Tag Archives: Spin off

Greenlight Re & E.On/Uniper update

Greenlight Re update:

As some readers might remember, I bought shares of Greenlight Re, the Bermuda Reinsurer with investment advise from David Einhorn back in December 2015, but then sold them one month later, triggered by the insight that I don’t really understand his investment criteria. Looking back, the decision to sell doesn’t look very smart, as the stock priced since then increased by around 18% in USD (or 14% in EUR). YTD the stock is up 14,8% in USD.

In early August, Greenlight Re filed their 6M report. Interestingly the NAV per share declined by -4% from 22.20 USD to 21,32 USD per share.

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David Einhorn: Nice Q4 letter but E.On as a long pick ? Really ? C’mon !!!

As this has turned out to be a very long post, a quick “Executive Summary”:

David Einhorn has published that German utility E.ON is one of his major new long positions. Based on what I have written in the past about E.On, I do think his summary investment rational has some serious flaws,  mainly:

  • buying management’s “spin” that the recent share price decline was only caused by uncertainties about nuclear provisions
  • assuming a quick and very benefitial (for E.ON) solution for nuclear liabilities

To me it looks like that he tries to come up with some short term, rather risky “bets” in order to make good on his horrible 2015 performance as quickly as possible.

As a new shareholder in Greenlight Re I have to seriously rethink if I want to stay invested, however as a German tax payer I might also be biased in this case.

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NN Group NV – “Hands off” IPO or interesting special situation ?

NN Group is the name of the soon to be just IPOed Insurance subsidiary of Dutch ING Group. NN Group sounds a little bit strange but is the “traditional” name of the Dutch Insurance company, “Nationale Nederlanden”.

As a value investor, normally, IPOs are an absolute “No go”. Benjamin Graham famously said that one should never touch an IPO because almost always, the stock price is overhyped and the risk return relationship is not good. Especially now with the market reaching new highs, buying IPOs doesn’t seem a good idea.

So why could this IPO be different ? In my opinion there are some good reasons:

1. ING is obliged to sell.

ING had to be rescued in 2008 by the Dutch Government under the condition that they dispose their full insurance activities. They cannot simply spin off the business because they need the money to pay back the Dutch Government and shore up the bank balance sheet.

This is form a recent Bloomberg article what they have done so far and what they committed to:

ING, the recipient of a 10 billion-euro bailout from the Netherlands in 2008, agreed with EU regulators to complete its disposal program by the end of 2016 and to sell more than half of NN by the end of next year. ING also still owns about 43 percent of Voya and a stake of about 10 percent in Sul America SA (SULA11) in Brazil.

The company is open to selling the Sul America stake, worth about 566 million reais ($253 million) based on the Rio de Janeiro-based insurer’s market value, in a block trade, Chief Executive Officer Ralph Hamers said in an interview in Sao Paulo yesterday.

2. The company is an “ugly duck” at first sight

The remaining insurance compqny is a strange combination of Netherlands, Eastern Europe and Japan with some Investment Management thrown in. In German, one would call the business mix a “Resterampe”, so the remains of what could not be sold directly. The majority of the business is Life insurance, which itself is clearly suffering from low interest rates.

The company shows more or less zero profits for 2013, however a couple of items could be considered true “One offs” in order to look better in the future, for instance the large charge against the closed Japanese VA business. Also Q1 2014 showed a loss, this time because of a charge in relation to pensions.

So now one can accuse ING of “dressing up the bride”, rather the opposite.

3. European Insurance is one of the sectors with the lowest valuations anyhow

The Stoxx 600 has currently a P/E of 24,8 and a P/B of 1,9. Compared to this, the Insurance sector trades at a trailing p/E of 12,4 and P/B of 1,21. This is even cheaper than banks and utilities. Within the insurance sector again, the Life Insurance sector is even cheaper. There are clearly many reasons for those low valuations, especially that interest rates are so low which makes it hard for life insurers to earn their guarantees and a spread on top if this.

4. The IPO valuation looks cheap compared to the sector.

The company comes to the market at around 50% of book value. Considering that they don’t have a lot of Goodwill, this looks cheap even compared to the generally low valuations for life insurance companies. Dutch competitors Aegon and Delta Llyod trade at P/Bs of 0,7 and 1,3, the average for European Life insurers is ~1.4 including UK, and around 1 excluding UK.

5. The company looks like a target

Looking at this IPO, there seems to be a big sign on the company saying “split me up”. This strange combination of businesses is clearly not value enhancing. Splitting the company up for instance into a Dutch entity and selling down the rest could be a pretty easy exercise for an activist Hedge fund. I could also imagine that some Asian financial companies would be interested in acquiring a solid Dutch “brand”-.

6. The company is relatively solid

If one looks at the “usual suspects”, like Goodwill, pensions etc. there is not much to be found. The company had 6 bn of defined benifit liabilities in 2013 but actually got completely rid of them in early 2014 against an extra charge. I consider this as very positive and a good sign that they really cleaned up a lot of stuff befor doing this IPO. Additionally, another insurance specialty, so-called “DACs”, which are capitalized distribution costs only play a very minor role at NN compeared to other life players like AXA.

They do have some leverage but overall I would rate the balance sheet quality as “above average” for the sector.

