive in any metric and th utilities look still cheap but not Deutsch TeleKom.

For the utility stocks for instance I think EV is too low, because one needs to add the liabilities for decommissioning the Nuclear plants to EV.

A quick word on Free Cash flow and P/Free cashflow ratio

As I have written earlier, one really has to be carefull with reported free cash flows. Cashflow statement are not really audited and it is quite easy to “massage” the categories. Free cash flow is clearly an important number to look at in a second step, but as a standard indicator it has very limited use in my opinion.

Some additional pitfalls

Using EV/EBITDA and EV/EBIT smoetimes can also be tricky. Among others are operating leases, pensions, certain prepayments etc. which can change EV dramatically. But there can also be issues on the EBIT/EBITDA side:

For instance, those are the stats for Statoil ASA, the Norwegian Oil company:

P/E 11.8
EV/EBITDA 2.2
EV/EBIT 3.3

From an EVEBit perspective, this clearly looks like a no brainer: we only pay 3 times EBIT for a rock solid oil and gas company. Well, but we might have forgotten one important thing: Between EBIT and Free cash flow we have still two other items: Interest and Taxes.

As Statoil doesn’t pay much interest (only 2% of EBIT) the issues is clearly taxes. Statoil is subject to special taxes, which on average amount to 75% of EBIT. There might be some leeway to shelter certain tax payments, but in a country like Norway the companies will have to pay most of those taxes in cash.

Interest and Taxes are especially important if one compares companies across different countries. All other things equal, companies in high tax rate countries with high taxes will trade at lower EV/EBIT and EV/EBITDA multiples than in low tax low-interest rate countries. So fo instacne the Swiss MArket Index trades at 16.7 x EBIT and 12.2 EBITDA significantly higher than the German index. At least part of that is due to the much lower tax rate in Switzerland and even lower interest rates.

So a comparison of peer companies across countries with very different tax rates ind interest rates should not solely be based on EV/EBIT or EV/EBITDA.

Other issues with EV/EBIT and EV/EBITDA – financial companies and financing business

EV measures usually don’t work well with financial companies and also companies which have a lot of financing business on their books. Originally, EV is meant to capture “real” leverage, i.e. debt issued to pay for machinery, inventory etc. Debt issued to fund for instance client purchases is referred to as “operating” leverage. It is a little bit a grey area. Clearly, one should prefer a company which sells only stuff against cash than financing it for several years. The financial crisis in 2008 has shown that such “operating” leverage quickly became “strategic” if the roll over doesn’t work. On the other hand, in normal times operating leverage could be potentially adjusted against EV as you have “extra assets”.

If one tries to compare financial companies vs. industrial companies though, P/E is clearly more useful, as financial companies per definition have much higher EVs than non-financial companies.

Price /Comprehensive income

This is a ratio which I use especially for financial companies. Comprehensive income inlcudes all kind of “value changes” which are booked directly against equity, such as changes in the value of pension libailities, value changes of financial assets including hedges, currency translations etc. Especially for financial companies, comprehensive income is a pretty good leading indicator although it is rarely used in my experience.

Summary:

In general, I would recommend to look at all “Popular” ratios in parallel, because it gives a better “multi dimensional” view on a company. For “Normal” company, in my opinion, EV/EBIT is the most significant ratio, followed by P/Comprehensive Income.

P/Es and Ev/EBITDA are clearly also helpful. The most interesting cases are those, where the different ratios are completely different. This is often an indicator for somthing “special” going on and potentially a stock to investigate further.

In any case, although I like EV/EBIT, one should always “look down” in the P/L to the real bottom line (comprehenive income) as good CFOs are quite creative in moving expenses “down” the chain where many people don’t bother to look any more.

Finally as a special service, an overview over the different ratios and when to use them:

Portfolio transactions: MIKO BV, Emak SpA

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MIKO

MIKO issued a short Q3 trading update 3 days ago, which in my opinion is very very good. I did already buy more MIko before and have now upgraded into a full 5% position.

