Tag Archives: Charlie Munger

Buffett & Munger on Cost of Capital: Don’t listen to what they say but look at what they do

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After bashing David Einhorn for his Consol Energy WACC assumption last week, by chance I read at the very good 25iq blog an article on how Buffett and Munger publicly speak about those things.

Indirectly, this is clearly a slap in my face because even the headline already says it all:

 

Why and how do Munger and Buffett “discount the future cash flows” at the 30-year U.S. Treasury Rate?

The post summarizes what Charlie and Warren have said over the years with regard to cost of capital and discounting. I try to summarize it as follows:

  • They seem to use the same discount rate for every investment, the 30 year Treasury rate
  • in a second step they then require a “margin of safety” against the price at offer
  • they estimate cash flows conservatively
  • Somehow Buffet seems to have a 10% hurdle nevertheless
  • Buffett compares potential new investment for instance with adding more to Wells Fargo

So if Buffett doesn’t use more elaborated methods why should any one else ? Was I wrong to beat up David Einhorn because he used a pretty low rate for Consol Energy ? Add to this Mungers famous quote “I’ve never heard an intelligent cost of capital discussion” and we seem to waste a lot of time here, right ?

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Book review: “Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger” – Janet Lowe

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The success story of Berkshire for a long time has focused only on Warren Buffett, the front man with the knack of explaining even the most complicated issues in a funny and folksy manner. Charlie Munger was for a long time only considered to be the “funny side-kick” who seems to be asleep most of the time during Berkshire’s annual share holder meeting.

This changed somehow in the last few years, among them the excellent “Poor Charlie’s Almanack” from Peter Kaufmann and there seem to be a couple of Charlie Munger books already released or in the pipeline.

So I was pretty surprised that there is a much older book about Charlie than the others. “Damn Right” was written and released in 2000 and is based on many interviews, some with Charlie Munger directly but also with his family and former colleagues and friends. 2000 was a year where many people thought that Berkshire had lost it, maybe one reason why the book didn’t become more well-known.

The book starts slowly with some stories on his parents and grand parents but gets more interesting pretty quickly. Munger started early on as a lawyer but discovered that he can make more money by being a real estate developer and started buying plots, building and selling apartments and houses. He then started to buy parts of or whole small companies. For a very long time he did so as a pure “Graham investor”, picking up bargains or even net nets.

Munger then started Munger Wheeler in the 60ies but was already discussing investment ideas with Buffett over the phone. He also invested together with Buffett and another Californian investor and friend Rick Guierin (One of Buffett’s “Superinvestors”) into the same companies sometimes even closely held ones. The most famous common acquisition of this time was the Blue Stamp company.

Wheeler & Munger performed greatly from 1962 to 1969 but did badly the next few years when Warren Buffett hat already closed his partnership. Munger dissolved the partnership in 1976 but still had a track record of making ~24% p.a.against 6% p.a. fr the Dow Jones.

The changing point in his history is clearly the purchase of See’s where they paid, for the first time in their history, above book value for a company. Munger is quoted that they would not have bought Coke if they hadn’t started with See’s.

After that the book covers some of the major Berkshire stories but with an interesting perspective. For me the most surprising facts from the book were:

– Munger and Buffett were fined by the SEC in 1974 (WESCO)
– Munger’s Partner had the original See’s Candy idea
– Munger was a “Graham style investor” for a very long time
– there were really big draw downs in the Munger partnership

Interestingly enough, the book says that already in the late 90ies, Munger wasn’t involved that actively in Berkshire anymore. For me the question always remains: Would Buffett had been as succesful without meeting Munger or would he would have become “just another succesful” investor ? Who knows.

Overall the book is definitely a good read for any value investor and tells most of the Berkshire story from a slightly different perspective. HIGHLY RECOMMENDED.

Updates: MAN SE & Sold Trilogiq

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MAN SE “Special situation”

In November 2013, I entered a special situation investment with MAN AG, arguing that the proposed compensation payment of Volkswagen might be too low and the court may decide to increase it.