7. The US IPO went relatively similar

There is a blue print for this transaction: Voya, the former ING US IPO. The US business was also supposed to be pretty ugly, so ING placed the first tranche very very cheap at below 0,4 times book value. Since then however the valuation seems to slowly approach those of other US life insurers and the stock almost doubled since IPO:

Other thoughts:

Management incentives
What I didn’t find out in the annual report or in the IPO prospectus was how the NN Group management is aligned with shareholders going forward.

In situations like this, a lot depends on Management, especially if they want to actually increase sahreholder value or if they want to maximise salaries which is easier in a bigger company and which would make reasonable spin-offs and disposals unlikely. So this is something to be watched.

Management has committed to a quite aggressive dividend payout ratio of 40-50%, starting with a large payout already this year in autumn. I am not a dividend investor, but this greatly reduces the risk of stupid acquisitions.

Distribution agreements with ING Bank

Life Insurance is mainly distributed via banks these days (often along with a mortgage loan). NN has an exclusive agreement with ING Bank according to the IPO porspectus until 2022. Although this is a limited time frame, this is very valuable as banks now charge high upfront fees in order to access their distribution channel.

Summary:

In my opinion this “IPO” of NN Group is much more similar to the classic “spin-off” than a “real” IPO. ING has to sell, the underlying business looks ugly at first sight and there is a lot of overall negative headline news for the sector and the specific business fields. As a result, other than with a normal IPO, the valuation is very cheap.

As I feel comfortable with the headline risks at this price level, I will invest a “half position” (2,5%) of the portfolio into NN Group at current prices (21,70 EUR). The short form investment thesis is that one gets an above average quality insurance business for a below average price.

Again, this is clearly not a “no brainer” and will need (lots of) patience, but over 2-3 years, the price of the shares could be easily 50% higher (including dividend distributions) if they reach average valuation ratios and the one-offs turn out to be real one-offs.

Missed opportunity: Autogrill SpA spin-off

Sometimes, the good old-fashioned simple ideas still work very well. One very recent example, which for some reasons I totally missed, was the recent spin-off of Word Duty Free from the parent Autogrill in the beginning of October.

The remaining business is the well-known restaurant business along Freeways, the duty-free business is the international business in most of the world’s airports.

If one looks at the Autogrill stock, the spin-off was a fantastic success:

A more than 50% outperformance against the index. The spun off stock World Duty Free now trades at a P/E of around 20, reflecting the assumed growth potential, the market cap is with 2 bn EUR higher than the parent (~1.5 bn). The CEO of the parent by the way is now CEO of the spin-off company.

I remember having read about the spin-off some months ago but I didn’t really follow-up. It is very interesting to see, how in this case this has unlocked value so quickly. It clearly shows also in my opinion, that some PIIGS companies with international exposure might still be heavily discounted by the market.

Unfortunately, I think the Autogrill spin-off is rather an exception than the rule for PIIGS companies, but I think it still makes sense to look for similar deals in the future.

Hankook Tire Co. (ISIN KR7161390000) – Spin-off Gangnam style ?

Hankook Tire is well known as a succesful Korean manufacurer of Tires worldwide. This year however, the company performed a spin-off which to a certain extend looks strange compared to other spin offs.

Basically, Hankook Tires spun off the operating tire business into a new entity. The old entity has been renamed Hankook Tire Worldwide and trades under the old ISIN KR7000240002. The spin-off entity is called Hankook Tire Co. and trades under the ISIN KR7161390000.

The spin off is strange to me at least for those “specialties”:

1. Before the spin-off, the stock was suspended from Trading for ~5 weeks, from August 30th to October 5th.
2. After the spin-off, the holding company will receive royalties from the operating company

There is a very interesting report from KDB Daewoo Securities about this “korean style” spin-offs in general and Hankook in particular.

Genrally, this seems to be the result of new rules in Korea which limits cross shareholdings as a mean to control companies.

If I understood the mechanics correctly, the process in general works the following way and intends to increase the stake in the HoldCo to the highest percentage possible:

A) The OldCo is split into a HoldCo and OpCo. So the “big shareholder” holds equal percentages in both compnaies
b) in a second step, the “big shareholder” will then execute both, a rights issue and a tender offer for the holding company

In the second step as far as I understood, the HoldCo will issue new shares. The “big shareholders” will tender their OpCo shares for new HoldCo shares. As not many investors are interested in in the new HoldCo shares. the price of the Holdco will suffer.

In order to maximise their final percentage in the HoldCo, the “big shareholder” has the following incentives:
– push down the value of the HoldCo shares before the offer
– push up the value of the OpCo shares before the offer

This leads, according to the research report to the following “investment opportunities”:

buy the OpCo shares after spin off and sell before or at tender offer
– buy the HoldCo shares after the tender offer

If we look at the stock charts, at least the first step seems to work perfectly:

So the HoldCo already lost -25% since October 4th. However the second part, the increase in value of the OpCo shares didn’t really work out so well, especially after the OpCo lost ~5% market value today.

So this might be a good special opportunity to buy the OpCo shares now and maybe hedge them with a Kospi Short position.

The only practical problem with this is that Hankook shares are not listed outside Korea and it is currently not that easy to buy shares on the Korean stock exchange. Ii still did not try to open a brokerage account with a Korean broker, but maybe I Should at some point in time….

I am not sure if I should open a “paper trading” position for the portfolio. If I would really run a 10 mn fund, it would be reall making sense to open a Korean brokerage account.

To be continues…….

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