Category Archives: Opportunities

Commerzbank HT1 tender offer – results

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Commerzbank just released the results for their tender offer.

Interestingly, all tendered securities have been accepted, so the described arbitrage strategy has worked out nicely for anyone able to exploit it.

What I found extremely interesting is the fact, that less than 15% of the UT2 were tendered but almost 60% of the HT1 bonds (584 mn out of 1 bn).

One of the reasons could be that the HT1 bond was owned by hedge funds anyway who had hedged the bonds at least partly with shares even before the tender.

For a small HT1 investor with a medium term time horizon, the outcome is actually positive. In my opnion, the reduced amount of outstanding bonds will increase the chance that Commerzbank will actually call the bonds in 2017, when they switch into floating rate and loose all benefits with regard to capital ratios.

Based on 68%, the potential yield if they are called at par in 2017 would be still 17.2% p.a. which I find is extremely attractive.

Good old friend: Asian Bamboo reports 2011 earnings

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One of our “good old friends”, the former short position Asian Bamboo announced preliminary results.

I find the report especially intersting, not because of “I told you so and I am so clever” but because of this:

As domestic and international markets were weak, revenue per hectare fell, while plantation costs, such as cultivation costs and amortisation, increased due to a larger plantation size.

Asian Bamboo is basically producing sprouts which is sold as food and bamboo trees which are mostly used for construction. The food part in theory should be stable, so there must have been significant negative developements in the construction sector.

Maybe it is just a lame excuse but it could also be that China domestic market is not so resilient as everybody wants to believe.

Back to Asian Bamboo: 2011 earnings are ~1.20 EUR per share. So the “ridiculous” PE has now normalized to something like 12-13.

As one could expect, return on assets for a plantation are rather low and without significant investments, the returns are stable at best. Even for a plantation with fast growing bamboo trees.

HT1 Funding – Hedgefund edition

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Last week I quickly outlined the tender offer for the HT1 funding.

In short, Commerzbank is offering 71% for HT1, however in shares based on the VWAP of the shares in a certain time period.

Today, almost 2 mn EUR of nominal HT1 have been traded at 68.85% on average, well below the 71% offer price.

So a (small) hedge fund could make the following arbitrage:

– buy the HT1 at 68.85%
– sell the respective shares at VWAP over the relevant period (which is no problem to achieve as institutional investor)

Share lending for Commerzbank currently costs 4-5% p.a. so for the roughly 2 weeks the payoff would be (71-68.85)-transaction cost. If we assume a transaction cost of overall 0.5% we still would have an “arbitrage” gain of 2.5% for 2 weeks. This could be in theory leveraged a couple of times to make it more interesting.

The only risk factor is that it is not clear how much Commerzbank will effectively accept or how much of the total packageis actually offered to Commerzbank.

In comparison, the UT2 bond which has a higher priority, is trading at 81,4%, a lot closer to the offer price of 82.5%. Based on my “gut feeling”, the

So in theory one could calculate the implict acceptance quotas for the different tranches based on those quotes relative to their offer price.

For any normal investor this sounds like peanuts, but for hedgefunds this is really an interesting opportunity to make non-market related returns within a very short time horizon.

For the portfolio, I would have joined the “party” if it wouldn’t be too much work to execute the transaction.

Commerzbank HT1 Tender offer

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Good times for my “special Situations” investments.

After Draeger came out with an 210 EUR offer last week, Commerzbank today announced that they will make a tender offer (among others) for the HT1 Bond at 71%..

The exchange offer invitation by the Offeror includes the following hybrid capital instruments, subordinated debt securities and other capital instruments:

Instrument Aggregate Principal ISIN Minimum Theoretical Order of
  Amount outstand-   Nominal Purchase Priority**
  ing   Amount Price  
Commerzbank Capital Funding Trust I EUR 189,550,000 DE000A0GPYR7 50000 31500 1
Commerzbank Capital Funding Trust II GBP 115,600,000 XS0248611047 £ 50,000 £ 30,500 1
UT2 Funding p.l.c. EUR 750,000,000 DE000A0GVS76 1000 825 2
HT1 Funding GmbH EUR 1,000,000,000 DE000A0KAAA7 1000 710 3
Eurohypo Capital Funding Trust I EUR 306,425,000 XS0169058012 1000 690 4
Lower-Tier-2-Anleihe (bearer bond) EUR 502,150,000 DE000CB07899 50000 € 41,000*** 5
Lower-Tier-2-Anleihe (bearer bond) EUR 272,850,000 DE000CB8AUX7 50000 € 42,500*** 5

The only caveat is the point that the inevstors will not get cash but Commerzbank shares.

The Offeror plans to contribute the securities it acquires as a contribution in kind to Commerzbank in exchange for new shares issued from the authorised capital (“genehmigtes Kapital”) of Commerzbank. There will not be a placement of the new shares with investors, as qualified holders of the selected securities will receive the shares directly in exchange for the securities tendered.

To make things more interesting, the amount of shares (and the implicit exchange price for the shares) will be determined in the following way:

The price of these shares will be determined based on the average of the daily volume weighted average price in XETRA during the period starting on February 24 and ending on March 2, 2012.

Th eoffer is limited to the number of new shares created (511 mn shares at 2 EUR would mean around 1 bn EUR), the securites affected have a total volume of 3.1 billion. If more people tender, the acceptance will be on a proportional basis:

In the event that the total volume of securities for which tenders have been submitted to the Offeror exceeds the authorised capital of 511,342,904 shares, the Offeror will accept the tenders on a pro rata basis as set forth in the Exchange Offer Memorandum dated February 23, 2012.

