Tag Archives: Joel Greenblatt

Underrated special situation – Deep-discounted rights issues

In many books which deal more or less explicitly with “special situation” investing, for instance Joel Greenblatt’s “You can be a stock market genius” or seth Klarman’s “Margin of safety”, many so-called “Corporate actions” are mentioned as interesting value investing opportunities.
Some of the most well know corporate actions which might yield good investment opportunities are:

– Spin offs
– tender offers /Mergers
– distressed / bankruptcy 

However one type of corporate action which is rarely mentioned are rights issues and especially “deeply discounted” rights issues.

Let us quickly look at how a rights issue is defined according to Wikipedia:

A rights issue is an issue of rights to buy additional securities in a company made to the company’s existing security holders. When the rights are for equity securities, such as shares, in a public company, it is a way to raise capital under a seasoned equity offering. Rights issues are sometimes carried out as a shelf offering. With the issued rights, existing security-holders have the privilege to buy a specified number of new securities from the firm at a specified price within a specified time.[1] In a public company, a rights issue is a form of public offering (different from most other types of public offering, where shares are issued to the general public).

So we can break this down into 2 separate steps:

1. Existing shareholders get a “Right” to buy new shares at a specific price
2. However the shareholders do not have to subscribe the new shares. Instead they can simply choose to not subscribe or sell the subscription rights

Before we move on, Let’s look to the two alternative ways to raise equity without rights issues:

A) Direct Sale of new shares without rights issues
This is usually possible only up to a certain amount of the total equity. In Germany for instance a company can issue max. 10% of new equity without being forced to give rights to existing shareholders. In any case this has to be approved by the AGM.

B) (Deferred) Issuance of new shares via a Convertible bond
Many companies prefer convertible bonds to direct issues. I don’t know why but I guess it is less a stigma than new equity although new equity is only created when the share price is at or above the exercise price at maturity. So for the issuing company, it is more a cash raising exercise than an equity raising exercise. Usually, the same limits apply to convertible debt than for straight equity.

So if a company needs more new equity, the only other feasible alternative is a rights issue. But even within rights issues, one can usually distinguish between 3 different kinds of rights issues depending on the issue price:

1) “Normal” rights issue with a relatively small discount
Usually, a company will issue the new shares at a discount to the old shares in order to “Motivate” existing shareholders to take up the offer. If they do not participate, their ownership interest will be diluted. Usually “better” companies try to use smaller discounts, high discount would signal some sort of distress

2) Atypical rights issue with a premium
This is something one sees sometimes especially with distressed companies, where a strategic buyer is already lined up but wants to avoid paying a larger take over premium to existing shareholders

3) Finally the “deeply” discounted rights issue

Often, if a company does not have a majority shareholder, the amount of required capital is relatively high and there is some urgency, then companies offer the new shares at a very large discount to the previous share price.

But exactly why are “deeply discounted” rights issues an interesting special situation ?

After all this theory, lets move to an example I have already covered in the blog, the January 2012 rights issue of Unicredit In this case:

– Unicredit did not have a controlling shareholder. One of the major shareholders, the Lybian SWF even was not able to transact at that time
– the amount to be raised was huge (7.5 bn EUR)
– it was urgent as regulators made a lot of pressure

As discussed, in the case of Unicredit, before the actual issuance at the time of communication the stock price was around 6.50 EUR, the theoretical price of the subscription right was around 3.10 EUR. However even before the subscription right was issued, the stock fell by 50 %. At the worst day, one day before the subscription rights were actually split off, the share fell (including the right) almost down to the exercise price without any additional news on the first day of subscription right trading.

But why did this happen ? In my opinion there is an easy answer: Forced selling

Many of the initial Unicredit Investors did not want to participate or did not have the money to participate in the rights issue. As the subscription right was quite valuable, a simple “non-exercise” was not the answer. As history shows, selling the subscription right in the trading period always leads to a discount even against the underlying shares, in this case some investors thought it is more clever to sell the shares before, including the subscription rights. Sow what we saw is a big wave of unwilling or unable investors which wanted to avoid subscribing and paying for new shares which created an interesting “forced selling” special situation.

Summary: In my opinion, deeply discounted rights issues can create interesting “special situation” investment opportunities. Similar to Spin offs, not every discounted rights issue is a great investment, but some situations can indeed be interesting. On top of this, those situations often are not really correlated to market movements and play out in a relatively short time frame.

Book Review: Joel Greenblatt -You can be a stock market genius

This is one of the books I always wanted to read but never managed to:

When Joel Greenblatt published this book in 1997,he had a tremendous run as manager of Gotham capital.

The book is aimed towards the “average” investor and makes the case for investing in special situations.

The best special situation he recommends are spinoffs, when a usually large company is spinning off a part of its business in the form of stocks which are simply distributed to the owner of the large company. As the owner of the large company don’t really want this stock, this creates an investing opportunity, especially if the management of the spin off is incentivised correctly.

He touches a couple of other special situations (merger securities, recaps, reorganisations, companies emerging from bankruptcy), which should be well known to people having read “Margin of safety” or other value oriented books.

The case studies in the book are good, it is interesting to see that Greenblatt invests even in highly indebted companies if they are “special”.

