IVG again (and again and again)

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disclaimer: The discussed investment is very risky and not recommended for any investor. There are strong hints of insider trading and permanent loss of capital and permanent loss of principal is quite likely. The author owns the investment and is clearly biased towards a positive outcome

Thanks to a reader, I received some “research” about IVG directly out of London, HF and “predator” capital (highlights are mine):

IVG – Further Thoughts

I had the opportunity to talk to the company late on Friday. I remain public on the name and have not received private information…

As one would expect, the company would not give any details of proposals being discussed with stakeholders; however, the company admitted that it had considered a number of options for repaying the convertible and deleveraging the company (which became necessary when the synloan holders indicated they wouldn’t be able to refi in September 2014)… including a rights issue which wouldn’t work due to the size required and the status of the hybrid and a quickie disposal of the SQUAIRE which would have seen a very significant discount to book.

A couple of things became clear:

· The company views the equitisation of the convertible and the hybrid as being the necessary first step in a restructuring process
· The haircut may also have to apply to the syndicated loans – especially SynLoan 1 which is under-collateralised
· The company’s fervent hope is to avoid any type of insolvency through a consensual agreement. Any type of restructuring under insolvency is currently considered a distant ‘Plan B’
· The company believes that significant value could be generated for equity investors through the continued management of the SQUAIRE and in the unencumbered caverns currently due to be delivered to Cavern Fund II in c. four years
· The company’s major shareholders are supporting the restructuring proposals – at least from their position on the Supervisory Board; that doesn’t mean that they will vote for restructuring at the AGM…
· Any new capital would require 75% approval at the new AGM
· The convertible bonds will require 100% vote of those attending a general meeting (quorum 50%); but that could be lowered to 75% under a new German Scheme
· It looks like Plan B may well be the more realistic proposition…

The German market is relatively short of ‘prime’ office space… prime would mean significant property located in the centre of major cities like Berlin, Frankfurt, Hamburg and Munich. IVG categorises most of its property as located in these cities. However, more properly it should be described as near one of these cities and very little of the investment portfolio could be described as prime… Prime properties still command premium rentals, non-prime properties face significant competition and rents are likely to fall on the renewal of tenancy agreements. The company states that €2.25bn is core/core+, €690mn is value add (needs work or on short tenancy) and €250mn is workout… in an insolvency the core/core+ valuations would come under pressure; the latter two categories may well be reflective of a going concern but I believe could well be significantly haircut in an insolvency… Furthermore I place little value in the €264mn ‘future caverns’ given the lack of interest from utilities; the fund valuations could come under pressure if EuroSelect 14 does indeed default; and tax assets are hard to transfer.

The company confirmed that:

· The debt on the SQUAIRE represent c. 60% LTV; the rental currently covers interest and the cover will improve. The company expects this debt to roll when it falls due at the end of the year
· The company also has a Core Financing: currently €570mn vs. assets valued at €800mn
· The Pegasus loan is currently €140mn and is secured on a variety of properties situated all over Germany and valued at €300mn
· SynLoan 1 is under-collateralised; I got the impression that less than 75% of the loan had collateral
· SynLoan 2 is over-collateralised but I have the impression that not by much… c. 90% LTV; obviously it benefits from the caverns disposals which should generate €300mn by the end of 2014

It would seem that it would be in the best interests of all of the stakeholders to keep the company a going concern, otherwise one can make a case that even the collateralised parts of the syndicated loans could be haircut.

Andrew Carrie ** 22nd April 2013 ** acarrie@knight.com ** +44 20 7997 2066

In my opinion only 2 parts of that “research” is interesting:

Number 1:

The company views the equitisation of the convertible and the hybrid as being the necessary first step in a restructuring process

This is the same kind of b…s… I have heard in the first few Praktiker calls. The answer is simple: Nope. The first step is that equity gets wiped out, then Hybrid then senior. However it clearly shows that will go down the same path as Praktiker tried and ask the bondholders for deferral.

If for some reason, they would succeed, this would in my opinion kill the complete (high yield) corporate bond market. If it is suddenly possible to change the sequence in teh capital structure, why should then be corporate spreads where they are at the moment ?

Number 2:

This is the really interesting part:

SynLoan 1 is under-collateralised; I got the impression that less than 75% of the loan had collateral

In some boards people were arguing: If a collateralized loan is sold at 85%, this is the proof that the senior is worthless, as even the collateral for the first priority loans is not sufficient. To be honest, I was struggling with that one most.