A technical side remark: Commerzbank has announced that the local GAAP result will be a hefty loss of 3.5 bn EUR, however they will use reserves to prevent any writedown on profit participating securites, including HT1.

Summary: The tender offer will boost the price significantly. I am however not sure if I want to sell at that price.

Draegerwerk Genußschein – some more thoughts on the repurchase offer

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Following yesterday’s post about the 210 EUR offer per “Genußschein”, some other interesting aspects should be considered.

Dividend cut

I think this is the only time in history I remember that a 80% suprise dividend cut led to a almost 3% increase in the corresponding share price. The reason could be very simple and I have maybe underestimated the Draeger shareholders:

Many Draeger shareholders were maybe well aware of the effective massive dilution through the Genußscheine. The repurchase offer with 210 EUR is considered to be very advantagous for shareholders and therefore the net effect of the Announcement (Dividend reduction against cheap repurchase price) is a positive for shareholders.

As the announcement alone maybe caused this jump, a high acceptence ratio could possibly move the stock price even higher. So there is a lot of “upside risk” in the stock from a short perspective.

Another reason for the jump in the share price could of cours be some short covering, if I was not the only one who has the relative value trade in place.

Game theory Genußscheine

I am still struggling how to interpret potential acceptance outcomes for the offer. If we have a very low acceptance for instance, we have two potential factors which could influence future Genußschein prices:

1. With a low acceptance ratio, everyone knows that Draeger needs to do more to buy the Genußschein back (positve)

2. In theory, they could try to make life difficult for the Genußscheine either by continuing low dividends for a longer time (negative) or try some other tricks like possible dilution etc. (negative)

With a high acceptance rate we have the following potential issues:

3. The Genußscheine will become illiquid, larger investors will no longer be interested (negative)

4. Draeger will not need to increase the offer (negative)

5. However, Draeger could afford to raise the dividend quite fast back to or above last years levels as it doesn’t hurt shareholders anymore (positive).

So we can see, there are many paths how this could develop.

I think what is also interesting in this case is the fact that as Genußscheinholder the interests are not aligned with Management (and shareholders) but directly opposed. This is something one should keep in mind.

210 EUR repurchase offer Draegerwerk Genußschein

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In a classic “carrot and stick” approach, Draeger issued a buyback offer today for the Genußscheine at EUR 210.

The “carrot” would be the 30 EUR premium compared to yesterday’s prices. The stick is the annoncement to drastically reduce the dividend for 2011:

Zur Finanzierung der verbesserten Kapitalstruktur beabsichtigt der Vorstand der persönlich haftenden Gesellschafterin, gemeinsam mit dem Aufsichtsrat der Hauptversammlung am 4. Mai 2012 eine einmalig reduzierte Dividende von 0,19 Euro je Vorzugsaktie und eine Dividende von 0,13 Euro je Stammaktie vorzuschlagen

The German announcement is quite funny, they argue to finance the repurchase with a one time dividend cut by ~-90%. This one time cut wouldn’t even finance 5% of the to be repurchased Genußscheine, so the only reason to do this is to scare some Genußschein holders to sell if the yield drops to less then one percent. As an additional effect the 2011 result of Draeger shows a positive effect as they have already accrued a higher amount of interest for the Genußscheine.

Going forward, they announce additionally to reduce the dividend from the current 30% of net income to 15% of net income until they meet their target equity ratio of 40%.

Bis zur Erreichung dieser Eigenkapitalquote beabsichtigt der Vorstand der persönlich haftenden Gesellschafterin, 15 % des Konzernjahresüberschusses (abzüglich der Ergebnisanteile nicht beherrschender Anteilsinhaber) auszuschütten

So what to do now?

If history is any guide, as a Genußschein holder you most likely should just lean back relax and get some popcorn.

Bertelsmann in 2010 was in a similar situation and tried to buy back their Genußscheine at 180, from that the price went straight to 225.

Inmy opinion the Draeger offerproves the following: They actually proved that the Genußscheine are a problem for the shareholders andthey need to get read of them. Effectively they introduced a “put option” at EUR 210 for the Genußscheinholder.

There might be less liquidity in the future,but with the preference shares at 70 EUR plus,the 210 EUR are still a joke.

For the long Genußschein short Vorzug strategy in the portfolio I will reduce the short position at least by half,as the implicit put at 210 EUR reduces the downside significantly.

Quick news: EMAK, WestLB and Tonnelerie

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EMAK

I just saw that after the capital increase, EMAK has a new “number 2” shareholder, a company called “Girefin SpA”. Girefin SpA is a holding company which holds 55% of Landi Renzo SpA, a quoted Italian company. Girefin is controlled by Stefano Landi who was CEO of Landi Renzo before.

From a minority investor point of view this might be interesting, to have a “local” guy on board.

WestLB

There is an interesting article in the FT Germany (in German) about the current situation at Westimmo, the real estate lending sub of WestLB. If they succeed in moving the whole subsidiary into the government owned “bad bank” and maybe at book values, than the 2011 result might only show minimal losses if all. This would be very good for the 2011 “Genußscheine”.

Tonnellerie Francois Frere

There are news that Tonnelerie and listed competitor Oeneo are negotiating about Oeneo’s oak barrel business, Tonnelerie Radoux. Although the news was already out on Friday, it looks like some people who think that this is a reason to buy Tonnellerie.

However in my opinion one has to wait to see what Tonnellerie is actually paying for this and how they finance it.

Kabel Deutschland – How relevant is negative net equity combined with a lot of debt for a “wide moat” business ?

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Background: Kabel Deutschland is one of the short positions of the portfolio and currently the only one which didn’t work out yet…

In one of the blog posts, reader Stairway commented with an interesting analysis.

I hope it is fair to summarize the argument as follows:
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