European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

<ul>
<li>
<strong>Spreads have generally tightened</strong> across our liquid universe, with some notorious exceptions such as Volkswagen and Grifols.</li>
<li>Recommendations<strong> long ords / short prefs</strong>: Henkel, Fuchs Petrolub, Telecom Italia, Grifols, Handelsbanken, Investor AB.</li>
<li>Recommendations<strong> long prefs / short ords</strong>: BMW, Volkswagen, Roche, Schroders.</li>
</ul>



Spreads have generally tightened across our liquid universe, with some notorious exceptions such as Volkswagen and Grifols.
Recommendations long ords / short prefs: Henkel, Fuchs Petrolub, Telecom Italia, Grifols, Handelsbanken, Investor AB.
Recommendations long prefs / short ords: BMW, Volkswagen, Roche, Schroders.


Liquid Universe of European Ordinary and Preferred Shares: November Report

<ul>
<li>KKR is looking at alternatives ranging from raising its stake in Telecom Italia’s grid operations to pursuing a full takeover of the unit, as an alternative to the merger of FiberCop (the crown jewel) with Open Fiber, by which Telecom Italia would own a minority stake in the merged entity.</li>
<li>The merger seems designed to facilitate the generation of cash (by partial disposal and/or enhancing the share price by focusing analysts’ attention on its SOTP). Ongoing restructuring has created uncertainty in Telecom Italia’s intentions and potential actions, which in turn will introduce increased volatility into the pricing of Telecom Italia equity and debt. Vivendi, sitting on a 67% paper loss, is (rightly in my view) concerned.</li>
<li>
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<div>
<div>
<div>
<p>I would look to put on any the following strategies: short credit/buy protection, short TIT IM (my SOTP valuation is €0.29/ordinary share), and long savings/short ords.</p>
</div>
</div>
</div>
</div>
<div>
<p></p>
</div>
</div>
</li>
</ul>


KKR is looking at alternatives ranging from raising its stake in Telecom Italia’s grid operations to pursuing a full takeover of the unit, as an alternative to the merger of FiberCop (the crown jewel) with Open Fiber, by which Telecom Italia would own a minority stake in the merged entity.
The merger seems designed to facilitate the generation of cash (by partial disposal and/or enhancing the share price by focusing analysts’ attention on its SOTP). Ongoing restructuring has created uncertainty in Telecom Italia’s intentions and potential actions, which in turn will introduce increased volatility into the pricing of Telecom Italia equity and debt. Vivendi, sitting on a 67% paper loss, is (rightly in my view) concerned.






I would look to put on any the following strategies: short credit/buy protection, short TIT IM (my SOTP valuation is €0.29/ordinary share), and long savings/short ords.











KKR/Telecom Italia: Open Fiber Deal, Ongoing Restructuring, Strategies

Senior Credit Analyst, Lucror Analytics

Leonard Law, CFA

Senior Credit Analyst

High Yield Experts

Lucror Analytics

Lucror Analytics is a leading credit and ESG research specialist and a provider of technology solutions for differentiated fixed income strategies. Our roots are in bottom-up fundamental credit analysis with a specialization in high yield corporate credits from Europe, Asia and Latin America. We are one of few research specialists integrating ESG considerations with fundamental credit research through a dedicated ESG platform. Our ESG assessment covers five key criteria: Disclosure, E,S, & G Pillars, Controversies, ESG Impact on Credit and ESG Momentum.

Recognizing the importance and value-add of Factor Investing in fixed income, Lucror developed the Smart Quant Navigator (SQN), an intuitive platform that helps clients devise and implement factor-based strategies ranging from pure quant to active fundamental, with integrated ESG.

Our company has been at the forefront of developments in the fixed income markets, identifying opportunities and consistently delivering new products and value-adding solutions to clients. Lucror has close relationships with the largest and most reputable asset managers, family offices, hedge funds, investment and wealth managers globally.

Credit

<p><br/> The Europe HY Trade Book for October 2021 includes high-conviction trade ideas drawn from our European HY coverage universe, along with relative-value scatter plots and tables by industry.<br/></p>

  The Europe HY Trade Book for October 2021 includes high-conviction trade ideas drawn from our European HY coverage universe, along with relative-value scatter plots and tables by industry. 

