B2 Holding B2H
August 15, 2015 - 3:37pm EST by
2015 2016
Price: 11.00 EPS 0.81 0
Shares Out. (in M): 311 P/E 12.9 0
Market Cap (in $M): 3,425 P/FCF 0 0
Net Debt (in $M): 1,300 EBIT 400 0
TEV (in $M): 4,825 TEV/EBIT 12.1 0

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B2 Holding (BTOH) - cheap, fast growing and an obvious take-over candidate

First things first: If you are unable or unwilling to invest in unlisted and/or relatively illiquid stocks, this write-up is not for you. But if you are willing to suspend your liquidity preference for a few months, read on.

Elevator pitch: B2 is a cheap, fast growing take-over target with a hard catalyst (full listing on the Oslo Stock Exchange) that offers 60% upside to my price target of 18 NOK within the next 12-24 months. Longer term, the upside could be considerably larger.

The investment case in bullet points: 

  • Strong leadership: A management team with a stellar track record of shareholder value creation is building a significant presence in European debt collection. B2 management has done this before - twice! They own about 10% of the company, not including a generous option package. These people are very skilled and highly incentivized to succeed. 
  • Favorable macro and regulatory environment: The company is a beneficiary of a stricter regulatory environment for European banks, who are forced to offload portfolios of debt to comply with new risk management rules. ECB's Asset Quality Review (AQR) results in more loans being classified as non-performing and leads to a capital shortcoming approaching 10 Bn Euros in total. Basel 3 means banks are forced to reduce high-risk weighted assets in many cases, and the introduction of IFRS 9 by 2018 will require more conservative calculation of loan losses. All this forces banks to sell, and B2 can take advantage of this by acquiring portfolios at attractive valuations. The flow of interesting claims portfolios should therefore be solid for some time. Record low interest rates and significant debt capacity will help B2 maximize returns going forward.
  • Growing quickly: The company is well capitalized and is also going to issue a bond loan in Q3 to fund aggressive purchases of new portfolios while this window of opportunity is open. The business is very scalable, and return on equity should improve markedly as B2 grows. And increased focus on the favorable eastern european markets will also help them achieve higher ROIs on purchased portfolios.
  • Cheap: B2 is trading at a discount to peers on most metrics.
  • Takeover target: B2 should be an attractive target for both larger Nordic peers like Intrum Justitia, US players like Portfolio Recovery Associates and private equity players. The PE industry is currently pursuing similar companies aggressively, to wit the Pemira purchase of both GFKL and Lowell Group this summer (financial terms are not disclosed at this time), and Nordic Capital's purchase of Lindorff (at EV/EBIT 18.4). Management has previously stated that a natural exit would be a sale of the company "within 3-5 years (said in 2014)." As they have done this very successfully twice before, I think one should view this as very likely. ​
  • I believe B2 is worth at least 18 NOK per share, which implies 60%+ upside from the current share price. 
  • A hard catalyst exists here since the company plans to list properly on the Oslo Stock Exchange in 2016 (Q1). This will result in higher pricing, increased attention and analyst coverage and better liquidity (note that the company is quite large for an unlisted stock with a market cap of > 3.4 Bn NOK, and lately the trading volumes have increased markedly into the millions, so it's not that illiquid anymore).

Key figures
Last price 11.00
Shares outstanding* 311.4
Market cap 3425.4
Net debt 1300
Minority interest 20
Earnout clause 40
CEO/COB exit clause 40
EV 4825.4
Gross ERC 4631
EV/gross ERC 1.0
Insider ownership 10 %
Multiples 2014 2015
EV/EBIT 19.4 12.1
P/E 27.8 12.9

* basic shares. Fully diluted incl all options the count is 325.8m shares.


Brief company overview

B2 Holding is a debt collection company with operations in the Nordic region and Central and Eastern Europe. The company operates in three business areas: unsecured non-performing loans, third party collection and consumer lending.

Through a series of acquisitions, the company has grown to become a serious player in the European debt collection industry. In 2014, the fairly large acquisition of Ultimo from Advent in Poland was the most important (Ultimo managed portfolios with a face value of 3840m at the time), followed by the purchase of a large portfolio in august 2014 from Hypo Aldria (about 168m EUR in face value). 

The company reported pro-forma revenue for 2014 including Ultimo of about 727m NOK (but was probably higher in reality), and cash EBITDA ( gross ERC stood at about 4600 NOK as of June this year. Pro forma EPS was 0.38 NOK. These numbers will be significantly improved upon when B2 reports full-year 2015.

Management has one of the strongest track records I've ever seen

The owners of the company I work for have had a relationship with senior management for years. We know and trust these people. This of course is not the case for the readers of this write-up, so here is some background information on two central figures, the CEO Olav Dahlen Zahl and chairman and founder Jon Nordbrekken.