Last week, the Munich court now decided to increase the compensation payment from 80,89 to 90,29 EUR. This is less than some investors hoped for, in the past 100 EUR or more were assumed to be realistic.

In my understanding, together with regulatory required interest and minus the already paid annual amounts, the fair value of the MAN share is around 95 EUR which is where the stock trades at the moment.

At ~95 EUR, this results in a yield of approx. 13,5% over 18 months, not spectacular but with very low risk as we can see in the chart:

I don’t think that there is much further upside although some hedge funds seem to be keen to get even more. I will wait and see but I think I will exit the position rather sooner than later.

Trilogiq

Trilogiq is a stock which I bought 2 years ago as a potential “hidden champion” and based on very good historic profitability.

However, pretty soon after I bought, things turned south. The official explanation was that they introduced a new product made out of graphite instead of the metal tubes they used before which should replace most of the existing installations. Sales went down by around -7% in 2014 against 2013 and profit halfed.

Lats week, Trilogiq released 2015 numbers (Year ends at 31.03.).

At a first glance, things seemd to have picked up sligtly. Sales are up slightly and also profit is up from 0,94 EUR per share to 1,06 EUR per share. Cash and Cash equivalents are at a healthy 23,7 mn EUR or ~6,35 EUR per share.

At currently 15 EUR per share, this results in a P/E ex cash of around 8. Still very cheap.

At a second glance however, things don’t look as good. The operating result (EBIT) actually deteriorated by -17% from 4,9 mn EUR to 4,1 mn EUR. Only a swing of +1,1 mn EUR in the financial result driven by FX gains led to a higher EPS.

What irritated me even more was that in they mention in this document that only 7% of sales in FY 2015 were the new graphite products. They way they presented it before one had the impression that more or less the majoriy of sales would have been switched.

Although the second half year looked better than the first, I do think that they have some fundamental problems in their business. Many of their clients (EADS, German automakers) work at full capacity and many automotive suppliers are doing very well.

At Trilogiq however, this is not the case.The US business for instance shrank if one accounts for FX movements. Wages and Salaries increased significantly, not really a sign of tight cost control.

Overall it is not easy to understand what is going on because they don’t provide a lot of information.

My initial thesis relied on the implicit assumption that if their clients are doing well (EADS, automakers), Trilogiq should do well. It looks however that this is not the case and Trilogiq does have individual issues.

As a consequence, I sold the position in the last few days at an average price of 15 EUR per share, realizing a loss of -17,88% against my purchase price as I do not have any visibility on what’s going on at Trilogiq.

It still could be that Trilogiq could be a good value investment as it is still cheap but now it looks rather like a potential turn around case which is very different from the assumed “hidden champion” I was hoping to invest in.

18 observations from Berkshire’s 2014 annual report

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Just an upfront note: I have written down those items while reading the 2014 annual report for the first time. Usually I read them at least twice. This year’s report contains a 4 page letter from Charlie Munger (page 39), nicely summarizing the “Berkshire system”. Overall, Buffett and Munger seem to emphasize in this year’s report that they see a great future ahead for Berkshire, even without them on board.

I would recommend anyone to read the annual report first before reading any comments from secondary sources. It is a lot to read but it is definitely worth your time.

My personal take is that it will be extremely hard for any succesor to fit into Buffett’s (and Munger’s) shoes. This company was built by and around two geniuses. Yes, the “Berkshire system” does have some enduring qualities but combined with the size of the company, it will be extremely hard to deliver outstanding performance ging forward.

Call for comments: Comments from my readers about what items you did find especially noteworthy would be highly appreciated !!!!

1. 50 year history

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My five (Value) cents on Whatsapp: Network effect meets Lollapalooza

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No breaking news here, the acquisition of Whatsapp by Facebook for 19 bn USD has been widely commented already many times.

