Search Results for: rhoen

Rhoen-Klinikum (DE0007042301) – or why merger arbitrage is a really hard business

The Story of the takleover fight for German hospital operator Rhoen Klinikum has been in the news quite often lately.

I try to summarize it in a few short sentences:

Fresenius AG the big German healthcare group launched a bid at 22.50 EUR contingent on getting 90%
– in the meantime, some of the German competitors bought large stakes (Asklepios, Braun) of 5% to block the deal
– additionally some M&A arbitrage specialists (John Paulson) took stakes as well, hoping for a higher bid
– on the weekend, Fresenius then declared that they will not pursue the offer and the stock price drops almost 30%

Rhoen is now back or even below the level before the offer:

This shows that merger arbitrage is not an easy business. I have to confess that i was tempted to speculate on the Fresenies offer as well, but thanks to not having time to write a blog post, I didn’t jump into it as I would have done before I started the blog.

Fresenius is a big player and I would have thought that they might make at least one more attempt to gain 90%, which under German law would give them the right to squeeze out monrity shareholders.

However, now it is a different situation.

Rhoen is a well managed company and scores quite well in my Boss model. On top, we know that the private market value of the company is 22,50 EUR and one could theoretically buy it at a nice discount. Rhoen is one of the few German companies which do not have a majority shareholder although the fuender with his 13% holding still has a big influence but obviously not enough.

However, Rhoen is now clearly “in play”. I am considering really hard, if I should not open a half position for my “special situation” bucket.

Any opinions on that one ?

All German Shares Part 18 (Nr. 351-375)

So back to the “new normal” with another episode of my German Stock series. Most of these summaries have been written before the crisis hit, so I just added a few comments here and there and updated the numbers.

351. Rhoen Klinikum AG

Rhoen Klinikum is a 1.1 bn 1.2 bn EUR market cap company owns and runs a series of clinics in Germany.  I used to own the shares some time ago but more like a “special situation” investment. The company was target of a take-over battle some years ago and sold a large part of its clinics to a competitor and kept the more difficult ones. The stock did quite well for some time but the started to decline with no end in sight:

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From the archive: Emak Spa, Sol Spa, Piquadro – The Italian update

From time to time I check on previous investments how they performed and if they might be interesting again. I find  this a very efficient way to create potential (re)investment ideas as only relatively little effort is needed to get up to speed.

EMAK SpA

EMAK SpA was an Italian “special situation” investment I made in 2011 following an “italian style” capital increase in 2011 and then sold end of 2013 and early 2014 for a decent profit. Looking at the chart we can see that the timing of the sale was not that bad, as after a peak of around 1 EUR in early 2014, the stock is now trading ~30% below that price:

emak

Optically, EMAK looks very cheap now:

P/E 12,8
P/B 0,7
EV/EBITDA 7,0

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Quick update Bilfinger

I looked at Bilfinger for the first time in August 2014, after the price dropped almost 50% from its peak some months before. I resisted again in November 2014.

Again as a reminder my comment from the first post:

– some of the many acquisitions could lead to further write downs, especially if a new CEO comes in and goes for the “kitchen sink” approach
– especially the energy business has some structural problems
– fundamentally the company is cheap but not super cheap
– often, when the bad news start to hit, the really bad news only comes out later like for instance Royal Imtech, which was in a very similar business. I don’t think that we will see actual fraud issues at Bilfinger, but who knows ?

So now the new CEO came in on June 1st. And surprise surprise, the 6th profit warning within a year if I have counted correctly.
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Performance review 2014 – The year in review & Short outlook 2015 & Happy New Year !!!

Performance 2014

In 2014, the portfolio perfomed 5,42% vs. 2,37% for the Benchmark (Eurostoxx50 (25%), Eurostoxx small 200 (25%), DAX (30%),MDAX (20%)). This is the 4th year in a row with an outperformance but such a small difference is rather arbitrary, so nothing to get excited.