Well, this argument now doesn’t hold anymore. If in reality, the Synloan is only collaterallized at 75%, then a price of ~85% is in line with the current pricing of the convertible.

The uncollateralized part of the Synloan is “pari passu” with the convertible. So in case of the bankruptcy, synloan holders would get full repayment on the collateralized part (75%) plus pro rata repayment with the convertible which trades around 55%. The “fair value” of such a Synloan would therefore be 75% + (25%*0.55)= 87.5% and therefore absolutely consistent with current convertible prices.

If we assume that the buyers have quite high return requirements, then I think the fear of a zero recovery for the convertible gets even more unrealistic.

Summary:

If only for this one piece of information, the “research” as superficial as it is has greatly increased my confidence in the IVG convertible, because suddenly the prices paid for the more senior but partly uncolateralised loans makes sense.

One should still expect a very bumpy ride with “Praktiker style” attempts to bail in the convertible holders before anyone else, but at current prices, the risk/return relationship looks very good to me.

Again a disclaimer: “Don’t do this at home” and I might be subject to confirmation bias.

Guest post: Book review – “Playing to win”

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Thanks to reader N. for submitting this !!!

In this book-review I would like to recommend you the book: “Playing to Win” which is written by Lafley and Martin. The content of this book focuses on the transformation of Procter&Gamble (P&G) between 2000 and 2009, and discusses the approach to strategy that led to this transformation, leading to a doubling of sales, a quadrupling of profits, and an increased share price of more than 80 percent during that decade. And focus especially on how strategy really works. Most of the time it doesn’t and reasons vary. However, Lafley and Martin identify these familiar troublemakers, when leaders tend to approach strategy in one of the following ineffective ways:

(1) they define strategy as a vision,
(2) they define strategy as a plan,
(3) they deny that long-term (or even medium-term) strategy is possible,
(4) they define strategy as the optimization of the status quo, or
(5) they define strategy as following best practices.

Lafley and Martin suggest that a strategy “is a coordinated and integrated set of five choices: a winning aspiration, where to play, how to win, core capabilities, and management systems.” The authors argue that what really matters is winning, and that the play book discussed in this book, which provides five choices, a framework, and a process, is what is needed to win.

In subsequent chapters, the authors present the “strategic logic flow” framework, designed to direct thinking to the key analyses that inform any strategy, and the “reverse engineering” methodology, designed to make sense of conflicting strategic options. In the former, there are four dimensions to be considered: (1) the industry, (2) customers, (3) relative position, and (4) competition. In the latter, which contrasts with traditional approaches to generating buy-in, there exist seven steps that involve exploring different ways forward and a wider variety of possible strategic choices.

If strategy is a set of choices, how the author write it “that uniquely positions the given enterprise so as to create sustainable advantage and superior value relative to the competition,” and I believe it is, then quality of judgment is imperative, not only when making a specific choice but throughout a continuous and cohesive decision-making process.

As a conclusion of their book, A.G. Lafley and Roger Martin acknowledge, “All strategy entails risk. But operating in a slow-growing, fast-changing, intensely competitive world without a strategy to guide you is far riskier. Leaders lead, and a good place to start leading is in strategy development for your business. But they state also, and I think that this is most importantly, “no strategy lasts forever”. So one of the best takeaways from what the author writes in that book is that “strategy is a highly dynamic area, full of fads and fashions that come and go”, and that “copying ideas that ‘work’ for others is unlikely to be a winning strategy”, because “success can only be based on being different from (existing or potential) competitors”.

In addition, I appreciated the “Dos and Don’ts” sections at the end of each chapter, which clearly summarize the material from a practical context, as well as the strategic lessons learned side bars following these sections at the end of most of the chapters. At some level, I find the book a little bit to repetitive.

I don’t think that a brief review such as mine, can possibly do full justice to the scope of material that A.G. Lafley and Roger Martin provide in this volume at as they did in it in their book. Also, I hope that those who read this review will be better prepared to determine whether or not they wish to read the book. I truly can recommend this book because you will have at least some idea of how an enriched and enlightened understanding of what strategy really is and the book perfectly fits to “Competition Demystified” from Bruce Greenwald.

Weekly links

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Prem Watsa’s Fairfax annual meeting notes from Cove Street Capital

Good interview with Peter Cundill disciple and Deep Value investor Jeroen Boes

Some simple but very good thoughts about Apple from the Brooklyn investor. By the way: This is one of the best value investment blogs in my opinion !!

