Short cuts: EGIS, Hornbach/Praktiker, Rhoen Klinikum, KPN

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EGIS

This is from a broker report issued end of September by “Wood & Company”_

During the brief analysts’ conference call yesterday morning, Servier stressed two points: 1) regardless of the acceptance of the offer, Servier plans to delist the shares; and 2) Servier’s HUF 28,000/sh offer is final and will not be revised.
The minimum threshold to trigger a squeeze out under Hungarian regulations is 90%, which means that Servier needs acceptance from 79.63% of the outstanding free float, or 3.043m shares.
Regardless of the acceptance of the offer, Servier still intends to call an EGM to delist the shares from public trading, a step that requires a 75% majority of the votes cast; to block the delisting would require an absolute minimum of c.1.32m votes against, or c.35% of the free float.

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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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Some links

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Very interesting post from Prof Damodaran on the differences between (value-)investing and trading

Bloomberg story about Eike Batista, the guy who lost ~ 35 bn USD in one year

Nate from Oddball muses about patience, simplicity and retail stocks

Good post about the implosion of Albermarle, the UK pawnbroker

Plus 2 interesting blogs I discovered just recently, both highly recommended:

– Valuevista from the UK
– AlphaVulture , a poker player and value investor

Finally, an interesting small cap “pump and dump” from Warren Buffet himself in 2000 (via Alphavulture comment section):
– Buffet buys privately a company called Bell Industries in Dec 1999
– in Jan 2000 he sells it after it has jumped 80% because of the disclosure
– in November 2000, he then bought again after the stock collapsed

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.

Missed opportunity: Autogrill SpA spin-off

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Sometimes, the good old-fashioned simple ideas still work very well. One very recent example, which for some reasons I totally missed, was the recent spin-off of Word Duty Free from the parent Autogrill in the beginning of October.

The remaining business is the well-known restaurant business along Freeways, the duty-free business is the international business in most of the world’s airports.

If one looks at the Autogrill stock, the spin-off was a fantastic success:

A more than 50% outperformance against the index. The spun off stock World Duty Free now trades at a P/E of around 20, reflecting the assumed growth potential, the market cap is with 2 bn EUR higher than the parent (~1.5 bn). The CEO of the parent by the way is now CEO of the spin-off company.

I remember having read about the spin-off some months ago but I didn’t really follow-up. It is very interesting to see, how in this case this has unlocked value so quickly. It clearly shows also in my opinion, that some PIIGS companies with international exposure might still be heavily discounted by the market.

Unfortunately, I think the Autogrill spin-off is rather an exception than the rule for PIIGS companies, but I think it still makes sense to look for similar deals in the future.

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%

Some links

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MUST SEE: 30 minute video with and from Ray Delio about the “economic machine”.

Damodaran with a 4 item checklist in order to identify potential value traps

The Brooklyn Investor explains, why one should concentrate on businesses, not on stock market levels, tapering etc.

A potential arbitrage opportunity with US “forever stamps” ahead of an announced price increase

Punchcradblog on Blackbaud, a software company with an interesting business model, which nevertheless is too expensive. Very nice write-up and way of analyzing a company.

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….

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