Category Archives: Opportunities

Special situation: MAN AG (ISIN DE0005937007 / DE0005937031)

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Short Background:

Volkswagen, the Geman car giant bought the majority of MAN AG, the German truck maker back in 2011. Over the next year, they increased their shareholding to 75%.

Under German law, once the 75% threshold is reached, a majority owner can implement a contract which cedes the full control to the majority shareholder. However, a compensation amount plus a guaranteed dividend has to be offered to minority shareholders. (for a true squeeze out, at least 90% ownership is required). The main benefit of those kind of contracts is not only control but also a big advantage from a tax perspective.

In the 2013 shareholder meeting of MAN, a “Beherrschungs und Gewinnabführungsvertrag” (BGAV) was decided with the following amounts:

– shareholders will receive a compensation of 80,89 EUR directly if they hand in the shares
– OR a guaranteed dividend of 3,07 EUR per share if the compensation offer is not accepted

Normally, investors have 2 months time after the BGAV has been registered in the commercial register (Handelsregister) in order to tender the shares. Minority holders however have the right to challenge the terms if they think that the offer is too low.

And here it gets interesting

As part of the process, MAN had to present the underlying assumptions and the valuation details to the shareholders. The document can be downloaded here (German).

And there the fun starts.

For instance on page 114, they describe the inputs for the calculation of the terminal value starting 2018. For some unexplained reason, the starting EBIT is some 24% lower than the official company plan on page 91.

As a risk free rate they use 2.5%, which for a German company should be a lot lower. Also the assumptions for Beta and Growth (-1%) as well for the equity premium are not in line with “standard” assumptions.

If any of those assumptions gets successfully challenged, Volkswagen has to pay more. One can easily calculate this in a spreadsheet.

All in all, a final price of 105-110 EUR might not be unrealistic. The downside is limited. If the court approves the original price, shareholders can still “put” the shares to Volkswagen at 80,89 EUR plus a 5% interest since the BGAV has been implemented.

The “Spruchstellenverfahren” is held in Munich which is known to be rather minority friendly.

One remark: 3. quarter results of MAN on a net income basis were quite weak, but this will not be taken into account for the current trial. Only the assumptions of the submitted document are relevant, not the “real world developement”.

Valuation:

So we have a quite interesting situation here:

The downside is ~82 EUR, I.e. a loss of 7 EUR for the common shares vs a potential gain of 15-20 EUR. If we assume a 50/50 chance, we already have a positive “expected” value of 11-13 EUR per share.

The stock price itself is slowly trading up since July:

Although this does not sound like a huge deal, I think it is a nice, uncorrelated “bet” with a rather short time horizon and a clearly limited downside. Therefore, I have opened a 2.5% position in the common shares at 89 EUR and hope for a minority friendly outcome….

Edit: There are by the way a couple of erman stocks which have this guaranteed dividend. Some of them might be an interesting alternative to bonds. More in a later post.

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.

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.

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