This is an excerpt from the release:

Turnhout, 28 October 2013 – Miko NV, the coffee service and plastic packaging specialist listed on the NYSE Euronext Brussels, has announced that during the third quarter of 2013 its turnover was 12.8 % higher than during the same period last year. The combined turnover for the first nine months of 2013 increased by 6.7 % compared with the first nine months of 2012.

The growth in turnover is due, firstly, to increased sales in the plastic segment and, secondly, to the acquisitions in the coffee segment that marked the first half of the year (Kaffekompaniet in Sweden and ABC Mokka in Denmark).

In terms of results, there were encouraging increases in both these segments.

According to Mr Frans Van Tilborg, CEO and Managing Director of the Miko Group: “Within the coffee service sector, we have seen a slight drop in sales in most domestic markets, Germany being a positive exception. Although the economic crisis is far from over, the situation has been helped by a number of acquisitions and by reductions in the price of raw materials. In addition, the plastics division is still performing well, with impressive sales growth at each of our plants in Belgium, Poland and Germany. We are optimistic for the rest of 2013.”

This represents a huge acceleration against the first 6 months.

It is a kind of strange feeling to buy at an all-time-high, but on the other hand I try to avoid any kind of anchoring with regard to past stock prices in my decisions. Fundamentally, I think MIKO is a really good deal at this price level.

EMAK Spa

On the other hand, I sold half of my EMAK Spa position. EMAK is/was a “special situation” investment I made during the brutal capital increae in 2011. Now, the price jumped to a level where I think the risk/return relationship is not as good any more. There was no fundemenatl news, so I assume that part of this price jump is the due to the momentm of PIIGS small caps in the last few weeks.

Compared to MIKO for instance, which is growing nicely, EMAK seems to be now rather overpriced, even assuming a further recovery in the “PIIGS”.

As I am always selling too early, I sold only half of the position now 😉 I will decrease my FTSEMIB hedge accordingly, as now the Italy exposure is down to only around 12.5% of the portfolio.

AKKA SA (ISIN FR0004180537) – Finally a French- German success story ?

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Akka technologies is a French company which is described in Bloomberg as follows:

Akka Technologies provides high-technology engineering consulting services. The Company specializes in scientific project management and engineering, mechanical, electronic, computing, and telecommunications project management and engineering, as well as industrial project management and engineering.

Valuation (at 22 EUR)

P/E 8.6
P/B 2.2
Div. Yield 3.0%
EV/EBITDA 5.0
EV/EBIT 6.0
Market Cap 320 mn EUR

The stockprice developed relatively well since the IPO in 2006:

This is supported by a very impressive EPS increase from 0.63 EUR in 2006 to 2.82 EUR in 2012.

Business model:

The company describes itself as „R&D outsourcing“ company. Mostly active in automobile and aviation. Main clients: EADS (22%) and Daimler Benz (28%).

I think it is a little bit more than a „high class“ temp agency. In their half year report they highlight for instance those projects:

• Daimler has just entrusted MBtech with its largest project so far, involving the design of a future vehicle.
• Renault is relying on AKKA for the industrialisation of three new vehicles in China.
• Airbus has entrusted the European coordination of one of its major contracts to AKKA.

Nevertheless, I think their business shows similar cyclical characteristics than their clients. They surely need less fixed assets, which should make results less volatile after deprecisation, but this is definetly not a super stable must-have service business. If times are getting harder for the clients, they will most likely cut first in their „outsourced“ R&D before firing their own guys. On the

I am not sure how dependent they are on the know how of the engineering companies. I guess that the clients try to avoid too much know how transfer.

Overall, this kind of business model can be quite attractive. Competitors like ALTRAN; Atkins (UK) or Bertrand (Germany) earn easily 15-20% ROICs as the business requires not much capital. This translates on average into valuation ratios which are twice as high as for AKKA (Bertrand trades at 11xEV/EBITDA, Altran at 9.6x) .

AKKA for instance showed a net Income margin of around 4.5% over the last 10 years which, due to the low capital requirements, translated into an average ROIC of around 20% which looks very attractive, especially combined with the strong growth.

