Tag Archives: sum of parts valuation

Alstom SA (ISIN FR0010220475) – an interesting potential “sum of parts” play after the GE deal ?

Profitlich & Schmidlin (“P&S”) had a post a week ago (in German) on how they view the current situation at Alstom.

A short refresher: Both, General Electric and Siemens wanted to take over Alstom and/or parts of it. At the end, GE prevailed, however they failed to take over Alstom completely. Instead, they purchase the Grid, Renewables and Power businesses, leaving the Transport business at Alstom.

In order to make it more “interesting” and to please the French Government, GE and Alstom will form 3 Joint Ventures of which Alstom will buy a 50% share each. Plus Alstom will buy a transport related business from GE for 600 mn EUR. Additionally, Alstom seems to have a put option for these JV back to General Electric with a floor of 2,5 bn EUR.

So in theory, one could now use the information given for instance in the GE press release and calculate a prospective “sum of the parts” valuation for Alstom after the deal and this is how P&S have done it:

No op Assets  
Net cash 4.122
London Metro loan 364
Transmash 700
Pension, others -620
Total 4.566
Per share 14,78

On top of those ~15 EUR per share “extra assets” they add the 2,5 bn EUR for the JVs, which results in around 22,87 EUR per share for all those non-transport assets. With a “fair value” of the transport business of ~11 EUR per share they come up with their target value of 34 EUR per share, which would mean a nice +30% upside potential based on the current share price of 26 EUR.

My 5 cents on this

First of all I find it great that P&S share their investment case via their blog. This is definitely a good thing. And clearly, as with everything, it is their opinion and not everyone will agree with this. My opinion differs from theirs, but that does not mean that they are wrong or vice versa.

Before jumping into the details, I would just want to refer back to some earlier stuff I have written about holding companies. The question is: will investors really apply a “full valuation” to the operating business plus all the “extra assets” or will they discount the extra assets, especially the JVs and the other non-consolidated assets. I think it is more prudent to apply a discount to the extra assets. Unless there is clear evidence that those assets get liquidated, I think it is too optimistic to assign full value to those assets.

A second big issue is that at the moment no one knows exactly how much of the liabilities will get transferred to GE. Especially with regard to operating leases (nominal ~830 mn EUR), litigation liabilities (528 mn EUR) and pension liabilites (gross 5,2 bn) there is no definitive answer how much will be transferred to GE and what remains at Alstom. In a sum of part calculation, any of those remaining liabilities will have to be deducted from the extra assets as they are economically equivalent to debt.

Net cash position

Let’s start with that one. In their annual report, Alstom provides us with EUR -3.041 as net cash at March 31st 2014. GE stated that the whole transaction will generate a 7,3 bn net cash outflow for them which is an equivalent inflow for Alstom.

So theoretically we could calculate -3.041 + 7.300 = 4259 mn EUR net cash for Alstom. However there are several caveats to this:

transaction costs: A transaction like this easily swallows up a large amount of costs for lawyers, consultants bankers etc. I would assume between 100-300 mn cash costs for Alstom before closing, with an expected value of -200
mark to market debt: Although any financial assets under IFRS are marked-to-market, debt is still accounted for at cost. If Alstom would really want to buy back their bonds to shorten the balance sheet, they would have to pay market value which is ~350 mn higher than book value. So net debt has to be adjusted for this.

So for my calculation, net cash would be 4.259-200-350 = 3.709 mn net cash after closing of the deal

Transmashholding

Transmashholding is a 25% stake alstom holds in a Russian transport equipment manufacturer. P&S value this company 10x average 2012/2013 earnings at 700 mn EUR which is around 90% higher than book value. I would value this asset significantly lower because

– according to Bloomberg, the majority of the profit is “extraordinary profit”
– if we value them based on operating income (EBIT) with the same averaging, we would get on average 2800 mn Rubels EBIT p.a. (which is around 60 mn EUR p.a.) and assuming 10 times EV/EBIT we get 600 mn EUR EV. Minus ~10 bn RUB or 200 mn debt, the equity would be worth 400 mn, 25% of Alstom then would be 100 mn EUR.

Other liabilities

As I said before, we how much of the liabilities go to GE. My own assumption would be that all the critical ones (Litigation, Pension deficit, operating leases) are divided proportionally to the total amount of liabilities for the transport segment. According to the segment report in the annual report, transport had ~28% of all liabilities of Alstom. My default assumption therefore is that 28% of all “debt like” liabilities remain at Alstom as part of the transport business

Discount to extra assets

Finally, I would argue that especially as this complicated deal will only close in mid 2015, it would be quite optimistic to assume zero discount on the future cash inflow, JV assets etc etc. So I would actually discount those assets to be on the safe side with between 10-20% at the current status, as a compromise I will use 15% both, for net cash and the JVs. Just as a reminder: I am not sure if anyone remembers the planned GE – Honeywell merger in 2001. This looked like a done deal for a long time before the deal actually fell through. The deal might be very likely but there is always the risk of a deal stopper and one has to adjust for this in my opinion.