Some of the more notable comments were:

Damodaran looks at it from a value and trading perspective and sees only merit as a trade

John Hempton feels “out of tune with the time” about the deal becasue the Facebook stock didn’t fall after the announcement

Henry Blodget has a slightly more positive take on the deal

What those comments have in common is that they all look at Whatsapp as another social media app like Twitter, Tumblr etc. In my opinion and my experience, Whatsapp IS NOT a social media app, at least not intentionally.

Whatsapp is so successful because it offers two big advantages for users:

– its cheaper than traditional SMS
– it is also much easier to use (nicer smileys, you can look if someone is online, easily send pictures etc.)

In my opinion, Whatsapp only “accidentally” became something like a “social media” platform as it allowed group communication more easily und unobserved compared to Facebook. If you use facebook nowerdays, efficient communication among friends is not that easy any more with all those crappy “likes”, advertising etc.

Back to Whatsapp “roots” as an SMS killer: There was an interesting article on Bloomberg.com about the amounts lost by mobile carriers due to Whatsapp & Co with the following estimates:

Free social-messaging applications like WhatsApp cost phone providers around the world — from Vodafone Group Plc (VOD) to America Movil SAB (AMXL) and Verizon Communications Corp. — $32.5 billion in texting fees in 2013, according to research from Ovum Ltd. That figure is projected to reach $54 billion by 2016.

So instead of thinking about a “social media app” one could also think of Whatsapp as a “Mobile communication company” which concentrates on a very specific part of the value chain of mobile phone carriers.

After the initial euphoria, mobile telecommunication has not turned out as such a great business as one would have thought. The high capital required for licences, tower infrastructure, retail outlets etc. plus the regulation has turned the business pretty much into a commodity business. As in many commodity business like car insurance etc., the carriers tried to discount their main offer as low as possible and then charge all different extra stuff, especially SMS. There was for instance a “scandal” in Germany, when providers let people especially kids, send SMS although the prepaid money was already used up. Many parents then were surprised when they then got extra bills or had to load unexpected high amounts in order to get the phone working again.

So one can imagine how quickly especially kids or poorer people with limited prepaid budgets (but a data plan included) adopted a free service like Whatsapp. This also applies to generally poorer countries where mobile phone expenses use up significantly higher shares of total budgets than for instance in Germany or the US.

Compared to the full value chain of mobile carriers, a texting app requires almost no infrastructure, no retail outlets etc. You can easily rent cloud processing capacity for very small money from Amazon on a variable basis and scale up if you need more.

Similar cases: Mobile phone contract resellers

A very similar business model is that of the classical mobile phone contract “reseller”. Freenet AG for instance, a German mobile phone “reseller” managed to get a 3 bn market cap just by reselling plans from existing mobile phone Providers.

Compared to moble phone carriers, this business is clearly attractive as one doesn’t need to buy the licences ec. Compared to Whatsapp however, the business model looks rather shitty as you need to advertise constantly, prefund the phones, maintain a retail outlet etc. And remember: This 3 bn market cap has been achieved with “only” 8.5 mn clients in one country. If Whatsapp for instance would decide to go into reselling, they could make live difficult for those guys as well.

No cashburn

What I found also very interesting is the fact, that Whatsapp didn’t burn a lot of cash. According to some articles, Sequoia capital only injected 58 mn UD in total “outside” capital. So this is another big difference to many other internet or social media companies: very little “cash burn”. I guess one reason is that they didn’t need to make a lot of advertising. As the reputation of mobile phone companies is bad enough, their service was just such a “No brainer” or “killer app” for many that it went “viral” without spending any money on advertising. I am not sure if they have to pay to Google or Apple for the app stores, but overall, distribution cost seemed to have been quasi non-existent.

Moat /network effect

In another comment on Slate about the Whatsapp deal, the author says the following:

The different pricing schemes they come up with are just different ways of trying to maximize the value they extract from consumers. In a world without WhatsApp, selling SMS separately from data is the best way to do that. Then along comes WhatsApp to exploit a hole in the pricing system. But if WhatsApp gets big enough, then carrier strategy is going to change. You stop selling separate SMS plans and just have a take-it-or-leave-it overall package. And then suddenly WhatsApp isn’t doing anything.

