Category Archives: Opportunities

Short update Portugal Telecom /OI: Sale of 6.1% stake by Caixa Geral

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In my first post on the PTC/OI merger I wrote among others the following:

For some PTC shareholders, the problem might be that the suddenly do not hold a Portuguese/European stock but a Brazilian one. According to the official announcement, the new stock will be listed in Brazil, US and on NYSE Euronext, so technically it should be not a problem for shareholders.

Today, Government owned Portuguese Bank Caixa Geral, which owns 6.1% in PTC announced to sell their stake:

Oct 24 (Reuters) – Portugal’s state-owned bank Caixa Geral de Depositos will sell its outstanding 6.11 percent stake in Portugal Telecom in a private sale as part of plans to sell non-core assets, the bank said on Thursday.

The sale of 54.77 million shares will be carried out via an accelerated bookbuilding process aimed at certain investors.

I am not sure if they wanted to sell anyway or if they have issues to hold a Brazilian stock, but in either case I think such a sale provides a good opportunity.

The stock has been currently suspended from trading, but I will try to increase my 0.5% stake to 1% today.

Portugal Telecom & OI merger – another PIIGS stock transformation ?

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It seems like that many PIIGS companies with significant international business operations try to transform their companies in some way or another in order to get rid of the “PIIGS” discount. Basically a first mover was Hellenic Botteling, which delisted in Greece and relisted as Swiss based company in the UK market in 2012. A second, very succesful attempt was made by Autogrill, spinning off the international business.

Now, a few days ago, Portugal Telecom (PTC), the Portuguese TelCo with a large Brazilian subsidiary, came up with a potential new way:

They want to merge with the Brazilian TelCo OI and effectively become a Brazilian Telecom company with a Portuguese subsidiary.

This alone is in my opinion already an interesting special situation. But it gets even more interesting. The structure of the merger is quite complicated, but in general, there will be a merger plus capital increase.

For Portugal Telecom shareholders, it looks like the following:

Each Oi common share will be exchanged for 1 share in CorpCo, and each Oi preferred share will be swapped for 0.9211 CorpCo stock. Each Portugal Telecom share will be the equivalent of 2.2911 euros in CorpCo shares to be issued at the price of the capital hike, plus 0.6330 CorpCo shares.

So on a first look, this looks interesting for Portugal Telecom shareholders. The lower the price of the capital increase, the higher the share in the combined company. Clever Hedge funds might even be able to construct a short OI long PTC trade. Although there is a corridor where either PTC or OI can step back from the transaction if prices would move too strongly in one or the other direction.

Some figures / ratios:

PTC:
Market cap 3.1 bn EUR
P/E 7.4
P/B 1.5
EV/EBITDA 5.5

OI:
Market Cap 6.5 bn BRL (~2.1 bn EUR)
P/E 11
P/B 0.6
EV/EBITDA 4.5

Both companies carry significant debt.

The share prices of both companies reacted at first positively, but in the recent days, OI shares dropped quite significantly and PTC is back to where it was before (after hitting +30% in the first day):

This might be the reaction to the large cash capital increase undertaken by OI in the course of the deal:

As part of the merger, Oi proposes to undertake a cash capital increase of a minimum of R$ 7.0 billion (Euro 2.3 billion), and with a target of R$ 8.0 billion (Euro 2.7 billion) to improve the balance sheet flexibility of CorpCo. Shareholders of Telemar Participações S.A. (“Tpart”) and an investment vehicle managed by Banco BTG Pactual S.A. (“BTG Pactual”), will subscribe approximately R$ 2.0 billion (Euro 0.7 billion) of the cash capital increase

So from an OI shareholder point of view, one could argue that this exercise is somehow quite dilutive.

For some PTC shareholders, the problem might be that the suddenly do not hold a Portuguese/European stock but a Brazilian one. According to the official announcement, the new stock will be listed in Brazil, US and on NYSE Euronext, so technically it should be not a problem for shareholders.

On the “plus side” for this transaction one could argue with the following points

+ A Portuguese company with a potential “PIIGS” discount will be “transformed” into a potential BRIC growth story.
+ The valuation of the overall group might improve as well, as the OI pref shares will cease to exist
+ As PTC shareholder, there is an additional opportunity with regard to the OI share capital increase. The lower the price for the new shares, the higher will be the percentage in the new company
+ it is very likely that the deal will go through. The CEO of both companies is the same guy and regulators will have no reason to object
+ part of the synergies (i.e. lower refinancing costs) might be relatively easy to achieve.