B2 was started in 2011 by industry veterans Jon Nordbrekken and Olav Dahlen Zahl, who have had considerable success in this business previously. Shareholders were extremely happy with their efforts. Nordbrekken and Zahl achieved an annual shareholder return (market cap CAGR) of 62% in Aktiv Kapital under their tenure from 1998-2004. In Gothia, the annual shareholder return from 2005-2008 (market cap CAGR) was an unbelievable 94%. 

Even if this can't realistically be replicated now, their previous experience is a major asset - among the most important barriers to entry in debt collection is having good relationships with banks and creditors. Nordbrekken and Zahl have cultivated relationships with said parties over 20+ years. This leads to access to better deal flow. 


The company's strategy is to buy portfolios of debt at a major discount to face (and fair) value, develop a strong operation platform (better scoring, analysis than competitors in their markets) and establish a pan-european player in debt collection. Their specifically stated strategic goals* going forward are:

  • Focus on financing with increased use of debt (the company is significantly overcapitalized)
  • Continue the stock listing process (planned listing in Q1 2016 on the OSE)
  • Grow in existing markets by utilising established platforms 
  • Further integrate and utilise core competencies in the group 
  • Enter into new markets

* Company presentation March 13th 2015


IFRS P&L 2014 (incl FY Ultimo from '14) 2014 2015
Interest income on loan portfolios 727 901
External collection (commission, fees) 91 96
Portfolio collection income 818 997
Other income 23 23
Total operating revenues 841 1020
IFRS writedowns on portfolios -261 -458
Total cash revenue* (add back write-downs) 1102 1478
Total opex -576 -595
Cash EBITDA** (= cash revenue - opex) 526 883
EBITDA (cash EBITDA - writedowns) 265 425
D&A -16 -25
EBIT 249 400
Interest expense -131  -99 
Other financial items 29  -
Net financials -102  -99 
PTP 147 301
Tax (12% from 2015) -24 -36
Net profit 123 265
# shares ( incl all options dilution) 311.4 325.8
EPS 0.39 0.81

NB: I'm using the fully diluted share count for the P&L estimates, but not in the quoted P/E multiple above. Hence the discrepancy.

Note also that I haven't bothered to try to estimate a detailed P&L for the coming years, simply because I can't see how it can realistically be done in this case: While I have some clue of what they have been able to buy this year and their costs, I don't know how much they will be able to buy in 2016 and how much debt they will have at that point. Any detailed estimates would be very speculative. Even the interest costs this year will depend on what size bond issue they do. So there's every reason to take my estimates with a grain of salt.

 I will say this though: It seems very likely that earnings will continue to grow at a solid clip for another couple of years at least. B2 is currently trading at about 12.9x 2015 EPS, which seems very low to me. To get a sense of how the market chooses to price comparables, see the table below detailing the IPO pricing recently.

So what's next for B2?

1. Aggressive portfolio purchase activity

In the coming months and years, I believe the company will grow their business aggressively, especially in Central and Eastern Europe and in the Balkans in particular. It is a very creditor friendly environment where B2's main competitors are not omnipresent, and where IRRs on debt portfolios are very high (so high in fact, that B2's Balkans representative did not want to disclose the average figure on the annual general meeting for fear of attracting more competition).

2. Optimizing capital structure

Compared to peers, B2's equity ratio is very high at 49% vs a peer average of about 30%. A bond loan of 500m NOK will be issued in Q3 this year, which will help the company fund portfolio acquisitions (management says the pipeline of deals looks excellent, and time and money are the main constraints). They could even do 1 Bn, but it will most likely be done in 2 tranches. Levering up lowers the company's cost of capital and helps increase ROE significantly as B2 will realize lower its relative cost base. As will more favorable taxation, the company will be able to lower its effective tax rate because a large number of portfolios will be held via Luxembourg (I have not given full credit to this tax scheme because it seems a little too good to be true and the details are not clear to me). B2 also recently concluded work on a new 4-year, 2 Bn revolving credit facility which replaces existing facilities in all geographical markets and provides both increased financial and investment flexibilty (the new facility allows for more types of claims to be held than the previous one did, which opens new doors for B2). 

