Tag Archives: Forced IPO

Landis & Gyr (ISIN CH0371153492): Potentially interesting “Forced IPO” Special Situation ?

Background

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Landis & Gyr, the Swiss based company was on my research “to do” list for some time. Why ? Because it looked very much like a “forced IPO” special situation when in Summer 2017 then almost bankrupt Japanese Conglomerate Toshiba decided to sell Landis & Gyr which was deemed to be one of their crown jewels.

Toshiba itself had bought Landis & Gyr in 2011 for around 2 bn USD from a Private Equity Seller (Bayard) who in turn had bought Landis & Gyr from KKR (via DEMAG), another PE shop in 2004. Back then, Landis & GYr had around 390 mn EUR in sales and it was rumoured that the purchase price was quite low at around 100 mn EUR (those were the days…..).

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Short cuts: Bilfinger, FBD Insurance, ABN Amro IPO

Bilfinger:

It’s “bloodbath time” at least when it comes to accounting. Bilfinger released 6M 2015 figures a few days ago. As often the case with new CEOs, the new one tried to write down as much as possible, in this case ~423 mn EUR or roughly -9 EUR/share:

Charges of 430 million euros ($476 million), including a 330 million write-down of the Power division and 30 million in restructuring costs for Industrial, pushed Bilfinger to a 423 million euro net loss from a profit of 47 million a year ago.

The CEO has sent a letter to all employees, similar to the “burning platform” letter at Nokia some time ago. In Nokia’s case back then it was already too late, let’s see how it works out for Bilfinger. I do think there is some good substance in the company but the transition will be very difficult. For me personally, Bilfinger is still on the “too hard” pile as I cannot judge the viability of the remaining business.

Overall my impression is that the “accounting blood bath” is less aggressive as for instance at Vossloh. I think this has to do with the motivation of the shareholders. At Vossloh, the biggest shareholder Thiele clearly wants to buy more shares at a price as cheaply as possible. At Bilfinger, Cevian clearly does not want to take over the company but rather exit sooner than later.

FBD

I looked at FBD, the Irish Insurance company in January and decided to not invest as a didn’t like a couple of things (non-alignment of incentives, aggressive reserving, stupid investment strategy).

In the meantime, quite a lot happened:

The CEO left, the CFO took over and the stock lost around -50% since then. On monday, FBD issued its 6M report and things look even worse than back then, as at Bilfinger, they created a nice “blood bath”. The Farmer’s journal interestingly has the best coverage for FBD. Here are the highlights from the 6M report:

– the had to increase past reserves by 88 mn EUR (!!!)
– they will sell their hotel JV at book value, the proceeds at Farmer’s side will be reinvested into FBD
– they will go for a subordinated bond issue (50-100 mn)

Overall, the lost over 1/3 of their equity in the first 6 months (from 275 mn to 180 mn). The current equity position includes a retroactively implemented restatement which boosted equity by 30 mn EUR. I honestly didn’t fully understand the reason for this restatement.

Within the 6M presentation, they give the following interesting statement with regard to Solvency II:

JV sales and pension scheme actions take FBD solvency capital levels to the regulatory minimum (~100%)

Debt raise will bolster the firm’s capital buffer, taking Solvency II capital to within the firms target range of 110-130% by December 2015

This clearly shows that FBD is extremely strained from a capital perspective. The biggest unknown in my opinion is how the proceeds of the sold JV will be reinvested into FBD. They don’t comment on that 45 mn EUR at current prices (5,8 EUR per share) would be more than 20% of the company. I don’t know about Irish company laws, but this normally needs to be done on a subscription rights basis. Or the Farmers provide the subordinated capital ?

Anyway for now I still don’t think that FBD is investible, one really needs to understand how the capital increase will be executed. From a positive side, my analysis in January was actually quite good and saved me a lot of trouble. Still, FBD will go on my “focused watch list” as it could develop into an interesting “turn around” case as the underlying business, if run well, is still attractive. I ususally don’t invest into turn arounds but in this case I would make an exception as I consider this inside my circle of competence.