If I would need to promote my results for 2014, I would argue that the result has been achieved with significant less volatility than the Benchmark. A quick look at the monthly returns:

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Performance review October 2014 – Comment “Stress testing”

Performance October 2014

In October, the portfolio lost -0,8%. Compared to my benchmark (Eurostoxx50 (25%), Eurostoxx small 200 (25%), DAX (30%),MDAX (20%)) at -1,7%, this is an outperformance of +0,9%. YTD the score is +4,2% for the portfolio against -1,2% for the benchmark.

Positive contributors were Koc Holding (+9,7%), G. Perrier (+7,1%), Cranswick (+6,2%). Loosers were Draeger (-9,2%), Bouvet (-7,1%) and Miko (-5,8%).

Obviously, October was a relatively volatile month (more to that in the comment). However, in the worst days in mid October, the portfolio behaved as expected with a max. draw down of “only” 1/2 of the benchmark.

Portfolio transactions:

October was relatively quiet. Citizen’s Financial, my first US stock since a long time entered the portfolio as a “special situation”. In between I did a little “special situation” trade with Rhoen, netting me ~2% in the process.

The current portfolio can be seen at the usual place here.

Comment: “Stress testing”.

The first “Stress test” I want to refer to is the “comprehensive assesment of the financial health” of 120 major European banks by the ECB. The press feedback was quite predictable, mostly saying that it was only a first step and is not tough enough.

In my opinion, two important aspects have not been highlighted very often. First, I think the major achievement of this is to make all the different bank models comparable. In my opinion, this is a result which should not be underestimated. Everytime when some kind of international standard is released, all the local governments try to lobby as hard as they can for exceptions for their own players. The result then is basically a general standard with very few “teeth” and no one is able to compare the results. In this case, the ECB has been quite succesful to make the results comparable and even get the approval of all the regulators which I find is quite an achievement.

Additionally, for me it was quite surprising that some banks actually failed. I would have expected more like “ok, they failed based on 2013, but have restored their capital already” outcomes. So I was quite surprised that especially for some Italian banks, the situation became quite difficult (esp., BMPS and Banca Carige). In my opinion this indicates that the ECB will not be a “lame duck” regulator, which in the long run is good news for the Euro zone despite more short-term issues. Plus, as Draghi is alway accused of helping the “Club Med” countries, this outcome shows that this is not the case.

Overall, despite all the negative opinion about the Eurozone, my opinion this is a very important and constructive step to get the “financial plumbing” right within the Euro zone. If and when this leads to a revival is another question but personally I think that the public opinion is underestimating what is actually being achieved here.

The second but more personal stress test was clearly the sudden drop in equity markets in mid October. Especially for the US market, this was the biggest drop since 3 years or so. I guess for many investors this was quite “spooky” as there was no apparent reason. In my opinion, a potential reason for this kind of volatility is the fact that many people who are owning stocks now shouldn’t own stocks. Buying stocks because the dividend yield is higher than the yields on deposits sounds good at first, unless your shares suddenly drop 10% or more. Often such investors are called “weak hands” because they sell just because of a drop in the share. After the financial crisis, many “weak hands” stayed out of the market for quite some time but are now returning mostly because of the low-interest rates.

Normally I don’t give general investment advise, but here I make an exception. Two points of advise to investors:

1. Don’t buy stocks because of the dividend yield
2. Stress test yourself: If October made you nervous, or you can’t afford your stocks dropping 10%,20%,30% or more, then you maybe shouldn’t be in stocks at all

I have clearly no divine insight where the stock market will go in the future, however we should expect the ride to be quite bumpy.

R. Stahl (ISIN DE000A1PHBB5) – Another “failed take-over” special situation ?

Usually, I try to stay away from a “true” Merger Arbitrage as this is mostly a typical “shark tank” situation where as a small investor, the chances are pretty high to end up as shark food. However the situation when a first attempt fails and the price pulls back, it could be more interesting. In cases such as Rhoen Klinikum ,the interesting aspect is that suddenly the “true” value or “control price” of a business is revealed when a bid is made. With this information, one can more easily calculate the odds and expected returns.