Why ist he stock cheap ?

Akka used to make acquisitions in the past, but usually only smaller ones. Until 2011, the company had significant cash on hand.

In 2012 however, they made a real big acquisition: The took over a full division of Daimler called MBTech.

The acquisition as such is not unreasonable, although some issues are clearly visible:

– Akka had to take on additional 100 mn in debt to finance it
– MBTech had only one customer: Daimler
– the company is barely profitable, despite the boom in the auto industry

On the other side, Akka got the company quite cheaply (almost at book value) because no one else wanted it. As Akka was already present in Germany, the do have experience and the logic, that such a division, once it is free from ist big parent, improves a lot, does make sense.

Daimler seems to have guaranteed business for 5 years. In the meantime, Akka needs to find new clients. So far, Akka seems to proceed slower than planned with the turn around and overal profitablity is now suffering clearly. Nevertheless, from a pure business point of view this could be an interesting turn around situation ifg the plan works out.

Loking at MBTechs recruiting web site one can see that they are currently searching for 200+ engineers. Daimler, the main client of MBTech has just released surpisingly good numbers. So for the time being it doesn’t look bad.

On the other hand, the purchase of MBTech could be considered to be some kind of „spin off“. As part of the large Daimler conglomerate, this small organization was most likely „rotting“ in the backwaters. Now, within a much smaller focused organization like Akka, theoretically, a lot of improvements could be expected.

Qualitative aspects

On the plus side, the company is still majority owned by the Founder/CEO Maurice Ricci with > 50% ownership. He is 52 years old and will most likely be in the company for a while.

BUT:

Going through my quality checklist, some issues really bother me. When I look at a company, I ususally google for pictures of the CEO and board members plus I try to watch videos to get a „subjective“ impression.

When I googled Maurice Ricci, I got among others, this link http://www.racingsportscars.com/driver/photo/Maurice-Ricci-F.html

And those pictures:

So Maurice Ricci seems to enjoy race driving quite a lot. I do have a BIG problem with CEOs who have extravagant hobbies such as race driving.

There are quite a lot of examples of race driving CEOs which drove their company „against the brick wall“, among others, Ulrich Schumacher from Infineon and Eike Batista.

My theory ist hat as a race driver you have to go to the limit all the time in order to be succesful, if you fail, you just need to get a new car. However, if you are shareholder in a company run by such a CEO, you have the risk that your stocks will bet he „old car“….

This alone would be just a warning sign, but when I went through my list, some other slightly worrying issues emerged:

Akka SA behaves a little bit irrational with regard to funding, both in 2011 and 2013, they issued new shares (1 new for 10) but paid a dividend as well. For shareholders, this is clearly value destroying (costs for rights issue, taxes on dividend).

Even more worrying ist he fact, that the CEO didn’t seem to particpate in the rights offering. According to the annual report, his percantage declined more or less with the increased share count.

It looks a little bit that he needs more than the 600 k salary to finance his lifestyle and therefore still pays out the dividend although it would be better to reinvest.

Finally, I am alaways careful if a company does a big acquisition compared to ist size. In this case it seems to have been relatively cheap

Overall, Akka only scores 13 out of 28 in my qualitative check list, which is not enough for my „core value“ portion.

Interestingly, I did some „scuttlebut“ with some French investors and they had a quite high opinion of the company from the operational and technical point of view.

So what now ?

We have a stock which is quite cheap but does only score „mediocre“ with regard to quality. For me, there is one line where I would not make any compromise: Accounting and integrity . If I have the feeling that a company is „cooking“ the books or if management has been involved in shady deals in the past, I will pass.

Here however, this is not the case. But clearly the risk is higher. So what we need here is better understanding of the potential values of the investment.

In order to keep it simple, I define 3 „probable“ scenarios, all three based on a 3 year horizon

1. Status quo.
The company does how it does now. Stock price remains constant

2. Bad case
The lowest net margin for Akka since they are listed has been 3.7% in 2009. If we use this as a basis and the current P/E of 8.5 (and again sales of 900 mn) then we would end up with a earnings of 2.2 EUR per share or a fair value of 18.60 EUR.