On the other hand, there are also some clear issues:

– Brazil itself is not in the “sweet spot” anymore
– OI itself is struggling. Being only the number 4 mobile operator, especially ROA and ROE is far below the competition
– in the presentation, the CEO committed to pay 500 mn BRL p.a. in dividends. Including the new shares, this will result in a much lower dividend yield going forward from the current 7-8%. As they want to grow, this makes sense, but for some investors this could be an issue
– debt will be relatively high, further capital increase in combination with acquisitions are not unlikely

At the moment, I need to dig a little bit more deeply into this, but in order to keep me motivated and interested, I take a 0.5 % position at current prices (3.40 EUR per share) in Portugal Telecom for my “special situation” bucket.

DISCLAIMER: As always, do your own research. This is not meant to be any kind of investment advise. When publishing this, the author will most likely own the stock already. Do not blindly follow any tips etc. Use your own brain. The author will also most likely sell the stock before posting this on his website.

EGIS minority buy out – What’s next ?

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Only 4 months after I bought EGIS for the portfolio, majority owner Servier has offered (for me totally unexpected) 28.000 HUF per share to minority shareholders.

This is roughly a 40% gain in 4 months, so quite oK, although in my opinion, the stock should be worth more especially compared to peers. The current offer is around 8.3 x 2013 earnings (ex net cash) and 1.1 x book value.

That’s what I wrote back then:

I think one doesn’t need to be to sophisticated here. A decent company like EGIS with a solid, non cyclical business should not trade at a P/E of 5 and P/B of 0.8. A fair price in my opinion, taking into account some issues from above should be a P/E of 10 or 1.5 times book, which would be still significantly below western peer companies.

Now the problem is the following: Acceppt the offer (and/or sell) or wait for a better offer ?

In most German cases I had so far, the first offer was ususally followed by a better offer and/or much higher stock prices, such as AIRE KgAA and Draegerwerke Genußschein.

In the EGIS case, Servier communicated the following:

– there will be no second offer
– they will ask the AGM to delist the company after the offer is settled

After googling a little bit, I found this from Lawfirm Weil (written in 2005):

In general, a simple majority of the votes is required to adopt a decision at a shareholders’ meeting. However, certain fundamental decisions (eg changes to the charter, merger or winding-up of the company, listing/delisting of shares) require a three-quarters majority of the votes. The charter may also impose supermajority voting requirements for decisions which, by law, could be adopted by a simple majority.

A 75% majority of votes is most likely relatively easy to achieve, unless an activist fund steps in and buys a large anough stake. I don’t have any clue how likely that is and how chances are in Hungarian courts.

So all in all, I guess the best will be to accept the offer and try to find another place to invest in. Somehow the number of cheap shares seem to become smaller and smaller….

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.

A few more thoughts on Rhoen Klinikum

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In my recent post, I had made a very quick analysis how I looked at the news that Rhoen now sells 2/3 of their business to Fresenius in order to sidestep the blocking shareholders.

That was my conclusion:

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.

Let’s move a step back before that:

Before we knew that Rhoen wanted to sell and Fresenius wanted to buy at around 22,50 EUR (old offer). Initially, before the Fresenius offer, the shares traded at ~15 EUR, which I would define the “undisturbed price” without any control premium. Until last week, the market seems to have valued a rather low probability for the deal going through.

Very simply, the implied probability was around (17,50-15)/(22,50-15) = 1/3 or 33%.

Now a deal seems to be much more likely, but it is unfortunately not as “clean” as the old deal. Instead of getting only cash, one now expects a certain amount of cash plus a remaining “stub”. On the other hand,”all in” the price seems to be even slightly better as the old 22,50 EUR.

So why is the share now trading only at ~19 EUR ?

There are three explanations for this in my opinion:

A) uncertainty the deal is NOT going to happen
B) what will the remaining company (“stub”) be worth ?
C) the effect of the withholding tax on the special dividend

In my opinion, the withholding tax is not very relevant. If I buy now at 19,15 and I pay the withholding tax next year, I can make a “wash sale” (sell at a loss and buy again) to set off the tax. For institutional investors this is no issue anyway.

I am also pretty sure that the likelihood of the deal happening is very high. After the fiasco two years ago, Fresenius and RHoen will have put a lot of effort into this deal. So I would think that there is at least a 90% probability that the deal is happening.

This leaves us with c): People don’t seem to like being stuck with the “stub”. If we look into the Rhoen 6 month report, we can see that on an annual basis, Rhoen earns around 300-310 mn EUR EBITDA. The part which was sold to Fresenius is clearly the currently more profitable part with EBITDA of 250 mn EUR according to the filing.