Funnily enough the price adjusted almost directly to the new “book value”. It seems as this is kind of the “anker” for investors.

ABN Amro IPO

The upcoming ABN Amro IPO could be another chance to invest in a “forced IPO” kind of special situation. However, for the time being it doesn’t seem to be a real bargain according to this Reuters article:

The government has said the bank is currently worth about 15 billion euros, just under its just-reported book value, suggesting a paper loss of about a third on the initial share sale. To break even, the bank would need to fetch a valuation of 1.4 times forward book value – higher than rival ING, which trades at 1.2 times.

For a wholesale/corporate/investment bank like ABN I would not be prepared to pay book value, so for the time being I will watch this from the sidelines, unless they come up with a clear discount to book value.

Deutsche Pfandbriefbank AG “forced IPO” – “Superbad” or interesting special situation ?

Management summary:

Oh my god, a bank again…. But Deutsche Pfandbriefbank is actually a pretty simple case: As a “forced IPO” of the good part of Hypo Real Estate, the bank is comparable cheap (P/B ~0,61) against its main peer Aareal bank (P/B 1,0). In my opinion, the risk is limited despite the recent HETA losses as the German Government has absorbed all of the really bad stuff in the bad bank. Similar to cases like Citizen’s, NN Group and Lloyd’s, PBB offers an interesting and mostly uncorrelated risk/return profile for patient investors provided that valuation multiples normalize at some point in time. Positive surprises like M&A are potentially on the table as well.

DISCLOSURE: THIS IS NOT INVESTMENT ADVISE. Do your own research. The author might have bought shares already.

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Special situation: Citizens Financial Group (CFG) – Another interesting “forced IPO” ?

Summary:
The recently IPOed US bank Citizens Financial Group looks like a typical “forced IPO” from a troubled regulated financial conglomerate, similar to Voya & NN Group /ING. The current valuation shortly after the IPO would imply a decent upside (~50%) even if Citizens only manages to become an “average” US regional bank.

Citizen Financial Group went public on September 24th . The story of the US-based lender is similar to the NN Group IPO in which I have already invested.

In this case, parent company Royal Bank of Scotland (RBS), which has been bailed out by the UK government following the financial crisis, is forced to concentrate on its UK business. RBS then decided to ged rid of its US business via an IPO instead of a direct sale to another buyer. It seems to be that there were quite some interested buyers.

Very similar to ING and NN Group, RBS has time until 2016 to sell down the whole stake. That this is not easy was clearly shown as RBS had to price the IPO at 21,50 USD per share, below the inital range of 23-25 USD.

Compared to other regional US banks, the valuation based on book value (and tangible book value) looks attractive:

Name Price/ Book Price/ Tangible Book ROE Current
CITIZENS FINANCIAL GROUP 0,65 1,00 -15,82
REGIONS FINANCIAL CORP 0,79 1,14 7,19
ZIONS BANCORPORATION 0,87 1,05 5,66
SUNTRUST BANKS INC 0,91 1,41 6,38
HUDSON CITY BANCORP INC 0,98 1,01 3,92
KEYCORP 1,07 1,21 8,87
COMERICA INC 1,08 1,19 7,56
FIFTH THIRD BANCORP 1,12 1,35 13,39
NEW YORK COMMUNITY BANCORP 1,17 2,02 8,35
BB&T CORP 1,20 1,82 8,00
HUNTINGTON BANCSHARES INC 1,29 1,44 10,92
M & T BANK CORP 1,37 2,02 10,76
FIRST REPUBLIC BANK/CA 1,73 1,84 13,66
CULLEN/FROST BANKERS INC 1,82 2,43 9,66
SVB FINANCIAL GROUP 1,98 1,98 11,37
SIGNATURE BANK 2,43 2,43 13,26
Average 1,28 1,58 7,70

If we just assume an average multiple, there would be a 50% upside based on tangible book and a 100% upside based on total book value. The problem is of course: in order to reach this multiple you have to earn the average return on equity.