3. Good case
In the past, Akka was able to earn a net margin of around 5%. If we assume that they can turn around Germany in 3 years time and generate an overall amount of 1 bn sales, we would have a net income of around 50 mn EUR or around 3.30 EUR per share

If we further assume that they will then trade at a p/E of around 12-15 times as most of the peers, we have a target price range of 39.6 -49.5, with the midpoint at ~45 EUR.

In the next step, I try to come up with simple probabilities and the calculate the 3 year IRR.

The simplest psoobility is always: Equal weight, 33.3% probability each. The result is calculated quickly:

3 year Horizon – Equal weight
Akka Prob
Low case 33.3% 18.6
Status quo 33.3% 22
Good case 33.3% 45

Expected value in 3 yaers 28.53
IRR p.a. 9.1%

So if we assume, all three scenarios are equally likely, weg et an IRR of 9.1% over 3 year which is not very attractive.

We could also look at the scenario where we can assume that the turnaround is basically a 50/50 gamble:

3 year Horizon – 50/50 turnaround
Akka Prob
Low case 25.0% 18.6
Status quo 25.0% 22
Good case 50.0% 45

Expected value in 3 yaers 32.65
IRR p.a. 14.1%

In that case we would get an IRR of 14.1. Not bad, but as this is clealry an above average risk stock maybe not enough.

If we assume a 75% probability of the MBTech turn around, we get the following picture:

3 year Horizon 20% IRR
Akka Prob
Low case 12.5% 18.6
Status quo 12.5% 22
Good case 75.0% 45

Expected value in 3 yaers 38.83
IRR p.a. 20.8%

So in order to come to a 20% IRR which I think would bet he right „Hurdle“, one has to be quite sure that the turn around is succesful.

If one uses the 50/50 scenario to find the „status quo“ level which would provide an expected 20% IRR, we would end up with 18 EUR.

So long story short summary:

I would buy the stock either if the price would be around 18 EUR or if I am convinced that the turnaround is happening with at least 75% probability (and the car sector is not cratering).

So for the time being, despite looking attractive from a pure valuation point of few, the risk/return for Akka is not good enough in order to qualify as core value. As it is no “special situation” neither (at least not in my definition), for the time being it will be a stock for the watch list only.

Confessions of an “arm chair investor”

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BeyondProxy,a blog I read frequently, had a big post about investing in Europe which seems to become more popular by the day.

What really caught my eye and made my somehow angry at first was the following quote:

Philip Best, Founding Partner, Argos Managers: “One of the things we really believe in is that there is too much investment that goes on from people who are basically just sitting behind a Bloomberg screen and who are doing arm chair investing. They are sitting there and they are waiting for ideas to come to them. And Marc [Saint John Webb] and I believe a great deal in getting out there. In getting out there and meeting companies and talking with managers and we spend a lot of time traveling around France. And “A” we like that and “B” that is what we think brings the most to the job…We try and read as much of the local press as we can. Whether it’s in France or the UK, Switzerland or whatever and also a bit of the trade press. Plus, it is classic value investor stuff. A lot of the ideas have come from this idea of ‘idea clumping.’ You know you find one cheap software company in Germany and suddenly you find a bunch of others.”

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Performance review September 2013

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Performance

September was a very strong month in most markets. The Benchmark (50% Eurostoxx, 30% Dax, 20% MDAX) gained 5.6%, this is the best month for the market since January 2012, where the BM started into the year with an 8.4% gain. Interestingly in September, the Eurostoxx outperformed both, DAX and MDAX.

The portfolio gained 4.9%, an underperformance of -0.7%. As discussed many times, I expect the portfolio to underperform in these markets, especially now when I own around 25% cash.

On a year-to-date basis, the portfolio is still ahead the benchmark with a gain of 26.6% against 17.5%.