I can clearly not look into the future but there are some obvious mistakes in that argument for instance:

1. Big companies hate to cannibalize itself. Whatsapp is already big enough but they haven’t done anything because more often than not, it is “easier” being cannibalized by someone else than by a guy or a division within the own organization
2. Anyone using Whatsapp will not go back using SMS again. Only few people prefer to live in the stone age if they have a choice
3. Although it was easy and cheap for Whatsapp to get to this stage, it is not as cheap and easy for any potential competitor to achieve critical mass. Absent any further technological break through, the “network effect” of the established leader will make it extremely expensive for any competitor to “scale up” in this business. In a sector where the network effect is so string, the “barrier to entry” increases tremendously if there is a dominating player with a large market share.

Especially the last point is important in my opinion. As long as this segment is growing, it makes a lot of sense for Whatsapp to provide this service as cheap as possible in order to avoid making it attractive for other competitors. Especially as it doesn’t seem to cost a lot of money to run it for a couple of hundred million people, they have a lot of time to actually increase profits.

Oh, and by the way, forget about that shitty Blackberry messenger app, this won’t save them (see number 3 above).

Lollapalooza effect

Warren BuffetT‘s “sidekick” Charlie Munger has coined this term. I copy the definition from this blog post:

The lollapalooza effect is what happens when you have more than one bias/incentive acting at the same time. It means the confluence of several themes heading in the same direction to produce a given result which can either be positive or negative. And, as it becomes hugely powerful, it also becomes a major driver of human misjudgment.

The current confluence of at least 4 important “streams” that are mobile communicication, faster internet, smartphones and Mobile micro payment is a good example of such an effect. On a single basis, a “product” like Whatsapp would not even exist. With my old Nokia 6110, I could only send sms and take calls. With my first “multimedia” phone (a Siemens Benq…what was that again ?) I could only surf some specialised web sites chosen by the mobile carrier at a horrendous cost and slow spead. But now, with full and fast internet access, easy to navigate touch screens, app stores and a cheap internet data plans, a couple of guys in SFC can create a product at a cost of 60 mn USD which is used by 450 mn people globally after only 5 years.

Valuing companies in such an environment is indeed very difficult as anything could happen, both to the positive and the negative side. I think we should prepare for much more “killer apps” coming out of this Lollapalooza environment which have the capacity to challenge or even destroy other established business models. And I do not mean only print magazines, Nintendo DS or alarm clocks.

What about the 19 bn USD paid ?

If we look at the Bloomberg article above and i we consider Whatsapp as a mobile communication company, one could make the following calculation:

If messaging really lowers mobile carriers revenues by 56 bn uSD globally in 2016, one could argue (among many other scenarios) in the following way:

– if Whatsapp is responsible for 20% of this, then their “damage” or cost saved for the mobile client is 10.8 bn annual
– if Whatsapp manages to charge 25% of the saved amount at some time, this would mean around 2.7 bn USD p.a.
– as the costs seem to be low (they don’t need to buy licences etc.), a net profit margin of 60% might not be unreasonable

So all in all we would expect under those (maybe too optimistic assumptions) around 1.6 bn in profits. Going back to professor Damodaran, this would be still lower than to justify the paid value:

Whatever the model, though, you would still have to generate at least $2.2 billion in after-tax income from advertising to Whatsapp users to break even.

but still, Whatsapp could turn out to be quite a valuable asset. This does not even include the possibility that Whatsapp moves further along the mobile communciation value chain, like actually handling all communication including calls and “degrading” carriers to exchangeable capacity providers which would be one option.

Now how about Facebook ?

First a short disclosure: I have never owned and will never own Facebook shares, that is on my “too hard pile”.