This leaves the stub with EBITDA of around 50 mn EUR. The “implied” valuation of the stub is around 340 mn EUR EV at the moment, so we are talking about an implied valuation of 6-7x EV/EBITDA which is not much. Rhoen announced that they intend to earn 150 mn EUR EBITDA in 2015 in the remaining company. Even if this is too optimistic, I still think the “stub” is implicitly very attractive as RHoen has a very long history in turning around hospitals.

So all in all, at the current price, the stub looks like a very interesting investment.. The only problem is that I need to invest the full 19 EUR now in order to get expsure to the 5,20 EUR implied valuation of the stub.

In theory, as a professional investor, I could borrow up to 13,80 EUR against the Rhoen shares to lower the amuont of capital I need to commit and increase my Return on Investment. At the moment, as I have a lot of cash anyway, I do not need to borrow.

Expectation management:

Just to make sure, I do not expect that the shares will jump 5 or 6 Euros until the dividend will be paid. One has to think about the stock rather as a 13,80 cash deposit plus a 5,30 EUR stock. There will be very poor “visibility” about the stub in the next few months until the deal is finally settled. So I do expect some price appreciation on the “deposit part” but not that much, rather like an implicit attractive deposit rate as off set for the execution risk or so. My return expectation until mid next year is rather something like +1 EUR with a very limited downside.

Qualitative aspect

What I do like is the fact, that funder, Mastermind and 12% shareholder Eugen Münch has to a large extent the same interests as the “Normal” shareholders. This is different from similar situations where the CEO just wants to get a big golden handshake. I think the adversaries (Braun and especially Asklepios) might even be tempted to take over the “stub” at some point in time before someone else thinks about buying this (then unlevered) turn around case.

Summary:

So instead of waiting and selling, which was my first reaction, I will actually increase my RHoen position to a full position (5%) as I think that the current risk/return relation is not spectacular but still very good and not correlated much to the overall market.

This translates into around 3.6% exposure on a portfolio basis to the cash payament (Risky deposit) and only 1.4% “true” equity exposure to the stub. I will watch this carefully and potentially increase the position up to 2.5% “stub exposure” if prices gow below 19 EUR. For me the “stub” is one of the most interesting special situations at the moment.

Correcting research mistakes: Pharmstandard – SELL

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A few days ago, I introduced Pharmstandard as a potential special situation with a catalyst in the form of a buy out offer.

Thanks to the input of a few commentators, I recognized that I got one very important detail wrong:

The record date for the potential 16,50 USD offer was already on July 5th, so a few days before they announced this offer. Anyone buying now will not be able to tender the shares. Interestingly, this information was nowhere to be found in the English language section of the official releases.

This of course wipes out the most significant part of the investment case at the current stage and explains the relatively low price.

As a consequence, I will therefore sell my 1% position as of today and watch the developement from the sideline. Maybe there will be another potentially interesting entry after they spin of the OTC drug unit.

In general, I think it is quite important to act quickly if a significant part of a stock analysis turns out to be wrong. It would be even better to identify this beforehand, but that is one of the drawbacks of not having an awful lot of time to analyze. In those cases it is even more important to start a position small in order to lower the risk of things turning out like they did here.

I think it is also a good example for extending the “Circle of Competence”: In this case I have learnt that you should not rely only on the English language announcements of a Russian company….

Anyway, thanks to all the commentators for their helpful comments !!! This is what makes blogging so much fun

Short cuts: IVG, KPN, ThyssenKrupp

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IVG

Friday night or Saturday is always a good time for another “breaking” news item about the IVG restructuring. This time they came out with an outline of the restructuring plan.

As expected, equity and hybrid capital are effectively wiped out. What I found highly surprising however is this part:

Further, it is, inter alia, envisaged that SynLoan I and the convertible bond will both be transferred to the company by way of a contribution in kind with 100% of their respective face amounts (so-called debt-to-equity swap), which would lead to a quota-ratio of these two creditor groups’ share in the stated share capital of 80% (SynLoan I) to 20% (convertible bond).

This is a great surprise that although collateralized, the Syn loan I is treated “pari passu” with the convertible. I do not fully understand this, but maybe the collateralization has happened to late (and too close to potential bankruptcy) and would have been invalid in case of bankruptcy. This explains the price jump in the convertible this morning I guess.

As usual in such cases, I am surprised that the equity is still valued at 35 mn EUR.

KPN

Interesting development at KPN: After KPN decided to sell its German Eplus subsidiary, Carlos Slim canceled the “stand still” agreement and is now bidding for KPN. I think this will be interesting to watch, as KPN surely doesn’t want to be acquired. I am pretty sure, they will come up with some defences like poison pills etc. Nevertheless I clearly sold out too early . I think I underestimated the “calros Slim” angle here.