Recommended: Entertaining post about the investment process at Eastcoast Management

Interesting special situation from Wexboy: EIIB (Ex-Bank)

Longish but very interesting interview script with Markel’s Tom Gayner

Rare interview with Cable Cowboy John Malone

Via Gurufocus: A KPN analysis with lots of data.

When you get congratualations from your broker (indirectly)

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I use CortalConsors as my broker for the non-German part of my portfolio, especially as they don’t charge any extra fees for French stocks. Some months ago, they started to send out performance and risk reports with some more or less usefull stuff on it.

One interesting feature is a return/standard deviation graph comparing the portfolio against several benchmarks. I was really surprised how well the portfolio is doing:

risk return consors

Explanation: The vertical axis is the return in the last 12 months (until end of March 2013), the horizontal one is the volatility meassured as standard deviation. The portfolio is (of course) the lonely light orange dot in the upper part of the chart….

Clearly, this will not go on like this forever. Nevertheless, I think it also shows that value investing is not dead yet, at least for the little guys 😉

If I would do this professionally, now would be the time to make a big advertising effort …….. It doens’t get much better than that.

“The death of value investing”

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There was a quite provocative article with the same headline “The death of value investing” on Business Insider a few days ago.

Why should one take such a Business Insider article serious at all ?

Well, at first, this was not written by some lowly paid BI staff but from Marc Andreesen and Ben Horowitz, two venture capital legends with currently 3 bn under management. Andreesen by the way was one of the creators of MOsaic, the first web browser and founded Netscape.

Let’s look at their article:

Most of the best investors in the world are considered value investors. Well, times are changing — the destructive power of technology is starting to break down companies faster than ever.
Value investing is an investment philosophy that evolved based on the ideas that Ben Graham and David Dodd started teaching at Columbia Business School in 1928. Since I started my career as an investor, value investing was the holy grail of investing.

Hmm, I am not sure about that one. I always thought that value investing is rather a minority strategy…but ok.

There are many interpretations of what value investing is, but the basic concept is as follows: essentially you want to buy stocks at a discount to their intrinsic value. Intrinsic value is calculated by taking a discount to future cash flows. If the stock price of a company is lower than the intrinsic value by a “margin of safety” (normally ~30% of intrinsic value), then the company is undervalued and worth investing in.

That part is OK although I am not sure where have the 30% “margin of safety”. But then it gets interesting:

Generally, value stocks are companies that are in decline but the market has overreacted to their situation and the stock is trading lower than their intrinsic value.

Hmm, that is in my opinion only true for the original Graham “Cigar Butts”, but lets move on:

The classic case is Research in Motion (RIM). In January 2007, RIM was trading at a high 55x PE multiple. Over in Cupertino, a computer company called Apple had reinvented itself as an MP3 player company and was now unveiling a new phone set to launch in the summer. By the end of December 2009, market share for Apple’s iPhone iOS as a percentage of US smartphone OS was 25% while RIM had increased from 28% to 41% in that same period. Though RIM had grown market share, fears of iOS growth had toppled the PE multiple to ~17x.

Many traditional, value investors sat back and thought, “Well, RIM is holding up pretty well compared to the iPhone, yet their PE multiple is getting destroyed.” It’s trading at near the historical average S&P 500 PE multiple of 15x. Apple hasn’t historically been strong in the enterprise, so maybe iPhone will just be a consumer phenomenon that doesn’t break through to business users. Android is irrelevant with 5% market share. The smartphone market is growing rapidly and RIM is the clear leader. RIM is still growing north of 35% and generating nearly $2.5B in net income. I think RIM looks cheap!
Two years later, RIM was trading at a 3.5x PE multiple and topline growth had screeched to a halt. Market share for RIM had contracted to 16% while iOS and Android combined for 77% market share. In fact, in 2012, RIM posted a net income loss of $847mm. Investors lost a ton of cash and were left scratching their heads.
How did this happen so quickly? Why did net income fall off a cliff? Why now?

They then go on to explain that technology changes faster and faster, mostly because of

1. Technology adoption accelerating
2. Internet way of life
and what they call: 3. Software Eating the World

Their final verdict is clear:

With technology upending markets, remaining a value investor is a death sentence. In the case of RIM, the company thought that their scale was defensible and stopped innovating on the operating system, favoring battery life instead. Apple’s iPhone operating system and associated software was an order of magnitude better than RIM and attracted consumers. Interestingly enough, Apple is dangerously close to losing their own software battle to Google with mobile versions of Google Maps, Gmail and Google voice being far better than their iOS counterparts.

