Category Archives: Spin off

Italgas SPA (ISIN IT0005211237)- follow & SELL

People who follow my blog for some time know that timing of purchase and sales of stocks is not one of my strengths. I usually buy too early and sell too early. Italgas is one of the very rare exceptions:

When I looked at Italgas and then bought it end of November, I really managed to buy at or very close to the absolute low after the company had been spun off.

Looking at the stock chart we can see that Italgas outperfomed the broad index (lower blue line) but mostly mirrored the Italian small cap index with a slight outperformance if we consider the dividend which was paid early this week (0,20 EUR/share).

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Actelion (CH0010532478) – Merger arbitrage with a potential Spin-off “Gold Nugget” ?

Yesterday, Johnson and Johnson announced that they intend to acquire Actelion, the Swiss Biotech company for 280 USD per share.

The stock price jumped to around 272 CHF/USD right after the announcement indicating a relatively high probability of closing. J&J has enough money on their bank account and according to the press, most Actelion shareholders should be happy.

Closing date is targeted as June 30th. So if everything goes according to plan, this would mean ~2,9% yield for 5 months which is not bad but not that great either (as there are always risks) , so why bother ?

However there is an interesting specialty in this case which I didn’t see when I first looked into it. The official announcement contained this potential “golden nugget”:

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Spin-offs: Uniper – Goal for Einhorn, Metro AG/Ceconomy – complicated but maybe interesting ?

Uniper /E.On Spin-off

In David Einhorn’s latest letter to investors he mentions the following:

We purchased E.ON (Germany: EOAN) in the fourth quarter of 2015. When EOAN spun out Uniper (Germany: UN01) in September, we kept the UN01 shares we received at €10.02 in thetransaction and sold the balance of our EOAN stake at a modest loss to redeploy that capital into additional UN01 shares. We believe the market does not appreciate the earnings stability o fUN01’s power generation and natural gas logistics assets. Further, the incoming management team is incentivized and has committed to cost-cutting, which will create a powerful cash flow profile. We own the company at 6x our 2017 earnings estimate.

So looking back this was a smart move. Although Uniper’s stock price came back a little bit, Einhorn is still up like 35% and has done clearly better than holding on E.On:

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Italgas SpA (ISIN IT0005211237) – Spin-off special situation meets contrarian opportunity

Management Summary

As this turned into a pretty long post again, quickly the highlights. I do think that Italgas SpA, the recent Spin-off from SNAM SpA represents a potentially interesting special situation investment because:

  • overall sentiment towards Italy is really bad (“Renzi referendum”)
  • the Spin-off was not timed well just a day before the US election
  • the current uncertainties within Italian regulation changes further deters potential investors
  • all this is reflected in asset multiples at the very low-end for comparable regulated assets

For those reasons I initiated a 2,7% position for my portfolio for my “Special Situation” bucket.

DISCLAIMER: This is not investment advice. Please do your own research !!!!


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Uniper/E.On Spin-off: Take one ugly duck and transform it into ….. 2 really ugly ducks ?


Monday, Sep 12th will be the first trading day for Uniper, the E.On spin-off. E.On shareholders will get one Uniper share for each 10 E.On shares they are holding.

Just to recap: Uniper will contain all the (unwanted) power generation assets of E.on, so all the “fossil fuel” power plants, the Russian assets and the Swedish nuclear plants plus some other stuff. The German Nuclear assets (and the corresponding liabilities) will remain at E.on due to the reasons I mentioned in the last post.

Uniper is clearly an ugly Duck, maybe the “most ugliest spin-off” I have seen since I started the blog. If we look into the most recent investor presentation, it is clear that you have a problem when the 3 listed growth projects are a German Hard Coal Power plant, q Russian power plant closed due to an accident which will reopen in 2018 and some strange dealings around the North Stream gas pipeline (page 9.). It doesn’t help either that Uniper had to take a 3,8 bn EUR pre tax write down in the first 6 months of 2016.That makes the duck still uglier.

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E.ON Spin off plan – The final “Hail Mary” pass ?

