European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

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<p>With this report, I continue the monthly series on some of the main European holding companies that I deem interesting to long/short clients.</p>
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<p>The discounts to NAV of Industrivärden and Kinnevik have considerably tightened. It is time to unwind them, and wait for the discounts to widen before setting up the trades again.</p>
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<p>The most compelling situations in this report are GBL and Investor AB. The spread in Unilever is less than okay, but safe. It should close in a month as a result of the share unification.</p>
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With this report, I continue the monthly series on some of the main European holding companies that I deem interesting to long/short clients.


The discounts to NAV of Industrivärden and Kinnevik have considerably tightened. It is time to unwind them, and wait for the discounts to widen before setting up the trades again.


The most compelling situations in this report are GBL and Investor AB. The spread in Unilever is less than okay, but safe. It should close in a month as a result of the share unification.


Selected European Holdcos and DLCs: October Report

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<h3>Trends</h3>
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<p>There has been no obvious trend over the last three months regarding the discounts, although it has widened in some names.  Trading opportunities are less obvious, but some still exist.</p>
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<h3>Recommended trades</h3>
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<ul style="list-style-type: disc;">
<li>
<a href="https://www.smartkarma.com/entities/bayerische-motoren-werke-ag" target="_blank" rel="noopener"></a>
<p><a href="https://www.smartkarma.com/entities/bayerische-motoren-werke-ag" target="_blank" data-smartkarma-citation="entities:21591:1" rel="noopener">Bayerische Motoren Werke AG (BMW GR)</a> : the discount has traded sideways since mid-September, and is now 23.2%. I would recommend setting up a trade long BMW prefs, short common shares with a target of a 15% discount.</p>
</li>
<li>
<p><a href="https://www.smartkarma.com/entities/fuchs-petrolub-se" target="_blank" data-smartkarma-citation="entities:21624:1" rel="noopener">Fuchs Petrolub SE (FPE GR)</a> 's premium of preferred shares is a whopping 34.4% currently. Remember that voting rights are valuable. Recommendation: long ords/short prefs, with a 10% target.</p>
</li>
<li>
<p><a href="https://www.smartkarma.com/entities/henkel-ag-co-kgaa" target="_blank" data-smartkarma-citation="entities:21646:1" rel="noopener">Henkel AG &amp; Co KGaA (HEN3 GR)</a> : the premium is 13.0% (down from 15.4% in my September report). I would set up a trade long prefs/short common shares with a 10% premium target.</p>
</li>
<li>
<p>Voting rights are valuable in a company like <a href="https://www.smartkarma.com/entities/volkswagen-ag" target="_blank" data-smartkarma-citation="entities:21738:1" rel="noopener">Volkswagen (VOW GR)</a> , so a 5.8% discount of the prefs. seems about right. It has moved sideways since mid-September.  If you believe that the higher liquidity of the prefs will, at some point, mean that the discount will close, then a long prefs/short ords may be an option; plus it can be executed in size. The discount tightened since the March selloff and has been moving within a tight range. </p>
</li>
<li>
<p>A 35.9% discount of <a href="https://www.smartkarma.com/entities/danieli-c-officine-meccanich" target="_blank" data-smartkarma-citation="entities:21177:1" rel="noopener">Danieli &amp; C Officine Meccanich (DAN IM)</a> savers (vs. 37.5% in September and 39% in June) seems still too wide, and low liquidity does not help. I keep on recommending long savers/short ordinaries. A 30% discount is not a demanding target.</p>
</li>
<li>
<p><a href="https://www.smartkarma.com/entities/grifols-sa" target="_blank" data-smartkarma-citation="entities:21274:1" rel="noopener">Grifols SA (GRF SM)</a> B shares are trading at a 37.9% discount (vs. 41.9 by mid-September), there is a trend towards the tightening of this discount since mid-March. The discount in Grifols B shares has averaged 28% since listing of the B shares in February 2016. I recommend setting up the trade long B shares traded on Nasdaq, short A shares traded in Madrid. The target is a 27% discount. Please note there is FX risk, which can be hedged.</p>
</li>
<li>
<p>The current discount in <a href="https://www.smartkarma.com/entities/atlas-copco-ab" target="_blank" data-smartkarma-citation="entities:22282:1" rel="noopener">Atlas Copco AB (ATCOA SS)</a> B shares vs. A shares is 13.2%. I recommend setting up Long B shares/short A shares, with a target of &gt;10% discount.</p>
</li>
<li>
<p>The discount in the <a href="https://www.smartkarma.com/entities/telefonaktiebolaget-lm-ericsso" target="_blank" data-smartkarma-citation="entities:22354:1" rel="noopener">Telefonaktiebolaget Lm Ericsso (ERICB SS)</a> (Ericsson) B shares has tightened since my July recommendation: from 8.7% to 6.8%. I would keep the trade on with a 3% discount target.</p>
</li>
<li>
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<p>The discount in <a href="https://www.smartkarma.com/entities/schroders-plc" target="_blank" data-smartkarma-citation="entities:22134:1" rel="noopener">Schroders PLC (SDR LN)</a> is now 32.7% (vs. 27% by mid-September). I would set up long non-voting/short voting shares.</p>
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</li>
</ul>
<p>Please read on for table and charts.</p>
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Trends


There has been no obvious trend over the last three months regarding the discounts, although it has widened in some names.  Trading opportunities are less obvious, but some still exist.