While there may still be opportunities for value investing, you need to be cautious of businesses that appear to be on a slow decline. With the rate of technology adoption accelerating, Internet being a way of life and software consuming the world, businesses who refuse to embrace or adapt don’t just slowly decline; they fall off a cliff and take their cash flows with them.

The final statement in my opinion is both, partly wrong and partly very important for value investors.

What A&H describe is what is known to value investors as a Value Trap. A superficially cheap stock, which however for different reasons is in terminal decline. This is clearly not restricted to technology stocks, although there it is quite obvious.

Even the most famous value investors are not immune against this, as Seth Klarmann’s unsuccessful investment in Hewlett Packard showed.

Interestingly, short seller Jim Chanos (who I consider to be one of the best value investors ever) basically says the same thing:

You have to be very careful, because we looked at our returns over the past 10 years, and, particularly since the advent of the digital age, some of our very best shorts have been so-called value stocks. One of the differences in the value game now versus, say, 15 or 20 years ago, is that declining businesses, while they often throw off cash early in their decline, find that cash flow actually reaches a tipping point and goes negative much faster than it used to.

I think this is a very important point here: Low valuation (low P/E, low P/B) and/or high FCF yields based on past data are by no means a guarantee for superior investment returns. He directly confirms A&H in this paragraph:

The advent of digitization in lots of businesses also means that the timing gets compressed, meaning that you need to move quickly or you are roadkill on the digital highway. That’s true whether you look at companies like Eastman Kodak, or Blockbuster, or the newspapers. Value investors have been drawn to these companies like moths to the flame, only to find out that the business has declined a lot faster than they thought and that the valuation cushion proved to be anything but.

I think this is also one of the reasons, why many of the older “Quantitative Value strategies”, such as Dreman’s or O’Shaugnessey don’t work so well any more.

To summarize it bluntly up to this point: If you think value investing is only about buying low P/E and/or low P/B or low P/FCF stocks, then you will most likely be in for a quite nasty surprise, especially if you invest in anything that is subject to the technological changes as described above. Many of thse companies will drop off much more quickly than in the past and reversion to the mean will not happen.

On the other hand, I don’t think that value investing is dead, but it has rather evolved. If you look at Warren Bufft (and Todd Combs and Ted Weschler of course), Buffet style value investing looks of course very different. He invests at much higher P/Es and P/B, however still with a lot of margin of safety as he is able to factor in the value of potential “moats”.

Other value investors like Seth Klarmann for instance go into other asset classes or “special situation” investing where “margins of safety” are created via forced selling of market participants.

Funnily enough, when I was googling “The death of value investing”, an article with exactly the same title popped up from 2008, written by the quite famous author Edward Chancelor.

He refers to mistakes made by some “value investors” at that time:

The housing bubble, however, changed many facts. But some of the world’s leading investors appeared not to have noticed. First, several prominent names piled into housing stocks when they were selling at around book value. This proved a disastrous move as falling land prices and slowing sales generated massive losses for homebuilders. Then, some of the same investors charged into banks, figuring they were cheap. That also turned out to be a poor idea.

As we know now, Value investing made it at least another 5 years and 2008 and 2009 provided the best opportunities for open minded value investors in a generation.

Summary:

Clearly, Value Investing is not dead. It was not dead in 2008 and it is not dead now. But as the A&H well describe, “simple value” investing, i.e. just buying low P/E and P/B stocks is much more dangerous now that it was in the past.

For the “Normal” value investor, this means to put more effort in to identifying potential value traps. There is strong support to the thesis that declining companies, especially those subject to technological change, will “drop over the cliff” much faster than ever. So buying HP/Apple/ Micrososft/Intel/Solar/Media because it is so cheap at single digit trailing P/E minus cash should not considered to be a value investment unless you are really sure that sales and profits will not drop off similar to Nokia and RIM.

Value investing willneed to further evolve, but buying investments at a discount to a (carefully) determined intrinsic value will always be a good investment startegy.