ThyssenKrupp

ThyssenKrupp might be an interestign “special situation in the making”. Last week, Berthold Beitz, the 99 year old industrialist who efefctively controlled ThyssenKrupp via the Krupp foundation, passed away. Rumours about an accelerated capital increase are emerging.

It is interesting to see in the shareholder structure that a lot of German inevstors got out (Deka, Union) and Anglos Saxon investors got in in the last few months. This could become really interesting.

Short cuts: Installux, Maisons France, SIAS, EMAK

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Installux

Installux reported 6m numbers. As they have already indicated, sales were down -10%. Interestingly, they managed to keep their EBIT margin at a constant 11%, despite higher depreciations.

This is very remarkable. The net result went down ~-11% mostly because taxes remained unchanged on absolute terms. At the end of the day, EPS for the first 6m was 13.80 EUR. If history is any guide, I would expect an additional 5 EUR EPS or so in the second 6m, resulting in 19 EUR EPs. Net cash went slightly down to around 16 mn EUR or ~53 EUR per share due to higher receivables which is normal for Installux in the first six months.

All in all, Installux is still one of the cheapest stocks around and the business seems to be surprisingly resilient and their cost base quite flexible.

Maisons France Confort

As expected, MFC is experiencing an even deeper decline in sales than Insatllux. Maybe it was also the weather, but sales are down -10.5%, excluding M&A by -15.4%. However they will publish results only in beginning of September. So lets wait and see. The stock price remained surprisingly resilient.

SIAS

SIAS released 6M numbers as well. Numbers were Ok. Traffic seemed to have picked up later in Q2. Overall, as now the “special” is gone, one of my lower conviction ideas. Good dividend and still below book value but that’s it.

EMAK

Finally, EMAK released the 6M report. Despite unchanged topline sales, they managed to significantly increase profitability which I find remarkable (profit margin 6.2% vs. 4.4%). Even moreinteresting, their European sales increased nicely despite the unfavourable weather and sales decreased mostly in Turkey. One more data point for my “gorilla theory”…. This is what they say:

In the “Asia, Africa and Oceania” the decline in sales is mostly due to the decrease in shipments to Turkey, tied to a moment of weakness of the local market.

They lowered slightly their guidance for 2013, but still the expect 38-40 mn EBITDA which would transale in somethin like 0.10 EUR profit per share.

Overall, EMAK in my opinion is on a very good way and has significant recovery potential from here.

Strange stocks part 2: East Asiatic Co. Ltd. – Australian miners meet inflated Venezuelan pigs in Copenhagen

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Summertime is always a good time to look at stocks which are to a certain amount “strange”. I started this mini series last year with the two listed National banks of Switzerland and Belgium.

In this second part, I want to look at the Company called “East Asiatic Co Ltd.”, incorporated and listed in Denmark.

Why is this stock strange ? Well, first, for a company called “East Asiatic”, Denmark is not the most natural site to be located. Secondly, the description in Bloomberg is the following:

East Asiatic Company Ltd. A/S processes food and offers moving services. The Company raises and slaughters animals and processes meat in Venezuela; and provides relocation and records management services to corporate and individual clients in Asia.

So Venezuela is not directly in East Asia. According to this website, the name is only related to the historic business of the company:

East Asiatic Company (Ostasiatiske Kompagni, Aktieselskabet Det.), Copenhagen, Denmark. Formed 1897 by Capt. H. N. Andersen and associates. Operated between Denmark and the Far East, trading in rice, oilseed, timber and spices. Operated first commercial ocean-going diesel ship (Selandia (1912)) after which routes expanded to include South Africa, the West Indies, North America and Australia. Survived WWII with a depleted fleet but retained their rank amongst the worlds leading ship operators. Largely divested itself of shipping interests between 1994 and 1997 and diversified into other areas.

So let’s directly look on EACs website to find out what exactly they are doing today.

Subsidiary Santa Fa

If one looks up Santa Fe’s website, this looks like a potentially interesting global business services company. They seem to offer everything, from Visa, moving furniture and finding real estate.

According to EAC’s 2012 annual report, two subsidiaries of Santa Fe (Wridgways, Interdean) were bought in 2010/2011. Overall, Santa Fe made up 31% of EAC’s total sales.

EAC’s annual report by the way is very good. On page 19, they explain Santa Fe’s business model clearly, which looks attractive in a globalized world.

Business is growing strongly, but margins have been reduced, specifically as they feel already the slump in Australian mining activity.

Simple valuation of Santa Fe:

Plan: 5% CAGR until 2016, 300 mn EBITDA. EV/EBITDA of 6-8x realistic ?