The September performance was boosted significantly by two special events: The new buy out attempt for Rhoen Klinikum (+8.6%) and the minority buy out of EGIS (+30%). Other outperformers were Sol (+9.1%), Tonnelerie (+9.7%) G. Perrier (+9.5%), IGE (+7.1%). Underperformers were April (-1.3%) and Miko (+1.6%).

Nevertheless it is also important in my opinion to assess the own performance as objectively as possible with regard to skill and luck. Yes, 26.6% YTD sounds like a lot of skill. But in reality, there is a huge percentage of luck (in the form of BM performance) involved as well. European small and mid cap indices are performing like crazy (MDAX +30% YTDT, French mdi/small caps +22%, Italian Small/midcaps +31% and +37)%. As I am investing mostly into those small and midcaps, my performance doesn’t really look so good compared to those benchmarks. Yes, the decision to invest half of the portfolio in French and Italian small and midcaps was a good one, but the stock selection was rather mediocre and the cash allocation so far value destroying.

Portfolio activity

Portfolio activity was rather high with 3 transactions. I sold Pharmstandard after a few days because I overlooked an important aspect (record date). I increased the Rhoen Position and I added Trilogiq as a new “half” position. I am actually considering putting a “hard” limit on portfolio transactions per month in place (maybe 2 or 3)

Portfolio as of 30.09.2013:

Name Weight Perf. Incl. Div
CORE VALUE    
Hornbach Baumarkt 3.9% 8.8%
Miko 2.5% 4.3%
Tonnellerie Frere Paris 5.9% 99.9%
Vetropack 3.8% 7.3%
Installux 2.8% 24.5%
Poujoulat 0.8% 11.4%
Cranswick 5.5% 44.7%
April SA 3.8% 33.0%
SOL Spa 2.9% 54.9%
Gronlandsbanken 1.8% 12.3%
G. Perrier 3.7% 50.3%
IGE & XAO 2.1% 18.5%
EGIS 3.2% 35.0%
Thermador 2.6% 8.2%
Trilogiq 2.4% 8.4%
     
OPPORTUNITY    
KAS Bank NV 4.9% 45.7%
SIAS 5.1% 75.1%
Drägerwerk Genüsse D 8.2% 169.2%
DEPFA LT2 2015 2.6% 67.3%
HT1 Funding 4.1% 49.9%
EMAK SPA 4.6% 54.2%
Rhoen Klinikum 4.6% 12.1%
     
     
     
Short: Prada -0.9% -17.5%
     
Short Lyxor Cac40 -1.1% -17.5%
Short Ishares FTSE MIB -1.9% -15.4%
     
Short CHF EUR 0.2% 6.4%
     
Cash 21.9%  
     
     
     
Core Value 48.0%  
Opportunity 33.9%  
Short+ Hedges -3.8%  
Cash 21.9%  
  100.0%

Potential Level 3 mistake: CIR SpA

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Two months ago I looked briefly at CIR SpA ( or more precisely an analysis on beyondproxy), the Italian holding company which had the following special feature:

CIR carries a €564 million liability that has been booked as “Borrowings”. In reality, this is not borrowed money – it is a legal reserve for an infamous legal proceeding that has been making headlines in Italy for the past twenty years: the so-called ‘Lodo Mondadori’.

At that time the share price was around 95 cents. According to my analysis, the fair value of the shares at a 480 mn settlement would be around 1.12 EUR per share.

I wrote the following:

Although I like the unique aspect of this special situation, the potential upside is NOT attractive enough to justify an investment at current prices.

I will keep this on the radar but I would not invest above ~0.70 EUR. I would need 50% upside in order to justify the risk of the underlying companies which are clearly struggling.

Yesterday, the Italian top court finally decided that Berlusconi has to pay 500 mn.

The CIR stock then jumped to a price of 1.20 EUR,which over this 2 months would have been a nice gain of over 25%.

The question I am asking myself is: Was this a typical level 3 investment mistake, analysing a company but rejecting it and maybe even forthewrong reasons ?