The attempted take-over of R. Stahl by closely held German company Weidmüller was a special case anyway. In April 2014, German company Weidmüller made an “unfriendly” offer to all R. Stahl shareholders offering 47,50 EUR under the condition that 50% of shareholders accept the offer. Later, they increased the offer to 50 EUR, which was significantly higher than the “undisturbed” price of around 34 EUR.

The strange thing about the offer was the fact, that 51% of the company is held by the heirs of the founding family and further 10% is held by R. Stahl themselves. The families directly commented that they won’t sell and of course R. Stahl’s management was also not a big fan of this transaction, so the Treasury shares were out of question as well.

Not surprisingly, on July 4th, Weidmueller released that the offer has expired as only ~17% of shareholders have tendered their shares.

R. Stahl as a company

Let’s take a step back and look at R. Stahl as a company. In my opinion, R. Stahl is one of the typical “hidden Champions” of the German “Mittelstand”. They specialize in electrical installations within potential explosive environmenta (chemical plants, gas/oil etc.). The company is financed “rock solid” and has shown good growth in its core business for quite some time althoughresults did not fully trail rising sales.

I actually owned R. Stahl back in 2003 when it was a turn around case. I do have prove for this as I opened a discussion thread at “wallstret:online” back in 2003 when the stockprice was around 5 EUR per share and which is still active. I sold at 17 EUR and thought I was a genius and missing the next 100% in 2 years…

R Stahl does not look too expensive. Although P/E is around 19, EV/EBIT and EV/EBITDA look pretty cheap. EV/EBIT of 7,3 for instance is pretty cheap and is not even adjusted for the 10% treasury shares which should be deducted from EV. The latest quarter didn’t look that good as R. Stahl suffers to a certain extent from the lower Capex of its mein customers, oil and natural gas companies.

R. Stahl was actually on my watch list after the fell in the beginning of 2014 however the Weidmueller offer came before I could look more closely into the accounts.

Back to the failed Weidmueller offer

So the question is: Why did Weidmüller make this offer anyway? To be honest, I don’t know. I researched a little bit and it seems, according to some newspaper articles (for instance here), that Weidmüller had contacts to the family before and that maybe the families are not such a “solid block” at all. In this other article there is an interesting comment that chances were not so bad after all as family controlled companies are more open to sell to other family companies like Weidmüller. They also mention “Phoenix Contact” as another potential buyer.

The combination of Weidmueller and R. Stahl seems to make some sense as this interview with the Weidmüller CFO clearly shows. It was clearly not a cost cutting project but a growth project.

Interestingly, the stock price did not retreat to the “undisturbed” level, but is hovering around 41 EUR, clearly above the level before the offer.

Q1 numbers which were issued after the first Weidmüller offer did not look so good, so this is not an explanation for the still elevated stock price.

Is this interesting ?

A very simple way to look at this is making the following assumptions:

– something is happening within 1 year, either deal or ultimately no deal
– the “undisturbed” price is EUR 34.
– the control price is 50 EUR per share
– I want to make an expected return of 15% p.a.

Then I can solve for the implict required probability of a 50 EUR deal happening within 1 year:

41*1.15 = (Prob*50) + (1-Prob)*34 or (41*1.15-34)/16 = Prob

Based on those assumption, I would need to apply a 82% probability in order to have a 15% expected return on investment. I think this is much too high for my taste.

At the moment, I would assume that there is a 50/50 chance. With this assumption, I can calculate my required price level where the stock gets interesting.

This would be then the follwoing calculation:

0,5*34 + 0,5*50 = Price *1.15 = 36,52 EUR. So at 36,52 EUR per share I could get an expected return of 15% with odds at 50/50.

Now we can make another assumption: Let’s assume we are still at 50/50, but we assume that any acquirer has to pay more than 50 as the 50 were clearly not enough. So lets say 55 EUR. Then my target price would be around 38,69 EUR per share where I would be prepared to buy.

In reality, of course the outcome will not be so binary, but I think this framework is a good way to get a feeling for an intersting entry point. For me, the current price level of 41 EUR is a little bit to high, but I think this could be interesting around 38,50 EUR as a special “failed M&A” situation.