Current borrowings 500 mn, growth by 5% in line with sales –> 600 mn debt in 2016

EV of 1.800 -2.400 –> equity value of 1.200 -1.800 in 2016. Discount by 15% for 3 years: NPV of Santa Fee according to this: 790 – 1.180 mn DKK

just for comparison reasons: Current market Cap EAC in total: 1.120 mn DKK

Plumrose:

No comes the fun part. Subsidiary Plumrose ist he leading pork producer in Venezuela, Cranswick of Venezuela so to say. However, other than Cranswick, Plumrose owns the complete vertical value chain. They are growing their animal feed, raising pigs, slaughtering, processing and distribution incl. branded food items.

As we all know, Venezuela has problems and doing business there is at least “challenging”. Among the problems specifically concerning Plumrose are restrictions of money transfers outside Venezuela and Hyperinflation.

Restriction on money transfers

According to the annual report, Venezuelan authorities did not allow to transfer dividends to EAc since 2007. Only one special dividend of 68 mn DNK was allowed in 2012. In parallel, EAC seems also to charge royalties to Plumrose, but again those royalties cannot be paid out.

The theoretical amount of those outstanding amount would be around 60 mn USD at current Bolivar exchange rates.

Inflation /Hyperinflation

Reading the annual report is also an interesting lesson in inflation and IFRS Inflation Accounting I didn’t know for instance that there is a separate IFRS article (IFRS 29) dealing with hyperinflation.

The big issue here in my opinion is the following: In a Hyperinflationary context, one usually is confronted with “official” fixed exchange rate which are subject to transfer restrictions and a black market rate which is usually a lot lower.

In Venezuela, the government devalued th Bolivar in February this year significantly by almost 50% from 4.3 USD/Bolivar to 6.3. Nevertheless, this is far away from the “black market” rate. currently, according to some sources, the “black” rate is around 32 Bolivar per USD, only a fraction of the official price.

Often, the black market rates are maybe too cheap because of the risk involved with “semi legal” transactions, but clearly, the official rate is far off the mark.

So if we look into the 2012 annual report of EAC, we can see that Plumrose is responsible for almost 80% of EAC’s profit as reported with an exchange rate of 4.3. If we look into Q3, we can see that Plumrose at 6.3 Bolivars er USD is responsible for almost all of EACs profits.

No, using the black market exchange rate, one should actually divided those numbers by 4 or 5 to come to a realistic representation. If one does so, then the currently cheap valuation of EAc (P/B 0.46, P/E 7 for 2012) suddenly look at lot different. Calculation with 30 Bolivar per USD, EAc would not have made a profit in 2012 and P/B would be around 1.

So this is an important lesson here: For any company having significant exposures in a hyperinflationary environment, one should not look at the “officially translated” earnings but recalculate at more realistic black market rates.

Other observations:

The company itself seems to be very shareholder friendly. Clearly, many investors would like the Santa Fe business but less the Venezuelan operations. On their website they state the following:

EAC strategy towards 2016

The overriding aim of the EAC Group is in the course of the coming years to develop its two businesses, Santa Fe Group and Plumrose in Venezuela, into strong and independent businesses; each with a size and scale sufficient to attract international investors and to become independent, listed companies.

So this is quite unusual. Many companies just want to become as big as possible. Here, it looks like that they really want to maximise value. This could also be a spin off opportunity at some point in time

Stock price:

The stock price has seen better days:

So it looks like that there is not too much optimism priced in at the moment (or too much optimism in the past). The stock price most likely also reflects that Santa Fe is currently struggling due to the BRIC slow down.

Summary:

All in all, EAC is not only a “strange” stock but also an interesting stock. Although both subsidiaries are struggling, I see some “real option” value here. The Santa Fe business, if the execute as planned, is worth more or less the whole market cap at the moment. Therefore, Plumrose, the Venezuelan pork producer is like a “free” option betting on a better future for Venezuela. This future is highly uncertain, but some positive signs are also visible.

I do not know any other way to invest in Venezuela apart from Government bonds which have their own issues if one wants to bet on some kind of recovery like we have seen in neighbouring Colombia.

On the other hand, Santa Fe is definitely negatively impacted by the slow down in the BRIC and commodities world. So it will need sometime until this potential value could be unlocked.

For the time being, I will however NOT buy the stock but watch developments closely.If Santa Fe really recovers I will establish a position.

Nevertheles, keep in mind that this is not a typical “margin of safety” kind of stock. This is more like “ray Delio style risky but cheap “real option” investment with relatively uncorelated specific risks.

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