For a European investor in our time howver, the book contains only partly directly actionable advise, as spinoffs are avery rare breed today. However it is still a very good books which shows that “special situation” investing can lead to great investment results.

Summary: I think the book is a good start for anyone who wants to have an “easy to read” entry into the world of special situation investing, although the focus of the book might not be easily applicable in current times.

“Exotische” Wertpapiere: Renault Redeemable Shares (ISIN FR0000140014)

Nachdem ich mir in Stefans Blog die Renault Analyse durchgelesen hatte, habe ich schnell auch mal einen Blick in den Renault Geschäftsbericht geworfen.

Und siehe da, neben den Bilanzzahlen bin ich auf ein “Exotisches” Wertpapier gestossen, die sog. “Renault redeemable shares”

Hier lohnt sich ein kleiner Einschub: Vor allem Joel Greenblatt (You can be a stock market genius) hat immer darauf hingewiesen, das ungewöhnliche oder komplizierte Wertpapiere eine Chance für Investoren sind.

Zurück zu den redeemable shares, auf der Renault Homepage gibt es dazu eine eigene Seite, zum Glück in Englisch.

Rein vom Namen her würde man hier eine Art Vorzugsaktie oder einen Genußschein erwarten, aber wir sind ja schliesslich in Frankreich.

Die beste Beschreibung der Wertpapiere enthält die Präsentation zum Rückkaufangebot (hört hört) in 2004, allerdings ist das auf Französisch

Mein Verständnis ist Folgendes:

a) Das Papier wurde 1983/1984 begeben, als Renault noch vollständig in Staatsbesitz war
b) Der Nominalwert des Papiers ist 152,45 EUR (ehem. 1000 Francs)
c) Die Laufzeit ist unbeschränkt
d) der Minimalzins ist 10.29 + 3.57 EUR = 13.76 EUR pro Anteil, das ist in jedem Fall garantiert
e) dazu kommt ein Aufschlag, der die Umsatzentwicklung seit Emission bemisst, basierend auf dem Betrag von 3,57 EUR
f) d.h. wenn z.B. im Jahr eins nach Emission der Umsatz um 10% steigt, dann bekommt man 10.29 + 3.57 + 0.1x 3.57
g) Aufgrund der positiven Umsatzentwicklung seit 1984 betrug der Gesamtbetrag 2010 19,15 EUR, in der Spitze waren es auch schon mal 22 EUR pro Schein (2008), 2011 dürften es wieder über 20 EUR sein
h) 2004 hat Renault versucht, dass Papier für 450 EUR zurück zu kaufen, da man ansonsten nur zu über 2000 (!!!) kündigen kann.

Man kann sich die Umsatzentwicklung von Renault der letzten Jahre z.B. hier anschauen.

Kommen wir zu der Frage: ist das Papier zum jetzigen Kurs von 300 EUR interessant ?

Mit aktuell 7% Rendite ist das Papier OK, aber auf den ersten Blick nicht der Renner. Schliesslich bekommt man zum einen schon Aktien mit der gleichen Dividendenrendite (oder mehr), und auch vergleichbare Corporate Anleihen (Renault hat nur ein BB Rating) notieren im ähnlichen Bereich.

Jetzt muss man meines Erachtens aber drei Punkte berücksichtigen:

1. Zum einen hat man mit den 13.76 EUR einen “Floor” von gut 4,6% (faktisch vmtl. eher 6%). Bei einer Aktie kann schnell auch mal die Dividende ausfallen oder stark gekürzt werden.

2. Die Koppelung an den Umsatz wirkt m.E. zumindest mittelfristig über den Zyklus wie eine Art Inflationsschutz, wenn Renault seinen Umsatz zumindest im Gleichklang mit der Inflation erhöhen kann. Demnach sollte man im Vergleich zu einer regulären Anleihe noch die implizite Inflation von 2-3% dazu zählen. Damit wäre man bei einer “fixed coupon equivalent yield” von 9-10%

3. Zuletzt weiß man, dass Renault die Papiere gerne vom Markt hätte, das beweisen die vergangenen Rückkaufversuche. Für Renault wäre der break even wohl in der Nähe der FK Kosten (aktuell 5-6%) oder zwischen 350-420 EUR.

Rein vom Chart her sieht man, dass es die Papiere im Tief schon mal für 216 EUR gab, Ende 2007 aber auch mal über 1000 EUR bezahlt worden sind.

Dennoch reisst mich jetzt eine “bond equivalent” Rendite von ca. 10% noch nicht ganz vom Hocker, wenn man mit HT1 oder VG Wandler potentiell deutlich 2-stellige nominale Renditen erzielen kann.

Fazit: Für ein Portfolio das auf relativ konstante und inflationsgeschützte Cashflows angewiesen ist, sind die Renault Redeemable Shares schon jetzt nicht uninteressant. Für mein Portolio würde ich wohl erst bei Kursen zwischen 250 EUR schwach werden. Auf diesem Level sind für mich Downside und Upside in einem guten Verhältnis

Edit: ich muss noch checken, ob im Kurs der noch austehende Coupon enthatlen ist. damit wären wir bei einem Ex kurs von aktuell ca. 280 EUR statt 300 EUR.