If we compare the CIR share price with the two listed subsidiaries SOGEFI and Espresso, we can clearly se that the CIR share reacted mostly to the ruling, this wa not a fundamental revaluation o the businesses, although Espresso performed similar:

I am especially surprised that based on the stock price reaction, this positive ruling doesn’t seem to have been priced in at all or to a very small extent.

So looking back I think I made 3 mistakes:

– I might have overestimated the efficiency of the Italian stock market. I thought a lot of that would be priced in already.
– I could have “isolated” the special effect maybe with a FTSEMIB short position
– requiring a 50% “margin of safety” for such a short term catalyst was maybe too much

Additionally, I think it is important to look at the special situation as special situation first. It might be a mistake to apply both, my usual value criteria plus the “probabilty” approach to special situations.

Short cuts: Rhoen Klinikum, Hornbach, Vivendi

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Rhoen Klinikum

KABOOM !! After a lot of corporate boardroom chess, Rhoen Klinikum and Fresenius today cam out swinging and announced that Rhoen will sell the mAjority of its business for 3.07 bn EUR to Fresenius.

Among other (and subject to regulatory approvals), Rhoen plan s to:

– pay a 13.80 EUR special dividend (this translates into ~1.9 bn EUR)
– and/or repurchase shares
– they will keep hospitals (mostly university hospitals) with an annual turnover of 1 bn where they expect an EBIDTA margin of ~15% in 2015
– the purchase price is cash, but Rhoen will use part of it to pay back debt
– the purchase price is priced at 12x EV/EBITDA

The stock price jumped initially today to 22 EUR and something but came back to ~ 19.50, giving Rhoen a current EV of around 3.5 bn (Net debt 800 mn)

The “stub” (remaining business) is currently then priced at around 500 mn EV but expected to earn 150 EBITDA in 2015. If we assume a Forward EV/EBITDA of around 6-8x, then a fair value of the current Rhoen shares (pre tax etc.) would be the current 19,50 plus 3,50 to 5 EUR per share or so. Slightly higher than the 22,50 Fresenius was ready to pay two years ago.

So for the time being I will not sell the shares and watch what is going to happen. At some point in time, the stub itself coul dbe an interesting situation in itself, as it will most likely drop out of the index etc. Sow I guess I will sell before the extra dividend is actually paid.

Hornbach

Quite a surprise: Kingfisher representatives, which owns 25% of the holding votes and 5% of the Baumarkt shares are actually leaving the supervisory board and planning to enter the German market.

They seem to target the “professional” market, not the retail sector. Clearly this is also the sector where Hornbach is strongest.

I am not sure how to interpret this. Clearly, it would be better if Praktiker (and MAx Bahr) would just disappear. I do not really understand why Kingfisher wants to enter the German market. Kingfisher is a great company, but in their major markets, UK and France they are number 1 with a clear size advantage. In Germany, they are a small fish and I would claim that the German retail market in general is one of the most brutal markets in teh world. Even WalMart didn’t have a chance here.

I am wondering if somehow now Hornbach enters the French market ? As far as I know, they so far operate some shops along the border which draw a lot of French people because prices are a lot lower in Germany.

Vivendi

Some 18 months ago, I had a quick look at Vivendi because Seth Klarman bought a stake.

Subsequently, he sold out again a large part at a loss. Now however, there seems to come some actual change. French “raider” Bolloré became vice chairman and the company announced the following:

Bowing to investor pressure to overhaul its structure, Vivendi will begin a formal study to separate its French phone unit SFR and assemble the rest of its businesses into a new international media group based in France, it said yesterday. Billionaire shareholder Vincent Bollore will become deputy chairman, as Vivendi ends its search for a new chief executive.

This is quite interesting. Thinking loud, Vodafone with all its Verizon Cash might be interested in the telephone part (after cashing out their minority participation to Vivendi some years ago….).

Nevertheless, I still hesitate to buy Vivendi. 2012 was a very bad year for them. Under my metric the made a loss, increased the share count and have 1 EUR per share more debt despite showing positive free cashflow.

Note to myself: Put Bolloré on my watch list. This guy seems to know what he is doing in France.

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