Activist angle

There is a further interesting angle. A smaller, but in expert circles well known investor (Scherzer) has released an “open letter” to the management and board during the offer period. There they critize that from the beginning Management and board were against the offer despite the fact that they are obliged to work for the benefit of all shareholders and not only the founding family. The letter contains some other interesting info, such as that the Head of the supervisory board had actually sold shares in the market before etc. etc.

The target of this letter is clearly to put pressure on the family in order to “Motivate” them making an offer to minority shareholders at the “eidmueller” price. I am not sure how the chances of success are here, but this could increase the odds towards an “event” as described above. I am not a lawyer, so I cannot fully judge if the potential legal issues mentioned in the letter with refusing the offer are enough to build a case against them but it clearly increases the leverage.

The question for me is: Does this move the “needle” far enough t justify an investment at the current price of 41 EUR ?

Summary:

Although the failed R. Stahl offer is clearly different from my succesful Rhoen investment, the situation itself is interesting. However for my taste, the current price of 41 EUR is a little bit to high compared to the undisturbed price of around 34 EUR in order to justify an investment. For me, this would get very interesting at a price of around 38-39 EUR at the curent stage. I will watch this one closely…..

Performance review February 2014 – Comment “Is small still beautiful ?”

Performance review:

In February, the portfolio performed +2,7%, which is -2,5% lower than the Benchmark (25% Eurostoxx 50, 25% Eurostoxx small, 30% DAX and 20% MDAX). YTD, the portfolio is up +6,5% vs. 3,2% for the Benchmark.

Main contributors for February were G. Perrier with +22,5%, TGS Nopec with +16,9%, SIAS with +10,4% and IGE & XAO +7,1%. Major looser was Cranswick with -5% (in EUR) and Vetropack (-2,8%).

Portfolio transactions

If I look at my transactions in February, I almost feel like a high frequency trader: I sold the final Rhoen Klinikum position as well as EMAK and SOL. I increased positions in MIKO and TGS Nopec and finally I invested in 3 (!!!!) new stocks: Energiedienst, Koc Holding and Ashmore. Cash is now at 13,5%.

The current portfolio can be found here.

Comment: “Is small still beautiful ?”

2014 again showed the usual pattern in the past few years: Small and Midcaps outperform everything else by a wide margin. This is how the constituents of my own benchmark performed YTD:

Perf. YTD
Eurostoxx50 (Perf.Ind) (25%) 1,51%
Eurostoxx small 200 (25) 8,06%
DAX (30%) 1,46%
MDAX (20%) 1,91%

So European small caps seem to be THE hot asset class. A long time ago, when I went to university (early nineties), I still remember when the finance professor talked about efficient markets. He didn’t believe in them and one of the example quoted was the famous “small cap” effect, the “fact” that small caps over the long run perform better than large caps.

Looking at most markets today, the history speaks for itself. Just look at the Charts:

S&P 500 vs. Russel 2000

or even more drastic: Dax vs. MDAX

Back to the “old times”: When I started to work for a financial institution in the mid nineties, one of my job was to monitor and explain the performance of a German small/mid cap fund. Every Quarter or so, I had to explain why again the fund had underperformed the DAX by a wide margin and the fund was finally closed end of 1999. Just to give an indication how badly Midcaps performed in this period: From the end of 1994 until end of 1999, the DAX performed ~26,4% p.a. against the MDAX with 10,6%, an underperformance of -16,4% p.a., or in absolute terms +221,96% against 65,55%. No matter what academia would say, the decision makers were tired of looking stupid and pulled the plug.

Consensus at that time was that in the age of globalization, the big international companies would be the stars and the small companies would be crushed. We all know how this story ended.

Let’s look at some more recent numbers: Since the end of 2009, the MDAX has performed 21,5% p.a. vs. 12,4% p.a. for the Dax. The French Small&Mid Cap index has performed 13,9% p.a. vs. 5,95% for the CAC in the same period. So again, many “asset allocators” are faced with a situation, where the logical thing to do is to allocate as much as possible into the much better performing asset class.