But overall, I am not sure that Facebook is the best fit for Whatsapp. Facebook didn’t get mobile unless a few months ago and I am not sure if they will get it now. For me, Google would have been a much better fit or even Microsoft or Apple. But again, who knows ? The biggest danger for Whatsapp in my opinion would be indeed if facebook would force a connection with their services or something similar as, in my opinion, Whatsapp IS NOT a social media app but a mobile communication platform with the potential to take out an even larger share of mobile carrier’s revenue in the future.

Summary:

Many people see the 19 bn Whatsapp purchase as a sure sign for a top in the social media hype. Although it might turnout as such, in my opinion Whatsapp itself is a very interesting mobile communication business with the potential to further shaka up this business.

Due to the network effect, Whatsapp has created a huge barrier to entry for any competitor, supported by the fact that they still offer this at basically no cost. The pricing power of Whatsapp in my opinion is much bigger than “social media” as customers clearly understand the savings against traditional mobile carrier charges. Going forward, Whatsapp seems to be well positioned to move even further into the territory of mobile carriers, resellers etc.

The price paid by Facebook clearly looks very rich, but looking at mobile carriers and the implied profit potential rather that social media businesses, it might not be unreasonable. It remains to be seen however what Facebook is doing with this acquisition.

If Whatsapp would be a listed company, I might even forget my traditional value metrics and buy it, maybe not at 19 bn but still, at a “non-value” valuation.

Book review: Poor Charlie’s Almanach – Peter D. Kaufmann

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This was one of my few “souvenirs” from my pilgrimage to Omaha some weeks ago.

The book can be basically divided in 2 parts:

1) The first 150 pages or so is some “Almanach style” collection of quotes, interviews, observation and general concepts of the “Munger style”
2) The remaining part then are transcripts/manuscripts of talks, Charlie Munger had given over the years

The speeches themselves are of course most interesting, as this is Charlie’s original work.

Those are the 11 talks / speeches

1) Harvard school Commencement Speech (1986)
Major concepts: Reliability, inverting problems

2) Talk at USC (1994)
“Worldly wisdom”, combining knowledge from many different areas, multiple mental models
Economics of scale / dumb bureaucracy, specialisation
Airlines vs. cereals, when does technology help or kill a business ?
Incentives

3) Stanford Law School 1996
make systems cheating proof, large companies shouldn’t produce football helmets

4) Practical Thought about Practical Thought (1996)
Mental model, Coca Cola case,

5) Harvard Law School reunion (1998)
Academic multidisciplinary

6) Investment Practices of Leading Charitable Foundations (1998)
Bernie Cornfeld, deficiencies of professional money management

7) Breakfast meeting of the Philanthrophic Roundtable (2000)
“febezzlemant”

8) The great Financial Scandal of 2003 (2000)
Option accounting at Tech companies

9) Academic Economics, USC (2003)
Raising prices often raises sales opposite to classical economic theory

10) USC Law School Commencement address (2007)
constant learning, acquisition of wisdom.LEarning machine”

11) The Psychology of Human Misjudgement
25 psychological “mental models”

At the end of the book, there is also a recommended reading list. The one from Charlie Munger himself can be found for instance here.

Summary:

I think it is a “MUST READ” for any serious disciple of the “Value Investing” School. It is basically the only book where you can find a lot of knowledge about the “number 2” guy at Berkshire Hathaway. For many people, the success of Berkshire is the success of Buffet. I am pretty sure, Buffet would have done well without Charlie, but I would not underestimate the contribution of Munger to the “Later stage” success of Berkshire.

The book is not an easy read and I will have to read it again. Although the author tried to compile it in a coherent way it is clearly not a “Bruce Greenwald” style step-by-step book or a “how to get rich quickly” publication.

One warning: It is a real heavy (1 kilo) big book. I “schlepped” this one back from Omaha and no, I will not take orders if I go to Omaha again next year.

A few more thoughts on KPN (potential deeply discounted rights issue)

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As discussed last week, KPN might become a potentially interesting “special situation” because of its announced massive equity raising.

In any case it makes sense to look a little bit deeper into KPN, even if it would be only a “short-term” special situation invest.