Bringing it all together & Summary:

So this would be my version of the “extra asset” calculation:

MMI
Net cash 03/2014 -3.041
+ Cash proceeds GE 7.300
– mtm bonds -350
– deal cost -200
   
Net cash adj 3.709
+ London Metro 364
+ Transmash 100
+ JVs 2.500
   
Total “extra assets” 6.673
– 15% discount JV&Cash -931
Discounted extra assets 5.742
   
– “pension others” from P&S -620
– 28% of Litigation liab -148
– 28% of operating leases -210
– 28% of pension underfunding -217
   
Adjusted “extra” assets 4.547
per share 14,71

With my rather cautious approach, i would value the potential extra assets after the deal ~ 8 EUR per share lower as P&S. Together with their valuation of the Transport business od ~11-12 EUR, the current Alstom price at 26 EUR looks fair with no big upside.

Clearly, any of my assumptions could (and should) be challenged as well. Transmash could be worth a lot more and maybe all the liabilities go to GE. On the other hand, one should not forget that the deal is not done yet. I am for instance not sure how happy the potential clients are and if I read correctly, they need approval of 32 national regulators for this deal. Plus, the French Government will be heavily involved in Alstom going forward which might lower the prospects of aggressive share repurchases and increase the risk for “strategic” acquisitions.

Alstom has proposed more detailed information in November before an extraordinary shareholder meeting. For me, at the moment Alstom is not a buy. This might change especially if most of the liabilities would be assumed by GE, then the Alstom “stub” could be really interesting. In the mean time, the stock however is “watch only”.

Compagnie Du Bois Sauvage & Ackermans Van Haaren update

A friendly reader has sent me a recent research report from KBC about Belgian holding companies, including “sum of parts” valuations for both holdings I looked at, Cie Bois Sauvage and Ackermans & Van Haaren. Just for fun, I wanted to compare my valuations with those valuation:

Cie Bois Sauvage

Here is the comparison table:

Prt Value Comment KBC Valuation
Neuhaus Chocolate 100,00% 300,0 PE 25 265,0
Behrenberg 12,00% 54,0 at 1.5 times book 63,0
Umicore 1,56% 60,5 At market 59,0
Recticel 28,89% 53,4 at market 51,0
Noel Group 29,37% 4,6 PE 10 12,8
Other   20,0 as disclosed 26,7
         
Codic Real Estate 23,81% 24,5 at book 23,1
other reals estate   60,0 as disclosed 66,8
cash etc.   20,0   11,5
         
Sum   597,1   578,9
Net debt   -80,0   -61
NAV   517,1   517,9
         
shares our   1,6   1,6
NAV per share   323,2   323,7

Strangely enoungh, the final valuation per share differs only marginally, despite some divergences, most notably did they value Neuhaus 40 mn lower than I did. Interestingly they have a target price of “only” 235 EUR and consider it as a “hold” position.

Ackermans & Van Haaren

Value Method KBC  
DEME 550 Implicit val. Takeover 995  
Van Laere 26 0.75 book 44  
rent-a-port 5 at book 9  
Maatschappi 20 At book 28  
Sipef 130 market cap 482 137  
Delen 522 1.5 book 970  
van Breda 336 1.2 book 470  
Extensa 80 0.8 book 187 Extensa + Leasinnv
Leaseinvest 108 Traded 0  
Financiere duval 40 at book 45  
AnimaCare 40 2x book 21  
MAx Green 70 10x Earnings 10  
Telemanod 30 10x Earnings 9  
Sofinim 255 75% of NAV minus cash 362  
GIB     41  
Other     39 Belfimas
         
Net cash holding 148 Q3 -93  
         
         
Total 2360   3274

Here we can see that they came out clearly much higher than I did. Especially the private banks were valued much more richly at 1.44 bn vs my 850 mn. I think that this could be a little bit aggressive. The other big difference is DEME/CFE. Where I used the initial valuation before the merger, they use the current market value, which is clearly better. This is partly off set by the lower cash balance where I used the balance before the transaction.

Interestingly again, they apply a discount to the NAV, however in Ackerman’s case only -20% vs the -30% at Cie Bois Sauvage. Their target price is 86 EUR and they rate the stock surprisingly as a buy despite an upside of less than 10%.

Overall it is interesting to see their valuation, but honestly I am not overly impressed and it does not change anything in my conclusions.

Rallye SA (ISIN FR0000060618) – another Holding company at a discount ?