IVG Convertible and distressed debt in general: Beware the “predators” – but don’t panic either…

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It is quite interesting to read the comments to my latest IVG post and elsewhere. The overall sentiment seems to be quite negative. I think this is also partly due to some recent bankruptcies in Germany’s fledgling “Mittelstand” corporate bond market, where a couple of companies with really bad balance sheets issued bonds and defaulted quite soon afterwords. Very often, recovery rates were low double digits or even single digits.

Investing and evaluating bankruptcy situations is very complex. You have to figure out two things in order to come up with a value:

1. The probability of the company going bankrupt
2. The recovery in case of bancruptcy

The valuation of the bond is then pretty straight forward. However, before going there, maybe we should take step back and

Why do companies go bankrupt ?

In general, companies do not go bankrupt voluntarily because first and foremost the equity holders and owners will object strongly. Once a company is in bankruptcy, the game is over for equity owners, however as long as the company “lives” there is always a chance (or technically the option) that things turn around. So an equity holder will always try to stay in business.

Also management usually has not a lot to gain from bankruptcy and will try to hang on as long as they can to their posts and receive salaries. This is also one of the reasons why in many jurisdictions, not filing for bankruptcy although you are in a unsolvable position is considered a crime. In German, this for instance would be called “Insolvenzverschleppung”.

Usually, it is creditors who “pull the plug”, either by not rolling debt or by enforcing covenants which usually are part of standard bank loans. “Normal creditors” like banks and normal bond holders also don’t really like bankruptcies, they prefer their bonds being paid or rolled over. For a normal bank for instance, there is no upside to simply enforce a loan covenant if there is still a high chance that the company can survive. Enforcing a covenant for a normal bank usually means that they have to swap their loan into an asset with a much higher capital requirement.

So what banks normally do is that they will press for more equity and/or a higher coupon but normally they prefer the company to stay in business because seizing the assets does not provide a lot of upside, as the bank at max gets its notional back.

However “normal” creditors get nervous if a debtor is loosing money and the underlying assets pool is shrinking fast. If a bankruptcy is more or less unavoidable and the asset pool is shrinking, than the logical way is to press for bankruptcy as fast as possible in order to protect the downside.

Introducing the “predators”

However there is also another group of creditors: So called “vulture funds”. Those guy usually come in if a company is in some kind of trouble, but there is still enough collateral.

Their strategy is quite simple: They try to enter the capital structure at the most senior level at a discount. Those discounts often appear, if for example a bad bank is set up and people want to dispose legacy assets as soon as possible.

Example:

Assume, secured loans of a troubled company with a maturity of 5 years are sold to a “distressed debt” fund at 60% of nominal. The interest rate is 5%. By holding it until maturity, the fund will earn 13.7% p.a. if everything goes OK. This is nice, however distressed debt claims to earn as their Private equity investors more like 20-30% ROEs.

So how can they increase their annual returns ? The answer is simple: Try to enforce bankruptcy as quickly as possible and sell the collateral. So for the example from above I made two further scenarios: either bankruptcy after one year or direct bankruptcy.

Period 0 1 2 3 4 5
HTM -70 5 5 5 5 105
IRR 13.7%          
Bankruptcy after 1 year -70 5 0 100    
IRR 15.1%          
Direct bankruptcy -70 0 100      
IRR 19.5%        

So in this simple example, the principle is quite easy to see: For a “distressed secured” buyer, the earlier the bankruptcy, the higher the returns.

How can a predator enforce bankruptcy ?

The usual way to do this is to enforce “broken” loan covenants. Normal bank loans contain certain minimum thresholds, often with regard to debt/equity or debt/asset ratios as well as interest/income. If those thresholds are not met anymore, usually the debtor has a certain “cure period” to fix things. Otherwise, the loans will become “due”. In normal cases, banks will not have an incentive to enforce the covenant. So they will renegotiate the covenants but demand extra collateral and/or a higher coupon.

A “predator” however, wil try to enforce the covenant in order to get his hands on the collateral.

In general, syndicated loans (i.e. a big loan which has been split up between a group of banks) will require a majority vote to actually renegotiate loan covenants. And that is where it gets interesting.

“Distressed debt” funds normally apply 2 strategies to accelerate their returns:

1) Enforcing bankruptcy
2) Blackmailing the loan syndicate

The second strategy is basically a game theory thing. If you have enough share of a syndicate to block decisions, sometimes those creditors who cannot afford a bankruptcy process will buy off th “predators”. This is often even better than going through the liquidation process.

Back to IVG: What does it mean here ?

Well, that’s easy: Look out for the predators !!!