Europe HY Trade Book - October 2021 - Lucror Analytics

<div>
<div>
<h3>Trends</h3>
</div>
</div>
<div>
<p>Spreads have generally tightened since mid-September, in line with market gains.</p>
</div>
<div>
<div>
<h3>Interesting situations and trades</h3>
</div>
</div>
<div>
<ul style="list-style-type: disc;">
<li>The discount of the preferred shares of <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> has tightened to 17.6% (vs. 18.5% by mid-September), in line with the recent market gains. Maintain long BMW prefs/short common shares on, with a target of a 12% discount.</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 preference shares premium seems to vary within a range, which is probably liquidity related. It has widened to 29.4% (vs. 28.5% by mid-September). With over 50% of the ordinary shares, the Fuchs family maintains the majority vote.</p>
<p>Although there is no reason why the voting rights should be specially dear in Fuchs's case, voting rights are still valuable and neither the dividend advantage of the preferred shares nor their being members of several midcap indexes (Prime Standard/MDAX; STOXX Europe 600; DAXplus Familiy 30) justify the large premium, in my view. Moreover, the yield on the ordinary shares is higher. Maintain the trade long common/short prefs on, 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> exhibits a long-term trend towards a reduction of the premium of the preferred shares. The premium has recently tightened to 7.5% (vs. 7.9% by mid-September). Maintain short prefs/long ords, with a 5% 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>. Prefs discount has tightened to 27.7% (vs. 30.1% by mid-September, it reached a recent maximum of 33.4% on 12 August). Preference shares have in the past traded at a premium due to its higher liquidity and inclusion in stock indexes. That said, ordinary shares are also liquid. Long prefs/short ords and  monitor the position.</p>
</li>
</ul>
</div>
<div>
<ul style="list-style-type: disc;">
<li>The premium of <a href="https://www.smartkarma.com/entities/telecom-italia-sp-a" target="_blank" data-smartkarma-citation="entities:21075:1" rel="noopener">Telecom Italia Sp A (TIT IM)</a> savings shares vs. ordinary shares tightened to 2.9% (vs. 5.8% by mid-September). The market may have given up on a conversion of savings into ords à la Buzzi Unicem, or à la Danieli, which still has to take place. A conversion makes financial sense as it would save the dividend advantage for the savings. But that would dilute the voting power of Vivendi (23.943% of the votes, the second largest shareholder is Cassa Depositi e Prestiti with 5.031%). Short savings/long ords.</li>
</ul>
</div>
<div>
<ul style="list-style-type: disc;">
<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 40% discount vs. the ordinary shares (vs. a 41.7% discount by mid-September). Ordinary shares are unloved (and arguably cheap) as of lately and even more so are B shares now that the dividend will be discounted until recent <a href="https://www.smartkarma.com/entities/biotest-ag" target="_blank" data-smartkarma-citation="entities:21589:1" rel="noopener">Biotest AG (BIO GR)</a> deal-related leverage is contained. There are some issues around Grifols leverage and some creative solutions to keeping it at bay. The Covid-related antitakeover provisions issued by the Spanish Government mean that the voting rights are less valuable now. Moreover, the by-laws contain a poison pill that should significantly reduce the discount in case of a takeover attempt. The discount in Grifols B shares has averaged 28% since listing of the B shares in February 2016. Although the discount is massive, the lack of dividend makes the B shares relatively less attractive vs. the A shares.</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 has tightened to 15% (vs. 15.2% by mid-September) and seems to be on a widening trend. Investor AB, a stable shareholder, has 22.3% of the votes.</p>
</li>
<li>
<p>On 10 May, Industrivärden divested its entire holding in <a href="https://www.smartkarma.com/entities/ssab-ab" target="_blank" data-smartkarma-citation="entities:22492:1" rel="noopener">SSAB AB (SSABA SS)</a>. Top shareholder is now LKAB (Luossavaara-Kiirunavaara Aktiebolag), a government owned Swedish mining company. LKAB is now consolidating its influence in SSAB "in order to take responsibility and ensure that the company continues to have a clear industrial ownership influence at a time when the steel industry is facing major change". On 7 June, LKAB communicated its increased holding in SSAB (16.0% of the votes and 10.5% of the capital). There is a new large shareholder: State Street Bank and Trust Co with 6.67% of the share capital and 9.26% of the votes. The discount has tightened to 12.9% (vs. 14.3% by mid-September). While there are changes in the share capital, which involve purchases of A shares, I recommend staying clear from this trade.</p>
</li>
</ul>
</div>
<div>
<ul style="list-style-type: disc;">
<li>
<p>The discount of non-voting <a href="https://www.smartkarma.com/entities/roche-holding-ag-77bd09c9-b0c2-45ea-98f1-6a7ca01dc9c5" target="_blank" data-smartkarma-citation="entities:27906:1" rel="noopener">Roche Holding AG (ROG SW)</a> shares has tightened to 9% (vs. 12.2% by mid-September). Shareholding seems very stable, so there is no reason for the voting shares to become dearer vs. the non-voting stock. Softbank has quietly purchased nearly $5 bn of non-voting shares, according to the FT. It may be time to jump on the trend and go long bearer shares/short non-voting equity.</p>
</li>
<li>
<p>The premium of <a href="https://www.smartkarma.com/entities/schindler-holding-ag-a63e9700-2075-4f83-952a-d3e71b14974b" target="_blank" data-smartkarma-citation="entities:25024:1" rel="noopener">Schindler Holding AG (SCHN SW)</a> participation certificates to Schindler Holding shares has tightened to 3.4% (vs. 4.5% by mid-September and 5.3% by mid-August).</p>
</li>
<li>
<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> non-voting stock vs. voting one reflects Schroders' corporate governance and the influence of family control (45.4% voting rights with a 36% economic interest). The discount has tightened to 30.5% (vs. 32.6% by mid-September). It seems time to leave this one quiet for a while.</p>
</li>
</ul>
</div>
<div>
<p>Please read on for table and charts.</p>
</div>