Recommended trades





Bayerische Motoren Werke AG (BMW GR) : the discount has traded sideways since mid-September, and is now 23.2%. I would recommend setting up a trade long BMW prefs, short common shares with a target of a 15% discount.


Fuchs Petrolub SE (FPE GR) 's premium of preferred shares is a whopping 34.4% currently. Remember that voting rights are valuable. Recommendation: long ords/short prefs, with a 10% target.


Henkel AG &amp; Co KGaA (HEN3 GR) : the premium is 13.0% (down from 15.4% in my September report). I would set up a trade long prefs/short common shares with a 10% premium target.


Voting rights are valuable in a company like Volkswagen (VOW GR) , so a 5.8% discount of the prefs. seems about right. It has moved sideways since mid-September.  If you believe that the higher liquidity of the prefs will, at some point, mean that the discount will close, then a long prefs/short ords may be an option; plus it can be executed in size. The discount tightened since the March selloff and has been moving within a tight range. 


A 35.9% discount of Danieli &amp; C Officine Meccanich (DAN IM) savers (vs. 37.5% in September and 39% in June) seems still too wide, and low liquidity does not help. I keep on recommending long savers/short ordinaries. A 30% discount is not a demanding target.


Grifols SA (GRF SM) B shares are trading at a 37.9% discount (vs. 41.9 by mid-September), there is a trend towards the tightening of this discount since mid-March. The discount in Grifols B shares has averaged 28% since listing of the B shares in February 2016. I recommend setting up the trade long B shares traded on Nasdaq, short A shares traded in Madrid. The target is a 27% discount. Please note there is FX risk, which can be hedged.


The current discount in Atlas Copco AB (ATCOA SS) B shares vs. A shares is 13.2%. I recommend setting up Long B shares/short A shares, with a target of &gt;10% discount.


The discount in the Telefonaktiebolaget Lm Ericsso (ERICB SS) (Ericsson) B shares has tightened since my July recommendation: from 8.7% to 6.8%. I would keep the trade on with a 3% discount target.



The discount in Schroders PLC (SDR LN) is now 32.7% (vs. 27% by mid-September). I would set up long non-voting/short voting shares.



Please read on for table and charts.


Liquid Universe of European Ordinary and Preferred Shares: October Report

<p>Shares of <a href="https://www.smartkarma.com/entities/koninklijke-kpn-nv" target="_blank" data-smartkarma-citation="entities:21122:1" rel="noopener">Koninklijke KPN (KPN NA)</a> closed on Monday 12 October c. 7% higher vs. the previous trading session, the highest level in three months, after Bloomberg News reported on Friday that EQT was considering a potential takeover bid.</p>
<ul>
<li>EQT was said to be in early discussions with advisers on a deal, without any final decision having been made.</li>
<li>Both KPN and EQT declined to comment on the report.</li>
<li>KPN shares had lost 17% since the start of the year until Friday.</li>
</ul>
<p>Given the depressed valuations of telco companies in Europe, the move by EQT is unsurprising, in my view.</p>
<p>KPN has a strong takeover protection against unwanted suitors. It can issue B-shares (preference shares) with the same voting right of KPN A-shares (ordinary shares) as a takeover defense. I believe that, if made, any bid approach should be agreed with KPN’s management in order to avoid higher dilution in KPN’s share capital.</p>
<p>In addition to the poison pill already mentioned, a deal could be blocked by the Dutch government using a law adopted this year that gives the government the option to block takeovers of Dutch telecom companies if they are deemed a threat to national security (source Reuters).</p>
<p style="text-align: justify;">I believe that KPN is an ideal target for Private Equity.</p>
<ul>
<li>KPN is the largest fixed line and mobile operator in the Netherlands (30% market share).</li>
<li>Has strong free cash flows and predictable revenue streams</li>
<li>Has the management capable to efficiently run a mature business</li>
</ul>
<p>Using Capital IQ consensus numbers, a 7.6x EV/EBITDA exit multiple, an acquisition premium of 15% to last closing price (€2.4 per share), an equity portion of 25% and spread of 250bps to 10-year Euro swap rates, I think an offer price of €2.76 could generate an IRR of 13.1% by year 8 (see table below).</p>
<p>On a valuation basis, KPN does not appear expensive, plus there is the upside of a takeover bid. Recommendation is LONG KPN, target price €2.76.</p>

Shares of Koninklijke KPN (KPN NA) closed on Monday 12 October c. 7% higher vs. the previous trading session, the highest level in three months, after Bloomberg News reported on Friday that EQT was considering a potential takeover bid.