As those guys smell the blood quite early, they have of course already arrived, at least according to this interesting piece of news from Reuters:

German property company IVG Immobilien is attracting attention from distressed debt investors as some lenders seek to cut their exposure to avoid potential heavy losses in a restructuring of its 4 billion euro ($5.3 billion) debts.

Between 400 million euros and 500 million in loans have been sold in three trades recently by banks looking to reduce or exit their positions in IVG and more trades are expected to occur in the coming weeks, bankers said on Friday.

And even more interesting:

IVG was not immediately available to comment.

The loans were sold to investors at around mid-80 percent of face value, a level considered to be distressed in Europe’s secondary loan market, bankers added.

IVG had outstanding debt of almost 4 billion euros at the end of 2012, comprising mostly bank loans, 3.16 billion euros of which are due to be refinanced by the end of 2014. IVG is close to breaching covenants on its debts.

So the predators are there, time to panic and sell the convertible ?

Not so fast. In my opinion there are 4 reasons why one should not panic:

1. The covenants are not broken yet, so there is no way to enforce the covenant here and now.
2. The price levels mentioned here does not justify a liquidation in my opinion. If you buy at 85% and you liquidate, then you will get money only within 2-3 years. This would be a single digit return at this levels
3. The amount traded does not provide a majority in any of the loan tranches.
4. There is a lot of money in the market chasing “high yield” paper, therefore improving IVG’s chance for refinancing

So for me it looks at the moment rather like a blackmailing strategy as discussed above, where the syndicate banks shall be forced to buy out the predators. Even if the predators go for liquidation, the question is how quickly they will be able to enforce the covenants.

Sometimes, “predators” run even more sophisticated schemes errrh strategies. One strategy for example would be Blackmailing as described above plus then investing in other parts of the capital structure at even more distressed prices. So the funds mentioned above could threaten the company and hold up the negotiation process only to purchase for instance the convertible at a very low price. At the last moment, they could then agree to a restructuring (or sell to the other banks) and harvesting the upside on the convertible.

Summary:

With the arrival of the “predators”, renegotiation for IVG will become more difficult. For the time being, it rather looks like a typical distressed debt “blackmailing” strategy, aimed at the other consortium banks. However this could change.

On the other hand, at current levels (66%-67%), a lot of bad news seems to be priced in, giving convertible holders an upside of > 50% in less than a year if the convertible gets paid in full.

Even in a liquidation scenario, I do not believe that we see such low recoveries as in other German cases in the recent past.

So for the time being, I am considering if I add carefully to my position if the (expected) bad news arrives. I am pretty sure the next call with management will be a disaster, so this could be a good entry point.

Book review: “The Dhando Investor” – Monish Pabrai

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For me, Monish Pabrai is mostly known as the guy who bid a couple of hundred thousand bucks in order to have lunch with Warren Buffet. But actually he has written a book as well.

The book claims as subtitle: “The Low-Risk Value Method to High Returns”.

The book shows a couple of “real world” examples, where people made a lot of money with somehow limited investments for instance a group of Indian refugees which went into Motels in the 70ties or Richard Branson with Virgin and Lakshmi Mittal.

He then lays out his “Dhando framework”:

1. Focus on buying existing businesses
2. Buy simple businesses with an ultra-slow rate of change
3. Buy distressed businesses in distressed industries
4. Buy businesses with a durable competitive advantage
5. Bet heavily when th odds are overwhelmingly in your favour
6. Focus on arbitrage
7. Buy businesses at big discounts to their underlying intrinsic value
8. Look for low-risk high uncertainty businesses
9. It’s better to be a copycat than an innovator

The book itself is very well written and quite accessible even for investment beginners. That is the big strength of the book. However I have also some “quibbles” with the book:

– In the “arbitrage” section, i think how confuses arbitrage and competitive advantage. The low costs of GEICO, WB insurance company is clearly the simplest form of competitive advantage (cost) and not any kind of arbitrage

– I personally find the combination of large bets and distressed situations quite dangerous. If you read the book, you could come to the conclusion that it is a good strategy to invest a large portion of your portfolio into a few, highly indebted companies. I would say this is in % of the cases a very good way to lose a lot of money, especially if you do that before a general recession.

