value and opportunity

Last year, I had a couple of posts about preference shares in general (part 1 and part 2) and spreads between German common shares and pref shares in particular (here).

II looked at a post of Valuation Guru Damodaran, who tries to come up with a theory of explaining the spreads between votung an non-voting shares.

Among other factors, his assumption is that shares with voting rights should generally trade at a premium and c.p. the premium should be higher for badly managed companies where a change of control event is likely.

When we looked at German pref shares, we could see that in certain cases this held up but not in general.

How do spreads look right now ? Let’s look at current spreads from quoted German companies with both, common and pref shares compared to last July:

Company	VZ	ST	Current spread	old	Delta
MINERALBRU UEBERKING-TEINACH	6.81	12.04	76.8%	100.0%	-23.2%
METRO AG	27.43	29.64	8.1%	52.4%	-44.4%
MAN SE	60.1	83.52	39.0%	47.3%	-8.4%
BAYERISCHE MOTOREN WERKE AG	44.85	69.04	53.9%	46.9%	7.0%
SIXT AG	13.24	15.63	18.1%	27.3%	-9.3%
FRESENIUS MEDICAL CARE AG &	44.9	54.71	21.8%	17.4%	4.5%
EUROKAI KGAA	20.35	25.542	25.5%	15.5%	10.0%
WMF*WUERTTEMEB METALLW-AKT	29.2	32.5	11.3%	7.1%	4.2%
SARTORIUS AG	39.84	36.083	-9.4%	-1.9%	-7.5%
RWE AG	30.565	32.605	6.7%	7.3%	-0.6%
DYCKERHOFF AG	31.77	30.01	-5.5%	4.1%	-9.6%
BIOTEST AG	38	39.51	4.0%	3.3%	0.7%
AHLERS AG	10.401	9.86	-5.2%	-0.5%	-4.7%
EFFECTEN-SPIEGEL AG	12.29	12.749	3.7%	1.4%	2.3%
KSB AG	442.05	483.1	9.3%	-1.4%	10.7%
HUGO BOSS AG -ORD	76.01	68.02	-10.5%	-9.2%	-1.3%
VOLKSWAGEN AG	142.6	127.6	-10.5%	-9.2%	-1.3%
FUCHS PETROLUB AG	38.075	34.29	-9.9%	-13.1%	3.2%
HENKEL AG & CO KGAA	47.31	40.1	-15.2%	-17.4%	2.2%
DRAEGERWERK AG	70.66	53.58	-24.2%	-21.2%	-2.9%

Most interesting is the developement at Metro, where spreads between prefs and common shares almost disappeared. The most prominent example against Damodaran’s theory, BMW (well managed, no chance of change in control) even increased it’s spread.

If we look at BMW again, we can see that after a some tightening, the spread is almost back to it’s peak:

Personally, I don’t really understand this. Of course liquidity is better for the common shares and they are in the DAX, but a 50% higher valuation for the common shares with a controlling shareholder family who does not want to sell doesn’t make sense.

Another intersting idea from Thomtrader are Hyundai Motors pref shares.

Hyundai pref shares (3 different series) trade at around 48-60 k Won against 220 k for the regular shares. That is a ratio of ~4-5:1, a massive discount. Again, this can not be explained through “conventional wisdom”.

If we look at the historical spread between the pref shares and the common Hyundai Motor shares, we can see that historically they were correlated quite well but are now diverging since the last couple of months:

Although I do not want to own them outright, a long Hyundai Pref short common shares trade looks interesting. One could buy 4 Pref shares and short (I don’t know if this is possible in reality) 1 common share.

Historical correlation is around 0.85, not perfect but Ok. The nice thing is that we have a good carry of ~ 3 pref dividends, which translates into a “carry” of around 7% for the nominal position (in hedgefund lingo) before borrowing costs, non-frefundable taxes etc..

Again the “Volkswagen” risk of shorting common shares should be relatively small as it is yet to be proved that anyone can take over a Korean Company.

This is a trade I am actually considering is another “capital structure” trade similar to the Draegerwerke long/short.

UPDATE: I just saw that there are single stock futures traded in Korea. I am not sure if a private investor can trade this but as an institutional invetsor, this should be possible.