Looking into the IPO filings, we can clearly see that things didn’t work that well in the past. “Normalized” earnings were around 650 mn USD in the past or ~2-3% ROE which clearly would not justify a valuation at book value. Due to the low-interest rate environment, revenues decreased and in 2013, most likely to prepare the IPO, they made a massive goodwill impairment of around 4 bn USD in 2013.

Banks as investments

As there is no shortage of material against banking and the associated risks and evil spirit, I want to outline instead what I do like about banking and this situation:

– Traditional banking in my opinion is a solid and good business if run conservatively and responsibly. Many value investors would never invest in a bank, but I have no problem with this (Mr. Buffet neither as we all know)
– Traditional banking (and Citizens is a traditional bank) profits from higher interest rates. It is easier to put margins on the loan if the nominal rate is higher. So owning a bank is quite a good interest rate hedge
– mid size banks used to have a disadvantage over the large banks, especially with regard to funding. With all the new regulation aimed at the mega banks, I think there is a much better “equal level” playing field. I like good & cheap mid-sized banks.
– I could imagine that being on its own feet, Citizen’s management can react better to local challenges and develop its business than being part of a nationalized UK banking group under constant pressure. The “spin-off effect” could be at work here. Many of the directors have purchased shares directly after the IPO. The CEO owns shares in the amount of 6 mn USD.
– Citizen does have scale on a regional level which in my opinion is quite important (see page 152 of the S1 document) in order to achieve good ROEs
– the region where they are active (North east, New England) had less issues with the housing bubble, so theoretically loan quality should be OK. Most of their business is by the way in so called “recourse states” which adds to the incentive of actually paying back personal loans

Stock overhang

RBS still owns ~66% after the IPO and a subsequent share repurchase. 2016 is not that far in the future and placing another 10 bn of shares will not be a walk in the park, but on the other hand a lot of this could be reflected already in the share price. For me it is always interesting to see when typically sell-side analysts apply a discount due to “stock overhang”. As an “intrinsic” value investor, those situations are one of the clearest situations for market inefficiencies as the intrinsic value of a company does not change because of this.

Similar to ING, I think RBS did sell the first part cheaply in order to then (hopefully) sell into positive momentum. ING for instance managed to sell Voya down from over 60% to now 32% within 1 year and the stock still outperformed the indices.

My assumption is that RBS will not sell below tangible book value which is around the current stock price. If they sell below, they will lose available capital at RBS and therefore weaken their capital base and ratios. So a scenario where RBS sells down to very low levels far below the IPO price is in my opinion not realistic.

Valuation

I am clearly not in the position to judge if CFG is an “above average” bank. However, I think one can attach a high probability to the outcome that CFG will be an average bank. The nice thing about this is that there is significant upside already to the “average case”.

Therefore I would make the following, simplified case:

I assume that there is a 50% probability that within 3 years, CFG will be an “average” bank and trade at an average valuation. Conservatively I ignore goodwill and assume a target price of 1,6x current tangible book value in 3 years which would be ~ 40 USD per share.

To keep things simple, I further assume that there is a 25% chance that they will do really well and a 25% chance that they screw up. In the downside case, I will assume a 50% loss, in the upside case I will assume a valuation at 2x tangible book or around 50 USD.

So my “expected” value in 3 years time would be (0,5*40)+(0,25*11,5)+(0,25*50)= 35,4 USD. Based on the current price of around 22,80 USD, this gives me a potential annual return of ~15,4% which looks attractive to me for such a “special situation” investment.

Summary:

Citizens Financial “forced IPO” looks very similar to ING’s NN Group and Voya IPOs. I think this could be very attractive as even the assumption of Citizens becoming an “average ROE US regional bank” has significant upside. Despite or because of the assumed “stock overhang”, the mid-term risk/relationship looks attractive although, but similar to NN Group, one should not expect a quick win here.

I will therefore invest 2,5% of the portfolio into Citizens at current prices of around 22,80 USD.

P.S.: This will be my first US stock since a long time. I don’t have anything against US stocks, but often I do not find any kind of “edge”. In this case, I do have the feeling that banks are still highly unpopular as investments in general and that there is a good chance for some market inefficiency, even in the highly efficient US market.