Trends



Spreads have generally tightened since mid-September, in line with market gains.



Interesting situations and trades




The discount of the preferred shares of Bayerische Motoren Werke AG (BMW GR) has tightened to 17.6% (vs. 18.5% by mid-September), in line with the recent market gains. Maintain long BMW prefs/short common shares on, with a target of a 12% discount.

Fuchs Petrolub SE (FPE GR) 's preference shares premium seems to vary within a range, which is probably liquidity related. It has widened to 29.4% (vs. 28.5% by mid-September). With over 50% of the ordinary shares, the Fuchs family maintains the majority vote.
Although there is no reason why the voting rights should be specially dear in Fuchs's case, voting rights are still valuable and neither the dividend advantage of the preferred shares nor their being members of several midcap indexes (Prime Standard/MDAX; STOXX Europe 600; DAXplus Familiy 30) justify the large premium, in my view. Moreover, the yield on the ordinary shares is higher. Maintain the trade long common/short prefs on, with a 10% target.


Henkel AG &amp; Co KGaA (HEN3 GR) exhibits a long-term trend towards a reduction of the premium of the preferred shares. The premium has recently tightened to 7.5% (vs. 7.9% by mid-September). Maintain short prefs/long ords, with a 5% premium target.


Voting rights are valuable in a company like Volkswagen (VOW GR). Prefs discount has tightened to 27.7% (vs. 30.1% by mid-September, it reached a recent maximum of 33.4% on 12 August). Preference shares have in the past traded at a premium due to its higher liquidity and inclusion in stock indexes. That said, ordinary shares are also liquid. Long prefs/short ords and  monitor the position.





The premium of Telecom Italia Sp A (TIT IM) savings shares vs. ordinary shares tightened to 2.9% (vs. 5.8% by mid-September). The market may have given up on a conversion of savings into ords à la Buzzi Unicem, or à la Danieli, which still has to take place. A conversion makes financial sense as it would save the dividend advantage for the savings. But that would dilute the voting power of Vivendi (23.943% of the votes, the second largest shareholder is Cassa Depositi e Prestiti with 5.031%). Short savings/long ords.