According to Wikipedia, a “Hail Mary pass” is described as following

Originally meaning any sort of desperation play, a “Hail Mary” gradually came to denote a long, low-probability pass attempted at the end of a half when a team is too far from the end zone to execute a more conventional play, and that it took divine intervention for it to happen.

I have covered E.ON already a couple of times in the blog, with a first analysis, followed by a deeper look into their Nuclear decommissioning liabilites.

Finally, just a few weeks ago when the “spun” their Q3 results, I commented that E.ON is one of the prime examples of Management/Shareholder “disconnect”.

Now on Sunday, out of the blue, E.on came forward with an announcement to split themselves up into 2 parts, a “Renewable energy & Grid part” and a “Conventional part” including oil upstream nuclear power etc.

This was big news in Germany with a lot of press coverage and let to a nice “Bounce” in the share price on Monday:

Before I make some comments on the proposal, I found it quite interesting that another part of the press release had been pretty much ignored:

Fourth-quarter impairment charges of about €4.5 billion anticipated due to altered market environment
Outlook for 2014 EBITDA and underlying net income confirmed

Further down the “explain” it the following way:

Altered market environment necessitates in impairment charges

As part of the process of preparing the annual financial statements and the new medium-term plan, the E.ON Board of Management recently tested the Group’s assets for impairment. Beyond the roughly €700 million in impairment charges already disclosed in the first three-quarters, E.ON expects to record additional impairment charges of about €4.5 billion in 2014, primarily on its operations in Southern Europe and on generation assets. Although not cash-effective, the impairment charges will result in E.ON reporting substantial negative net income. However, E.ON expressly reaffirmed its forecast for full-year 2014 EBITDA and underlying net income.

Once again, EBITDA, which is relevant for the CEO bonus looks great, unfortunately shareholder’s equity will be further reduced by a cool 4,5 bn EUR, but the capital market either seemed to have not noticed this “small detail” or they are so enthusiastic about the spin-off.

The “Spin-off”

Spin-offs are generally considered interesting “special situation” investments. The underlying theory is the following: Many times, the capital markets seem not be able to price companies correctly, if the company either runs very different business lines or some of the business lines are performing badly. “Spinning off” underperforming divisions to shareholders then can unlock value because the capital market will value each part correctly and in sum this should be higher than the conglomerate. A secondary effect of spin offs is often that previously underperforming divisions freed from their previous owners often develop a unexpected positive dynamic, especially if the incentives for the management of the spin-off are correctly aligned.

Before moving into more details, let’s look once again in the original press release of EON:

The first step of the spinoff will involve E.ON transferring a majority of New Company’s capital stock to its shareholders, with the result that New Company will be deconsolidated. E.ON intends—over the medium term and in a way that puts minimum pressure on the stock price—to sell the shares of its remaining minority. This will enhance E.ON’s financial flexibility for future growth investments.

Why does EON only spin-off part of the “bad ship” ? Well, I guess the reason is simply that “E.On new” does not have enough capital to grow the renewable business on its own. It need the proceeds from the retained part in order to fund future investment.

In my opinion, this already lowers my enthusiasm for the deal, as the two parts are clearly not able to exist independently without an external capital injection. Economically, the sale of the remaining part is equivalent to a “backdoor capital injection”. This will clearly not be beneficial for the valuation of the “bad ship” part after the spin-off und limit the upside potential for some time.

Let’s look at the proposed structure of the spin-off next:

I didn’t listen to the Concall, but the slides for the new strategy can be found here. Before jumping into the presentation, let’s look what I have written almost 2 years ago:

– Nuclear is not coming back, that was more than 1 bn of EBIT which is missing going forward
– 60% of sales are actually energy trading revenues. The results of this “sector” look quite volatile
– they show huge swings in the net results of financial derivatives. In 2010 for instance, E.on showed a net gain of 2.5 bn against a 2011 loss of -1 bn .
– E.on has around 17 bn liabilities for nuclear waste etc. This liability is hard to analyse and could be grossly over-/understated. In the notes they state that the discount rate they use is 5.2%. I think this is a rather high rate. Combined with the long duration of those liabilities, there could lurk a potential multi billion hole there as well as in the 14 bn pension liabilities
– another “whopper” are the 325 bn EUR (yes that’s three hundred twenty five billion) of outstanding fossil fuel purchase commitments. Disclosure is rather limited here but I guess this is one of the big problem areas where they have locked in Russian NatGas purchases at too high rates