However, this past performance is only one side of the medal. Let’s again look back and look at something else this time: Valuation

When my employer at the end of the nineties decided to pull the plug of the small/midcap fund, the DAX was trading at a P/E of 32 vs. the MDAX at 16. Interstingly enough, the situation now is just the inverse: The MDAX now trades at 28 times earnings against the DAX at around 16 times. The situation looks similar in other markets. The Russel 22000 for instance trades at ~50 times 2013 earnings against 17x for the S&P 500. Of course, profits in small and midcaps could continue to grow much faster than in large caps, but at current valuation levels they have to grow much faster than for large caps in order to justify their valuation.

There seems to be so much money flowing into small caps at the moment that even the weak companies enjoy their day in the sun. So what to do now ? Chase the few remaining “cheap” small caps and hope that they get pushed up by the momentum ? Or exit completely ? I don’t know, but for instance European small caps have almost completely disappeared in my BOSS score database from the “attractive” bucket. The few remaining ones are rather “deep value” cases.

In any case, one should be very careful with small caps going forward. Based on current valuations, profits at most small cap companies (Europe and US) would have to increase really strongly in order to be able to produce additional outperformance in the next few years. There might be a few remaining opportunities, but overall “the air is getting thinner”. We will see how this plays out, but experience shows that multiple expanions will stop at some level and then usually reverse quite drastically and for long time periods. So be careful with small caps. Maybe “big is beautiful” might come again….

Performance review January 2014 – “Taking responsibility”

Performance:

January was a very good month for the portfolio. The portfolio gained 3.68% vs. -1.86% for the benchmark (New benchmark since 1.1.2014: Eurostoxx 200 Small 25%, Eurostoxx50 25%, Dax 30% MDAX 20%).
Major positive contributors were April SA (+12,8%), Cranswick (+10.2%), Installux (+9.6%), Draeger Genußscheine (+8,0%) and Hornbach (+7.1%). Overall, the portfolio benefited from a January small cap effect more than anything else.

Portfolio transactions:

As discussed, I sold the entire Celesio position. Additionally, I started to sell down a quarter of Rhoen at around 21.95 Eur. On the sell list as well is the remaining stake in EMAK. Unfortunately the January effect did not help the EMAK share a lot.

Cash is currently at 15.6% of the portfolio. The portfolio as of January 31st can be found here.

Comment: Taking responsibility

Currently, two complete former management boards of two infamous German banks are standing trial. In both cases, HypoReal Estate and BayernLB, the boards made large acquisitions just before the financial crisis (Depfa, Hypo Alpe Adria) which turned out to be disastrous and sank both banks.

Of course, both boards and CEOs do not see themselves responsible for what happened. Hypo Real Estate’s former boss Funke blames the former German Finacne Minister Steinbrück for everything, the BayernLB CEO Kemmer blames of course the financial crisis for everything.

Taking credit personally for success and blaming others for failure seems to be common today in most management boards. As an investor however this kind of behaviour is very dangerous in many ways. In order to compound wealth long-term, investors need to avoid mistakes much more than trying to pick the next Apple or Google.

Blaming others for bad investments is in my opinion a sure way NOT to compound well in the long run. Blaming others and not oneself increase the risk that the same mistakes are made over and over again. Clearly, luck plays a big role in investing as well, but in the long run skill and especially the avoidance of “Unforced error” will dominate luck.

A good example is the current Prokon “scandal”. Many people now are blaming the German authorities that they didn’t step in and closed the scheme long ago. No, it was not the fault of the investors, which ignored all the warnings, it was the fault of others. Thinking like this leaves the door wide open for the next Ponzi scheme and then the next and the next etc.

If I make a (big) loss with an investment, my first question always is: What did I do wrong ? What did I miss ? Did I ignore facts or did a fall into a behavioural trap ? Unlike a CEO, the only person I can possibly fool is myself, so no need to blame the financial crisis, incompetent politicians, bad weather etc.

