Potential opportunities in the Oil and Gas sector
The panic of 1907 (directly from the FED)
A great collection of investing mistakes by famous investment managers
Why Switching Cost is important
Why Apple Pay (or Android Pay) might finally get a chance
Syngenta ChemChina offer
After the failed attempt of Monsanto to buy Syngenta last year, Chinese conglomerate ChemChina made an offer for Syngenta a couply of weeks ago. Other than with Monsanto, the Syngenta board already approved the take over.
The offer itself is as follows:
ChemChina will pay 465 USD. On top of that, anyone who buys Syngenta shares now, will receive the normal dividende of 11 CHF and a 5 CHF special dividend.
If we expect closing at the end of the year, the potential return would be (in CHF) at a current price of 400 CHF:
-400+(465*0,994)+11+5= +77,75 CHF or a potential 19,4% return for 10 months.
This looks very attractive. However the merger arbitrage/event market is a very competitive one and those spread usually don’t come “for free”. So why is there such a large spread ?
US regulatory risk
I guess the most obvious reason is that investors fear that US regulators will try to kill the deal. Syngenta has a signifcant US business. There are several rumors around why the US authorities might challenge the deal, most recently some in connection with the Zika Virus.
The Committee on Foreign Investment in the US (CFIUS) will review the deal because Syngenta, through its US research and production facilities, plays a key role in the US food industry.
The Zika virus problem could force CFIUS’s hand, sources said.
“CFIUS focuses solely on whether an acquisition represents a national security risk,” a Beltway CFIUS expert not involved in the merger told The Post. “I certainly think Zika will be a factor.”
From what I found on the net, the problem is that the CFIUS never really explains their actions, so it is very difficult to judge as an “amateur” what the chances will be. A professional hedge fund clearly has the money to pay for advice, most likely from former members of the CFIUS. This is clearly an information disadvantage form me as small investor.
China FX issues
Another problem I could see is the fact that ChemChina needs to come up with around 44 bn USD in USD financing and this could be difficult if there would be really turmoil in China in the meantime.
They haven’t even refinanced their Pirelli bridge loan yet and at least in the Pirelli case they don’t seem to guarantee those loans:
The new refinancing will be non-recourse to ChemChina, but will have elements of support from Pirelli’s Chinese owner, bankers said.
So I guess the ~20% discount is basically a mixture of regulatory risk and financing/China turmoil risk.
On the plus side, even if the ChemChina deals would fall through, there still could be other players interested such as German chemical Giant BASF.
Is Syngenta then an interesting special situation investment ?
What is bothering me is the following: As I said before, this area is very competitive and Syngenta is a liquid stock (50-100 mn CHF a day) and I do not have any special insights into the situation.As discussed before, I guess I have even an information disadvantage.
The potential downside for a failed bid is at least -25% when we look at what happened after the Monsanto bid:
So if I assume a simple 50/50 probability, my expected value is negative.
Every “event driven” fund is clearly looking at Syngenta which in turn means that they seem to price the risk at the current price and assume a slightly better chance than 50%.
However I clearly have no basis to assume any higher percentage for a succesful outcome.
All in all, in the past it never had paid out to invest into such a situation with an information disadvantage, so I will stay away from this one.
Koc Holding
On Monday, Koc Holding released 2015 results. As always, they have a very decent presentation which nicely summarizes what happened.
Consolidated net income went up +32% in 2015 in local currency. Even including the 2015 depreciation of around -12%, for me as EUR based shareholders, profits increased significantly.
Based on 2015, Koc now trades at around 8,5 times P/E. The discount to a “sum of part” calculation is around 20%, a value which has been relatively stable over the last 2-3 years.
2 Investment book lists: Barry Ritholz and from the beforelosingmysanity blog
Recommended: The 2015 letter of the “TGV Truffle” fund (Aggreko, Rolls Royce, Microsoft, Alphabet. Leucadia)
A good collection of 2015 annual hedge fund letters (h/t Valuewalk)
Some thoughts on American Express and a write up about Nintendo
Why a 1428 year old Japanese company went finally bankrupt
History repeats itself, at least it looks like this in the banking sector at the moment.