Rallye SA, France is the holding company for 49.97% of Casino Guichard, one of the big French retail chains.

In their annual report they present the company as follows:

Their major assets are:

– 49.93% of Casino Guichard Perrachon SA (ISIN FR0000125585)shares (61.24% of voting rights)
– 72.86% of Groupe Go Sport SA (ISIN FR0000072456)(78.73% of voting rights), another small listed French company
– “investment portfolio”.

There is some qualitative description of the “investment portfolio” on page 19 of the report, it seems to be a quite divers collection of participations and real estate.

Rallye’s investment portfolio was valued at €365 million as of December 31, 2011, compared to €435 million as of December 31,
2010. At the end of 2011, the portfolio consisted of financial investments with a market value(1) of €272 million (vs. €295 million
at end-2010) and real estate developments measured at historical cost(2) of €93 million (vs. €140 million at the end of 2010).

Net external debt stands at 3 bn as of year end 2011. Other than that i did not see major positions.

The trickiest part of Rallye’s balance sheet is the 2.5 bn EUR receivables position the show in their single entity balance sheet.^2.3 bn of that seem to be receivables against Group companies:

The current account advances made by Rallye to its subsidiaries are part of the Group’s centralized cash management system. They are
due within one year.

The point I am struggling with most is the following:

If those receivables are against Casino, then one would add those assets for the Rallye evaluation. If those receivables are against their various subholdings which also hold Casino shares, then one would need to fully eliminate them.

I have quickly checked the 2011 Casino annual report, but didn’t find any liability against Rally SA. So we should assume that those internal Rallye receivables are a technical position which is financing the Casino stack and should therefore not be counted extra. Only the “external” part (~200 mn) should be used).

So with that assumption we can now calculate the “sum of part” or intrinsic value of the Rallye SA share:

EUR mn
Casino Guichard (50%) 4,112.3
Group Go 34.8
Investment Portfolio 365.0
Receivables, other assets 220.0
Sum assets 4,732.1
   
Debt -3,000.0
Other liabilites -110.0
Net Assets at market 1,622.1
   
 
Number of shares 47.2
Value per share 34.37
 
Current market price: 25.80
“Discount” 24.9%

Overall, a 25% “discount” seems to be quite normal for such a slightly in transparent structure including extra financial debt. However if one thinks Casino is a great investment, then investing through Rallye might be a good idea:

Casino Guichard itself is not uninteresting. Although it is not cheap, they are growing pretty strongly. Especially interesting is the fact that 60% or more of their sales are now in LatAm (Brazil and Colombia), two markets which seem to be the most interesting retail markets at the moment.

On the other hand, I am not a big expert on retail chains, so from that point of view I will not analyze Rally/Casino further.

Summary:

If my assumptions are correct, the current “discount” of Rallye vs. its sum-of-parts as a holding of 50% Casino Guichard is only 25%. Considering the extra leverage and the lack of visibility, it does not look greatly undervalued.

Bouygues Q3 update

The Q3 numbers of Bouygues are a first test for my Bouygues investment case.

If I update my simple sum of part valuation, we can see the following:

Market values listed companies:

  16.11 initial
Colas 96.55% 3.56 3.34
Alstom 29.40% 2.42 2.47
Tf1 43.59% 0.667 0.58
       
Total listed   6.65 6.39

So the listed subs have slightly increased in value.

Now looking at the unlisted, I will simply assume 9 Month EBITDA will equal 75% of total EBITDA:

9 month EBITDA 12M est EV Multiple EV
Bouygues Constr. 432 576 7 4,032
Bouygues Real estate 117 156 7 1,092
Bouygues Telecom 802 1,069 6.5 6,951
 
        12,075

Compared to the 6 month numbers I used last time, Telco is slightly below 6M run rates, construction and real estate perfom better.

Both, listed and unlisted subsidiaries in theory look better than at the time of my initial analysis. Net debt has slightly increased to 5.8 bn form 5 bn, mainly due to a 2 bn purchase of mobile licenses in France.

Putting this together, the updated fair value of Bouygues equity at “sum of parts” would be 6,65 bn + 12.075 bn -5.8 bn = 10.9 bn or around 35 EUR per share. From my point of view I see no fundamental reason why the shares have dropped quite substantially. I guess this is more “market psychology” following the announcement of France Telecom to cut their dividend.

However the stock chart looks really ugly now, although I am not a stock chart expert, there doesn’t seem to be any “technical” support on the downside and momentum is clearly negative:

Fundamentally the company seems to be “on track” at least compared to my investment case. So I will use today’s low prices to “fill up” again the current 2.2% position to 2.5% weight, further purchases will follow if the stock goes below 17 EUR (and fundamentals remain stable).