Grifols SA (GRF SM) B shares are trading at a 40% discount vs. the ordinary shares (vs. a 41.7% discount by mid-September). Ordinary shares are unloved (and arguably cheap) as of lately and even more so are B shares now that the dividend will be discounted until recent Biotest AG (BIO GR) deal-related leverage is contained. There are some issues around Grifols leverage and some creative solutions to keeping it at bay. The Covid-related antitakeover provisions issued by the Spanish Government mean that the voting rights are less valuable now. Moreover, the by-laws contain a poison pill that should significantly reduce the discount in case of a takeover attempt. The discount in Grifols B shares has averaged 28% since listing of the B shares in February 2016. Although the discount is massive, the lack of dividend makes the B shares relatively less attractive vs. the A shares.


The current discount in Atlas Copco AB (ATCOA SS) B shares vs. A shares has tightened to 15% (vs. 15.2% by mid-September) and seems to be on a widening trend. Investor AB, a stable shareholder, has 22.3% of the votes.


On 10 May, Industrivärden divested its entire holding in SSAB AB (SSABA SS). Top shareholder is now LKAB (Luossavaara-Kiirunavaara Aktiebolag), a government owned Swedish mining company. LKAB is now consolidating its influence in SSAB "in order to take responsibility and ensure that the company continues to have a clear industrial ownership influence at a time when the steel industry is facing major change". On 7 June, LKAB communicated its increased holding in SSAB (16.0% of the votes and 10.5% of the capital). There is a new large shareholder: State Street Bank and Trust Co with 6.67% of the share capital and 9.26% of the votes. The discount has tightened to 12.9% (vs. 14.3% by mid-September). While there are changes in the share capital, which involve purchases of A shares, I recommend staying clear from this trade.






The discount of non-voting Roche Holding AG (ROG SW) shares has tightened to 9% (vs. 12.2% by mid-September). Shareholding seems very stable, so there is no reason for the voting shares to become dearer vs. the non-voting stock. Softbank has quietly purchased nearly $5 bn of non-voting shares, according to the FT. It may be time to jump on the trend and go long bearer shares/short non-voting equity.


The premium of Schindler Holding AG (SCHN SW) participation certificates to Schindler Holding shares has tightened to 3.4% (vs. 4.5% by mid-September and 5.3% by mid-August).


The discount in Schroders PLC (SDR LN) non-voting stock vs. voting one reflects Schroders' corporate governance and the influence of family control (45.4% voting rights with a 36% economic interest). The discount has tightened to 30.5% (vs. 32.6% by mid-September). It seems time to leave this one quiet for a while.




Please read on for table and charts.


Liquid Universe of European Ordinary and Preferred Shares: October Report

<p><br/> The Europe HY Trade Book for September 2021 includes high-conviction trade ideas drawn from our European HY coverage universe, along with relative-value scatter plots and tables by industry.<br/></p>

  The Europe HY Trade Book for September 2021 includes high-conviction trade ideas drawn from our European HY coverage universe, along with relative-value scatter plots and tables by industry. 

Europe HY Trade Book - September 2021 - Lucror Analytics

Italy

Telecom Italia S.p.A., through subsidiaries, offers fixed line and mobile telephone and data transmission services in Italy and abroad.  The Company offers local and long-distance telephone, satellite communications, Internet access, and teleconferencing services.

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Telecom Italia SPA (TIT IM)

Liquid Universe of European Ordinary and Preferred Shares: November Report

Spreads have generally tightened across our liquid universe, with some notorious exceptions such as Volkswagen and Grifols.

Jesus Rodriguez Aguilar

KKR/Telecom Italia: Open Fiber Deal, Ongoing Restructuring, Strategies

I would look to put on any the following strategies: short credit/buy protection, short TIT IM (my SOTP valuation is €0.29/ordinary share), and...

Jesus Rodriguez Aguilar

Europe HY Trade Book - October 2021 - Lucror Analytics

The Europe HY Trade Book for October 2021 includes high-conviction trade ideas drawn from our European HY coverage universe, along with...

Lucror Analytics

Liquid Universe of European Ordinary and Preferred Shares: October Report

Spreads have generally tightened since mid-September, in line with market gains. Interesting situations are the German liquid shares and Roche.

Jesus Rodriguez Aguilar

Europe HY Trade Book - September 2021 - Lucror Analytics

The Europe HY Trade Book for September 2021 includes high-conviction trade ideas drawn from our European HY coverage universe, along with...

Lucror Analytics

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P/E

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