Relative valuation

let’s look at some standard valuation metrics:

Name P/B P/E Dvd Ind Yld EV/EBITDA T12M EV/MC
           
KONINKLIJKE KPN NV 1.88 6.47 3.81 3.80 3.79
DEUTSCHE TELEKOM AG-REG 1.46   8.04 4.28 2.22
BELGACOM SA 2.30 9.45 7.74 4.98 1.26
FRANCE TELECOM SA 0.76 5.63 17.49 3.81 2.60
BT GROUP PLC   9.78 3.26 5.02 1.41
VODAFONE GROUP PLC 1.23   5.67 8.20 1.34
TELIASONERA AB 1.72 9.51 6.56 7.28 1.35
PORTUGAL TELECOM SGPS SA-REG 1.55 17.25 15.71 5.43 3.23
SWISSCOM AG-REG 5.05 11.92 5.49 7.09 1.39
TELECOM ITALIA SPA 0.55   6.39 4.11 3.99
TELE2 AB-B SHS 2.20 13.92 6.91 5.95 1.34
TDC A/S 1.54 8.99 11.23 5.39 1.69
TELENOR ASA 2.53 41.85 4.20 5.65 1.20
TELEFONICA SA 2.19 7.37   5.29 2.41
ILIAD SA 5.04 42.03 0.27 11.09 1.14
TELEKOM AUSTRIA AG 2.53     3.75 2.39

KPN looks relatively cheap based on some metrics, especially P/E and EV/EBITDA. However we can also see that KPN is one of the TelCo companies with the highest debt loads. I used here´EV divided by market cap, but one could also use simple debt/equity ratios.

What is interesting to see is for me that despite the very weak performance of the sector, price/book is still relatively high for most of the companies. I think this is a result of the high dividends being paid by the TelCos which “eroded” book equity.

KPN history

In the case of KPN, things look a little bit different. If we look at this first set of numbers, dividends don’t’ seem to be the problem:

EPS DIV BOOK Value
31.12.2002 -3.94 #N/A N/A 1.83
31.12.2003 1.11 #N/A N/A 2.90
31.12.2004 0.72 0.16 2.69
30.12.2005 0.66 0.40 2.36
29.12.2006 0.79 0.48 2.19
31.12.2007 1.42 0.52 2.51
31.12.2008 0.77 0.56 2.18
31.12.2009 1.33 0.63 2.36
31.12.2010 1.15 0.73 2.23
30.12.2011 1.06 0.81 2.05

If we exclude 2003 (which contained the losses from the 3G licence excesses), KPN paid out only ~45% of its earnings as dividends. So what happened ?

This becomes clearer if we look at the next tabel, which shows free cash flow, net debt per share and outstanding shares:

FCF p. Share Net debt per share Shares outstanding
31.12.2002 1.17 4.99 2,491
31.12.2003 1.08 3.37 2,491
31.12.2004 0.91 2.90 2,410
30.12.2005 1.16 3.82 2,151
29.12.2006 1.31 4.32 2,036
31.12.2007 1.35 5.92 1,843
31.12.2008 1.21 6.32 1,714
31.12.2009 1.23 6.56 1,629
31.12.2010 1.54 7.45 1,573
30.12.2011 1.66 8.46 1,478

So we can easily see that until recently, KPN looked like the classical “anglo saxon style” shareholders dream: Fat free casflows used together with increasing debt to repurchase around 40% of their outstanding shares since 2003.

If you would take Charlie munger by his words, KPN should have been an excellent “Cannibal company”.

Looking at the stock chart, this seemed to help KPN to outperform for instance Deutsche Telekom for a long time, but now finally they both seem to have met at the bottom again:

So one lesson one can learn here is that being a “cannibal” company does not mean automatically that this will be a good investment. Based on a rough calculation, KPN had purchased around 10 bn EUR of its own shares between 2003 and 2011, nevertheless, the market cap of the company remained more or less constant over this period in time.

So looking back, this share repurchase looks rather like a debt financed liquidation than a value enhancing share buy back.