EQT was said to be in early discussions with advisers on a deal, without any final decision having been made.
Both KPN and EQT declined to comment on the report.
KPN shares had lost 17% since the start of the year until Friday.

Given the depressed valuations of telco companies in Europe, the move by EQT is unsurprising, in my view.
KPN has a strong takeover protection against unwanted suitors. It can issue B-shares (preference shares) with the same voting right of KPN A-shares (ordinary shares) as a takeover defense. I believe that, if made, any bid approach should be agreed with KPN’s management in order to avoid higher dilution in KPN’s share capital.
In addition to the poison pill already mentioned, a deal could be blocked by the Dutch government using a law adopted this year that gives the government the option to block takeovers of Dutch telecom companies if they are deemed a threat to national security (source Reuters).
I believe that KPN is an ideal target for Private Equity.

KPN is the largest fixed line and mobile operator in the Netherlands (30% market share).
Has strong free cash flows and predictable revenue streams
Has the management capable to efficiently run a mature business

Using Capital IQ consensus numbers, a 7.6x EV/EBITDA exit multiple, an acquisition premium of 15% to last closing price (€2.4 per share), an equity portion of 25% and spread of 250bps to 10-year Euro swap rates, I think an offer price of €2.76 could generate an IRR of 13.1% by year 8 (see table below).
On a valuation basis, KPN does not appear expensive, plus there is the upside of a takeover bid. Recommendation is LONG KPN, target price €2.76.

K P N - E Q T: Prospective Private Equity Bid

<p>With this report, I continue the monthly series on some of the main European holding companies that I deem interesting to long/short clients.</p>
<p>The discounts to NAV of Swedish holdings have considerably tightened. It is time to unwind, and wait for the discounts to widen before setting up the trades again.</p>
<p>The most compelling situations in this report are GBL and Unilever.</p>

With this report, I continue the monthly series on some of the main European holding companies that I deem interesting to long/short clients.
The discounts to NAV of Swedish holdings have considerably tightened. It is time to unwind, and wait for the discounts to widen before setting up the trades again.
The most compelling situations in this report are GBL and Unilever.

Selected European Holdcos and DLCs: September Report

<p>With this report, I continue the monthly series on some of the main European holding companies that I deem interesting to long/short clients.</p>
<p>All the discounts to NAV have remained stable, with no major changes to the holdcos portfolios, with the exception of Kinnevik. Most represent an attractive entry point from fundamentals, in my view.</p>
<p>I note there have been market rumours about a combination of Unilever and Reckitt Benckiser. Certainly, a collapse of the DLC structure would allow Unilever to offer own shares as a currency in M&amp;A.</p>
<p>The most compelling situations in this report are:</p>
<ul>
<li>GBL</li>
<li>Heineken</li>
<li>Investor AB</li>
</ul>
<p>Please read on for charts and comments.</p>

With this report, I continue the monthly series on some of the main European holding companies that I deem interesting to long/short clients.
All the discounts to NAV have remained stable, with no major changes to the holdcos portfolios, with the exception of Kinnevik. Most represent an attractive entry point from fundamentals, in my view.
I note there have been market rumours about a combination of Unilever and Reckitt Benckiser. Certainly, a collapse of the DLC structure would allow Unilever to offer own shares as a currency in M&amp;A.
The most compelling situations in this report are:

GBL
Heineken
Investor AB

Please read on for charts and comments.

Selected European Holdcos and a DLC: July Report

Sweden

Investor AB is an industrial holding company. The Company owns significant shareholdings in major public multinational companies and conducts private equity activities in Europe, North America, and Asia. Investor takes an active ownership role in many of the companies it owns.

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Investor (INVEB SS)

Selected European Holdcos and DLCs: October Report

The most compelling situations in this report are GBL and Investor AB. The spread in Unilever is less than okay, but safe. It should close in a...

Jesus Rodriguez Aguilar

Liquid Universe of European Ordinary and Preferred Shares: October Report

No clear trend over the last three months regarding discounts. Some ords/prefs trades/situations to watch: BMW, Fuchs Petrolub, Henkel, Volkswagen,...

Jesus Rodriguez Aguilar

K P N - E Q T: Prospective Private Equity Bid

KPN is an ideal private equity target due to its strong free cash flows and predictable revenue streams. An offer price of €2.76 could generate an...

Jesus Rodriguez Aguilar

Selected European Holdcos and DLCs: September Report

With this report, I continue the monthly series on some of the main European holding companies that I deem interesting to long/short clients.

Jesus Rodriguez Aguilar

Selected European Holdcos and a DLC: July Report

With this report, I continue the monthly series on some of the main European holding companies that I deem interesting to long/short clients. All...

Jesus Rodriguez Aguilar

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