Stock prices are dropping like stones and CDS spreads are “exploding”:
Graham & Doddsville Winter 2016 issue (Edit: the Craig Effron interview is a MUST READ)
TGV Partners Fund 2015 letter explaining the Mutui Online investment plus thoughts on Tech stocks and Oil & Gas from a value investor perspective
Cliff Assness vs. Eugene Fama (on momentum)
Pipeline companies, distress, long term contracts and more
The “indiscriminate” sell-off of European Banks (WSJ, google for Headline)
AIG vs. MetLife from Aleph blog
Some fun with probabilities and Russian Roulette
Gaztransport – Dodged the bullet..
Well, that was quick. 2 weeks after I reviewed Gaztransport, they have dislosed the following:
2016-01-29Paris, 29 January 2016 – GTT (Gaztransport & Technigaz) announces that it received today a notification from the Korea Fair Trade Commission informing the company that an inquiry has been opened into its commercial practices with regard to its Korean shipyard clients.
The result: The stock price dropped ~20% in two days:
I am happy to present one of the infrequent guest posts. This time a very interesting general post on RoCE (Return on Capital Employed) and Brand value by contributor Knud Hinkel.
Executive Summary:
The RoCE is an important ratio for value investors. However, as it regularly relies on balance sheet data, the concept is susceptible for at least two inconsistencies: (1) Items on balance sheet are not correctly reflected in the EBIT, and (2) items that contributed to EBIT are not reflected in the capital employed. My hypothesis is that the RoCEs of industries with significant self-created intangibles like consumer and software companies are subject to a systematic upward bias and this might light lead to a wrong judgment of (1) the underlying company performance, (2) acquisitions, and (3) the capital intensity of the business model.
Why drivereless cars might become reality more slowly than we think
A great inside story of a bank trader who was down 200 mn USD on a single oil trade
Rob from RV Capital has released his 2015 letter. +46,7% in 2015 and a new stock: Trupanion
The Punchcard blog on Ackman’s Q4 letter and “platform value”
Rare interview with “Big Short” Steve Eisman
Interesting matrix on relevant types of moats per sector (H/T Valuewalk)
Wertart goes “deep value” in Australia with LogiCamms
“Capital Returns” is an edited collection of investor letters from UK based Marathon Asset Management. Before reading the book,I actually didn’t know much about Marathon.
On their website, they summarize their strategy as follows:
At the heart of Marathon’s investment philosophy is the capital cycle approach to investment. It is based on the idea that the prospect of high returns will attract excessive capital (and hence competition), and vice versa. In addition, an assessment of how management responds to the forces of the capital cycle and how they are incentivised are critical to the investment outcome.
This capital cycle approach is very interesting. As mentioned above, the book has no direct narrative. The investor letters are however clustered together in chapters with similar main topics:
The book is not so easy to read because the letters themselves, despite very well written, are very condensed with a lot of deep insights. I always had to take a kind of a mental break after one or two letters in order to digest everything
Overall, I would characterize their approach as follows:
Essential personal learning experience
The main take away for me was that their supply focused capital cycle model enabled them to see and avoid many of the problems (CDOs, housing, commodities, PIIGS, China) well in advance. Most analysts focus on the demand side only and forget about supply.
This is something to keep in mind for the future. As a bottom up investor, I think their approach can improve decision making without going into useless macro analysis. If you just look at single companies, one might miss some of the overarching issues in the sector (TGS Nopec…..).
Marathon Track record
The question always is: Talk is cheap, how about their returns ? At least from their website, it seems that their funds made 3-5% outperformance p.a. constantly on a 3, 5, 10 and 20 year basis. This is very remarkable for a manager with a couple of billion under management.
For me it was also interesting to see that they not only share many of my personal opinions about investing, but that there is also a nice overlap of companies I find interesting and what they found interesting, for instance Lloyds Banking, Admiral, Handelsbanken and Koc as a well managed family owned company. Clearly there is some “confirmation bias” at work from my side, but still interesting.
Recommendation:
Overall, the book is an essential”MUST READ” for any investor. The major drawback is that it is currently only available as hard cover at around 37 EUR.
The “value option” is to be found on their webpage where they published some of their investor letters for free.
There is also a similar book on the time period from 1993-2002 called “Capital Acocunt” which costs around 80 EUR on Amazon.
Overall, for me Marathon is clearly one of the “Gurus” in investing and it makes a lot of sense to pay attention to what they are doing. Especially if and when they re-enter oil and commodities.
P.S.: the editor, Edward Chancelor has also written one of my all time favourite financial books: “The Devil took the hindmost” from 2000. If you like financial history, this is also a “must read”:
value and opportunity 