Debt profile

Having so much debt, it makes sense to look at the maturity profile of KPN.

Payments Principal Only
Year Amt(Mln)
2013 1,085
2014 1,400
2015 1,000
2016 1,250
2017 1,000
2019 1,046
2020 1,000
2021 1,250
2022 750
2024 700
2026 473

The table shows, that KPN has quite some debt to roll. So far they still have investment grade ratings (Baa2 from Moody’s, BBB- from S&P). Moody’s has them on negative outlook, S&P on stable.

The problem seems to be S&P. Despite having a BBB- rating on long term debt, S&P has them as “A-3” short term, which is the second worst rating available in the short term rating scale. This means effectively that KPN is shut out of short term financial markets as there are only a very small number if institutions permitted to buy such low grade paper. Even Telekom Italia still has an A-2 rating.

Especially the December S&P report clearly outlines some of the most important weaknesses of KPN. An interesting aspect is that one:

That said, the group is facing intense pressures on its domestic mobile revenues in particular, owing to the cannibalization of consumer revenues by IP-based instant messaging applications.

I have read that several times, that mobile carriers made most of their money with SMS. Now however, applications like “What’s App” are eating their lunch because they just use the internet flat fee, effectively eliminating the need to send SMS. As always, the established players were much to slow to react to this threat and I guess that now it is already to late.

KPN seemed to have identified this threat quite early and according to this article tried to increase fees for those services, but this actually resulted in a backlash called “net neutrality”. So The Netherlands and Chile are now the only 2 countries with full “net neutrality” which means the following:

The new law requires companies providing access to the Internet to treat all Internet services equally. They cannot favor their own services, nor charge extra to access a competitor’s service.

I guess this is one of the reasons why they earn higher margins in Germany as number 4 than as market leader in the Netherlands.

Another interesting point here:
If one reads the S&P anaylsis carefully, their major issue seems to be the 1.5 bn spectrum purchase which they think seems to be expensive. The big question here is:

Why does KPN target 4 bn as a capital increase although the rating agency problem seems to be a lot smaller ?

In my opnion, both the amount and the way to raise capital does not make sense. Why don’t they try to to the same as Telefonica and list a minority stake of their German business on the stock exhange ? With an EBITDA of almost 1.3 bn EUR of E-Plus in Germany, a 49% stake could easily raise 2-3 bn EUR on the basis of the Telefonica Dutschland valuation. This would be more than enough to resolve the rating issue and secure roll over of debt.

After being quite shareholder friendly over the last 8 years or so, suddenly, they don’t seem to care any more for shareholders. This is something which really worries me.

One explanation could of course be that they want to annoy or shake off Carlos Slim as large shareholder. In my opnion, this looks like the most likely reason why they behave in such a way. This howver would present exactly the short term opportunity I would be looking for. Management acting irrationally could open up an interesting sitauation, once the capital increase is being executed.

The other explanation would be that management sees a lot mor bad news coming and want to build up a cushion for big future losses. This would be bad.

Summary:

Honestly, I would not want to own KPN as a long term investment, however I will watch the situation carefully especially if they are going through with a deeply discounted issuance price. If the shareprice than will go down close to the discounted issuance price, there migth be a good “special situation” opportunity.

Lesenswertes – Rückblick KW 24 & 25

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Urlaubsbedingt ein kurzer Rückblick auf interessante Artikel in den letzten 2 Wochen:

Greenbacked is back

WESCO / Charlie Munger Protokoll (sehr lesenswert)

Schöner Value Artikel zu Halford’s (UK)

Interessantes zum Bankia IPO

John Mauldin Ausblick auf das 2te Halbjahr

Wann werden Banken als Investment interessant ?

Swap ETFs fliegen aus den Portfolien großer Vermögensverwalter

Konsumentenverschuldung in Brasilien erreicht erstaunliche Höhen

Wer erinnert sich noch an Myspace ? Das war der erste Versuch von Social Networking. Leider nicht erfolgreich.