-some of his own investments mentioned in the book rather look like lucky timing (buying in 2002) than anything else

Summary:

Overall, I think it is a well written book, which nicely summarizes several aspects of “Value Investing”. In my opinion, it is clearly not any kind of new method, but that doesn’t matter and you will not be producing superior invetsment returns after reading it. But it is a good book to wet ones appetite for value investing and hopefully read other books (Bruce Greenwald, Seth Klarman).

Although the book is clearly written for “the average investor”, one should however be careful not to misinterpret the different approaches, especially position size and “distressed” investments.

Sourcing ideas: Quick Scan Evermore Global portfolio

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In the weekly links, I had linked to the Evermore portfolio. On reader commented that the fund performed badly, so why bother ?

Well, I do not know if they perform better in the future, but their philosophy which the lined out in the report looks quite OK and if they follow that then in the long run they should do OK. It is also rare that you have a “mutual fund wrapper” for a special situation fund. There are many funds where you can see the “usual” value stuff. As sourcing special situation ideas is not as easy (there is no real “screener”), having such funds and looking for ideas is quite helpful.

So as I use the blog also as my personal notepad, I wanted to quickly put down some points about their positions in order not to forget them:

Frontline Convertible
Far out of the money convertible, maturity April 2015. Currently trades at around ~50%. Situation similar to IVG. Could be interesting.

Ei Towers
Italia based operator of broadcasting “infrastructure”. At a first glance not as cheap as SIAS but more shareholder oriented.

Constantin/Highlight
Many years ago I had saved Constantin as “uninvestible”, however I do not remember why. Time to look at them again ?

AIG/Genworth
No interest here. I guess many people underestimate how catastrophic the combination of low interest rates and potentially higher inflation is for insurance companies (yes I know, Baupost owns them both, but why does Buffet not write Life Insurance policies ?)

Vivendi
Also a Baupost stock. I still believe Bougyues is the better company.

Bolore
I personally view Bolore more like a financial “juggler”. There is much cheaper stuff in France in the small cap sector

ADT
Spin-off / split off from Tyco. US company, not my cup of tea

Moduslink Global
This seems to be some sort of Asset play. Unprofitable US small cap (market cap ~140 mn USD), however half of market cap in cash.

Impregilo
Smart move, although I looked at them during my Autostrada/SIAS analysis, I didn’t figure out the stake in the Brazilian company. I don’t know when they bought but this was a very good one. The Sicilian guy Salini made a tender for 4 EUR per share and Autostrada seems to accept it at 4 EUR per share.

Exor SpA
The HoldCo of the Agnielli family for FIAT. I saw them in some other portfolios (Longleaf, Southeastern) but never had the time to look at them.

Sevan Drilling Norway
Stock price looks distressed (P/B ~0.3). However I have no knowledge about deep sea drilling. MAybe a good stock to start ?

Sky Deutschland
Nothing for my portfolio.

Ackermans & Van Haaren
Diversified Belgium company. Looks more like a potentially “boring compounder” than special situation but interesting.

Guoco Group
Hongkong based group, bid from a Malaysian company. First Eagle and Third Avenue are shareholders as well

Pulse Seismic
Seismic data licensing company. Never heard before. business model itself quite interesting

Lonrho Plc
(in)famous UK conglomerate, now seems to be reinvent itself as an African-Agricultural company. Anyone remembers Tiny Rowland ?

Summary:

I think their portfolio is quite interesting, despite the yet lackluster performance. I will keep them on my list for possibly “Stealing” some ideas. Currently, I think Ei Towers, Sevan, Pulse and Ackermans look the most interesting to me.

Quick updates: WMF AG

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WMF, the succesful German manufacturer of Coffee machines and cutlery released 2012 earnings last week and the annual report today.

Additionally, two rather strange things happened:

1. Despite a good result and extremely strong Free cash flow, they cut the dividend from 1.40 EUR to 1 EUR per share citing the need to “strengthen the internal funding capacity” of the company.
2. Yesterday, the CEO who successfully turned around the company, resigned as of may 31st 2013.

Quick Recap: Last year, the former private equity owner Capvis sold out to KKR, the legendary P/E company.

The reduction of the Dividend and especially the reason given is of course a joke. WMF has net cash and could be leveraged quite a bit before you start cutting dividends.

To me this is a kind of “deja vu” with another German company i used to own (before i started the blog), ANZAG AG, a German pharmaceutical distribution company.

KKR indirectly bought the majority of ANZAG vie their Boots/Unichem purchase. Then in 2009, they started to cut the dividend and communicating bad outlooks before they then managed to buy out the remaining minority shareholders for 31 EUR. In my opinion, KKR is not unfair, but they make sure that the upside remains with them and not minority shareholders.