This is the plan from page 3 of the presentation:

+ Renewables
+ Distribution/grid Germany / EU
+ “customer solutions” (whatever that means)
+ Turkey

NewCo (Bad ship):
– Generation (fossil, Nuclear)
– Hydro (why is this not renewable ?)
– E&P
– Global commodities
– Russia
– Brazil

So comparing my “problem list” from back then clearly shows, that ALL PROBLEMATIC areas would go to New Co.

Does this create value ?

I think some smart investment bankers have compiled valuations of utilities across Europe. This is a quickly compiled list of some utility and “utility like” companies across Western Europe:

SNAM SPA 14.196 9,9
A2A SPA 2.672 9,5
RWE AG 17.672 8,3
IREN SPA 1.221 8,0
E.ON SE 30.405 7,8
ACEA SPA 1.876 7,7
ENDESA SA 16.760 7,6
IBERDROLA SA 37.017 7,0
ENEL SPA 36.372 6,7
ACCIONA SA 3.427 6,3
EDF 45.477 4,9
GDF SUEZ 48.498 4,0

It is pretty easy to see that anything which sounds like “renewable” and/or “grid” trades at double-digit EV/EBITDAs whereas all the “integrated players” trade at medium to low single digit EV/EBITDA multiples.

So the idea behind this the proposed split seems to be clearly driven by the hope that the grid/renewable part will be valued at double-digit EV/EBITDA and the rest remain in the “integrated” valuation range.

The problem is of course, if the “bad ship” will actually trade at an integrated utility” multiple or not. My guess is: In the beginning, it will most likely not. I could also hardly imagine that the government will let the “bad ship” pay high dividends for a longer time because they will know that this is money which should be held for the nuclear liabilities.

Other considerations:

Looking into the past, E.ON has been spectacularly bad at reacting to changes and timing its strategic investment decision. They bought into Brazil right before their partner Batista went bankrupt, they missed the first 10 years of renewables etc etc.

If history is any guide, then the timing of the proposed split could indicate that maybe we have seen the worst and better times for conventional power generation lie ahead

It is also interesting that they said nothing about who will be running the two companies. Will the old guys remain at E.On ? This would be clearly negative

There could be some roadblocks on the way. The current German energy minister Gabriel seems to like the transaction (or doesn’ understand it) but there could be more resistance building up if people understand that the nuclear liabilities are dramatically under reserved. Also the pensioners of the “bad ship” could try to block the deal as having claims against the bad ship is clearly les valuable than for “E.On new”.

Summary & evaluation

The proposed split/spin-off of E.On was clearly a surprise. So far, the spin has worked and the stock market has liked this move. E.ON has outperformed the DAX and RWE by 7% since the announcement, which is a lot considering that they announced an unexpected 4,5 bn loss at the same time.

For me, E.On currently is clearly not a buy. On one hand, there is the risk that the spin-off does not work. Secondly, it is no real spin-off and depends on people actually buying the minority stake. Thirdly, just splitting the company in my opinion will not increase the value. If the same guys remain who made all the past mistakes, why should they suddenly be able to turn things around ?

On the positive side, the grid/renewable part could clearly be a take-over target, the bad ship however looks pretty toxic. For me, E.ON is still too much of a black box and without management change and better incentives, I could not see that much more upside. Still, I will keep them on my watch list as the prospoctus for the “Bad ship” IPO could be really interesting.

Coming back to the beginning of the post: Yes, E.ON has just thrown their final “Hail Mary” pass, but at the moment there is no way to tell if the ball even makes it to the end zone….

Valmet Spin off – No action

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

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

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

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

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

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