The same goes for greate investments. One should also ask oneself: What part was luck and what was skill ? History is full of failed investors which made one lucky trade and then lost it all because the thought that they actually knew what they were doing. The Celesio trade is a good example. Yes, I made a quick nice profit, but my initial assumptions were wrong. So instead of thinking: Hey, merger arbitrage is easy, I should ask myself if this is really a game I should play in the future as I do not seem to have better insights than anyone else.

So to make the long story short: For long term investment success, it is far better to take the opposite strategy of a typical Bank CEO: Take full personal responsibility for failures and only partial credit for success. I will almost guarantee that this will lead to a much better outcome than the typical “Bank CEO” approach for your personal portfolio.

Celesio – why merger arbitrage is hard business

Let’s start with a few quotes from yesterday’s post:

a) It is almost 100% assured that the bid goes through, there is now a “floor” under the stock price at 23,50 EUR

and

I have written above that this was a “Low risk” bet. In reality, I do not know if it was high risk and I was very very lucky or if it was indeed low risk. In statistics, one would call this a “beta error”, assuming that one was right but in reality the probabilities were very different. For me the best way to handle this is to do only small “bets”, keep track of assumptions and outcomes. Systematic “beta errors” in investing in my opinion are very dangerous as this will inevitable lead to some disastrous outcomes in the long run (Bill Miller).

Very rarely, one gets such a direct feedback from the market. McKesson said yesterday around 7 pm that they did not reach the 75% threshold and dropped the bid.

So this was clearly no a low risk M&A arbitrage situation but a high risk one and I was very very lucky to exit just in time.

McKesson themselves seems to be surprised as well:

“This is fresh news to us. We obviously had the support of the management team, we had the support of the family, which obviously was a significant holder, we had the support of Elliott, which was one of the vocal players in this process,” he said. “The best I can speculate is that people either forgot the tender date or they somehow believed that there is more on the other side of this.”

Let’s quickly check the facts:

In their 9th notification, dated January 9th, 2 pm, McKesson reported the following:

As of the Notification Reference Date, based on the regular conversion price, the aggregate number of Celesio-Shares held by the Bidder and/or persons acting jointly with it plus the number of Celesio-Shares for which the Takeover Offer has been accepted plus the number of voting Celesio-Shares which can be acquired through instruments pursuant to section 25a WpHG amounts to 106,213,544 Celesio-Shares; this corresponds to approximately 62.44% of the currently issued share capital and the currently existing voting rights in Celesio. In relation to the acceptance threshold in section 13.1 of the offer document the aggregate number amounts to 107,617,021 Celesio-Shares, which corresponds to approximately 52.94% of the share capital and the voting rights in Celesio on a fully diluted basis.

This was a significant increase against the 44,88% (fully diluted) a day before.

How much did Elliott own ?

This is from their official “recection” notice as of December 23rd:

Elliott Associates, L.P. and Elliott International, L.P. together with affiliated entities (“Elliott”), which own or have an interest economically equivalent to over 25% of Celesio AG (1)
(1) Calculated in accordance with Section 25a of the German Securities Trading Act (Wertpapierhandelsgesetz/WpHG), in connection with Sections 21, 22 and 25 WpHG

Elliott did report surpassing the 25% threshold in late November 2013.

If I read this correctly, they owned 25.1% on a non-diluted basis.

So let’s do quickly the math with what we have available:

  Undiluted Diluted
McK 107,617,021 62.44% 52.94%
Elliott 42,803,603 25.16% 21.06%
Total   87.60% 74.00%
       
Celesio      
Shares undiluted 170,100,000    
Shares diluted 203,281,113  

So this is interesting: Even with Elliott tendering its full stake, McK was still short 1% to their threshold on a diluted basis.

Could it be that this whole thing was just an accident ? No super-clever play by Elliott but rather a stuoid one ? Were other people assuming like myself that the offer period would be extended ? I don’t know, but I think it would have been better if MCK had said something about the offer period.

Looking back at the Rhoen chart after the first bid failed, one can expect the stock price to be very very volatile:

Anyway, I will watch this from the side line and will be extra carefull with the next M&A arbitrage situation….

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