So I do not understand, why now the share price goes up so much. For me, the situation is very different to the Capvis situation. Capvis in my opinion always wanted to exit via a share sale, so the interest of minority shareholders and Capvis were more or less aligned.

KKR on the other hand, will most likely look for another solution (break up, leveraging up, mergers). So the firing of the CEO and cutting the dividend could be the first sign that they are changing the strategy and that the “ANZAG strategy” might be applied here as well. In my opinion, the interest of majority shareholder and minority shareholder are less well aligned as before and the resignation of a very succesful CEO is one “early warning” here.

Additionally, in my (non growth) valuation model, the ordinary shares already look overvalued, the pref share which are owned are fairly valued.

Also, the chart looks kind of “stretched”.

So as a result, I will start selling the WMF pref shares (~3.7% of the portfolio) from today on under the usual rules.

Quick updates: Installux, EMAK, SIAS & ATSM

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As I am not doing this fulltime, I sometimes miss if companies publish their results. In principle, for my “Value companies” I don’t think that one time period makes a big change in the overall investment case. However it definitely makes sense to look at existing companies at least once a year.

Installux

As reader Caque commented, Installux reported prelimary earnings a few days ago.

With 6.67 mn EUR or around 22 EUR per share, earnings were surprisingly good. Net cash is now at 18.8 mn EUR or 62 EUR per share. So trailing EPS ex cash is around (100/22) ~4.9 times, quite low for a company which earns around 15-20% ROCE.

2013 will clearly be a challenge for them, according to the last sentence of the statement:

L’environnement général incite Installux à la prudence quant à ses perspectives 2013. Le groupe anticipe un repli d’environ -8%. “Cette tendance se confirme malheureusement en terme de volume d’activité sur le 1er trimestre (-13%),

-13% in sales in the 1 quarter is quite substantial. On the other side, this might open up some interesting entry points during the year. Nevertheless it should be clear that France in general is going through a quite difficult year. As ussual, the stock price doesn’t do much and volume remains low:

One remark from my side: France and the Netherlands are Germany’s major trading partners. I cannot understand how people can be so positive about German companies and negative about Netherlands and France in particular.

EMAK

EMAK came out with a investor relation presentation including preliminary annual figures already a few weeks ago.

Interestingly, the “old” EMAK business is doing quite poorly, profit is down 50% or so. The “new” businesses acquired from the main shareholder were holding up much better. So looking back, the dilution is not that big.

EPS was ~5 cent per share so we have a trailing P/E of around 10. If they really make good on their ambition level (38-40 mn EBITDA), the stock would be quite cheap. Let’s wait and see, no need to do something at the moment. This has 2-3 years more to play out.

The stock price at the moment seems to “lazily” trail the FTSE MIB to a certain extent:

SIAS SpA

SIAS came out with preliminary 2012 numbers already 4 weeks ago.

What was clearly an issue is the fact, that traffic declined significantly in 2012, much more than expected. So despite a overall tariff increase, revenues stayed flat.

The good news: On April 15th, they are expected to pay the special dividend of 90 cent per share , distributing what is left from the sale of the Chilean asset sale and the purchase of the concession.

Operationally, there seems to be additional preassure from the regulatory side, as agreed tarrif increases have been suspended by the regulator.

After the special dividend, a large part of the “special situation” aspect (extra asset) has now played out. Howver, the fundamental part looks not as good as I have though initially. I will need to decide if I hold on to SIAS as a “Normal” value investmetn or sell it at some point in the near future. Fundamentally, the company does a lot worse than I had exepected. Thankfully, the entry price was low enough and investors seem to liek special dividends.

The stock price has outperformed the FTSE MIB in the last 12 month by a margin of more than 30%. Quite significant for a purely domestic business:

Even more interesting:

Autostrada (“ATSM”) now caught up with SIAS ver 2 years as it turned out that the “Italian Job”, the Purchase of Impregilo,turned out to be a great special situation investment, netting Autostrada a nice profit.

http://chart.finance.yahoo.com/z?s=SIS.MI&t=1y&q=l&l=on&z=l&c=FTSEMIB.MI&a=v&p=s&lang=de-DE&region=DE

Maybe time to switch back into the “Cheapie” ? Let’s wait and see. Definitely worth to check the Autostrada annual report this year.

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