3. Listing on the Oslo Stock Exchange - should lift valuation

B2 will list in Q1 of 2016. This is not a coincidental choice, I think the company wants to report a strong 2015 in conjunction with the listing process. Looking at the average pricing on recently completed, comparable IPOs in the Nordic markets, it seems very likely that B2 will get a valuation uplift. Note that use my estimated 2015 EPS and book value as of june 2015 for B2 which is probably unfair since I think we can safely assume book value and earnings will grow somewhat by next year's listing. Which means this is not an apples-to-apples comparison, but an added margin of safety is never a bad thing. The implied fair pricing is about 18.7 NOK per fully diluted share (including all options held by management), 

IPO pricing comparables T12 P/E T12 P/B
Hoist Finance 25.4 3.3
Collector 31.0 4.9
Nordax 18.2 3.0
Arrow 23.8 3.6
Average 24.6 3.7
Median 24.6 3.4
B2 multiples on 2015 EPS/Q1 2015 BV 13.5 2.4
B2 share price at avg peer IPO pricing: 20.0 15.8

Valuation and price target

The midpoint of the P/E and P/B values in the above table implies 17.9 NOK is a likely value for B2 after listing (identical to my price target). A fast growing, well run company with strategic value to the industry and appeal to private equity could very well see pricing at these levels. Earnings visibility is good, and debt collection is a cash machine when done right. In an energy-dominated market like the OSE, a company like this will probably be well received. 

Looking at other peers, Intrum Justitia and Kruk S.A. are the most relevant. Intrum trades at 18x 2015 EPS, while Kruk is not as aggressively valued at 13x. In terms of P/B multiples, Intrum trades at 6.8x while Kruk is at 3.6x. Doing the same excercise here, the average multiples are 15.5x EPS and 4.9x book. So other listed peer valuations imply plenty of upside as well.

To get a sense of whether B2 is too cheap from another angle, one could estimate the a reasonable price/book multiple like this: (assumed sustainable ROE - growth rate) / (discount rate - growth rate). Assuming a ROE in line with industry median (25%) is sustainable going forward after optimizing the capital structure and paying lower taxes, a 10% discount rate and a long term growth rate in earnings of 4% (in line with the long term historical growth rate in earnings in the stock market overall), this works out to a fair P/B multiple of 3.5. Using the current BV of 1405m NOK, that implies a fair value per fully diluted share of 15.1 NOK. So B2 looks cheap from this point of view as well, even if assuming normal growth only in perpetuity.

Recent M&A support 18 NOK as a share price target.

Finally, there's a good chance the company is acquired in a couple of years, but I don't think it is for sale just yet -management is probably going to want to keep building critical mass before they sell out. They sold too soon in 2008, when Herkules Capital bought Gothia. This was partly because of pressure from other leading shareholders. Herkules sold the company for over double sum paid only five years later when selling it to Arvato. Considering this was a levered purchase, the returns were obviously very good. I think this was rather painful for Nordbrekken and Zahl to watch, and thus believe they will be more patient this time around if they think that's better for B2's shareholders.

Like I said previously, the company should be interesting to several industry players because of its geographical exposure. There are also likely other buyers: Debt collection is a cash generative business with fairly stable margins. Just the thing you might want to buy and lever up in this climate if you're a private equity guy. The average pricing over the last couple of years indicates that a reasonable expectation is somewhere around EV/cash EBITDA (=EBITDA+portfolio amortizations) of 6-7. Assuming B2 can grow 2015 cash EBITDA at a 10% pace through 2017, 883m*1.10^2=1068m in 2017. If somebody were to pay EV/cash EBITDA 6-7 at that point, it implies a valuation of 18-19 NOK per fully diluted share. 

This is an imprecise but interesting excercise, because if you do that for another couple of years, the value of B2 increases to 25 NOK and so on. And with size comes increased cost efficiency and ROE, so should a buyer not materialize, it's not a great loss to me. This is the kind of business I would like to own forever, and the dividend capacity will likely be significant over time.


Buy B2 Holding before this opportunity is recognized by the broader market. (At least start looking at it now, even if you can't buy before the listing. By the time it's listed and the major local brokerages have initiated coverage, it will probably be too late to start work on this. As of today, only Fondsfinans has some coverage, and that was initiated this week). 

In the interest of full disclosure I should say that this is by far our largest position. We run a concentrated portfolio, but even by our usual standards we are being aggressive here. While the company is not dirt cheap on multiples, it is a great business run by great management with a promising growth runway. This is, in my opinion, a fat pitch and we are acting accordingly.

Pre-mortem -a summary of risks: if something were to kill the investment case, what could it be?

  • Regulatory changes could impact B2 negatively. Central and Estern Europe is very creditor friendly. This is good for B2 now, but future reforms would likely favor debtors. 
  • Capital intensive business, if something goes wrong with funding, it's a major problem. But this looks unlikely.​ However, if the credit markets crack up before their bond issue, that will impact near term growth negatively, obviously.
  • Supply of claims could dry up for a number of reasons. The company is dependent on finding interesting portfolios to buy. If supply does dry up, growth stops or goes in reverse. If private equity steps on the gas in the industry, it could be positive for valuations of B2 and comparables, but it could potentially also increase competition in B2's markets and lead to fewer opportunities faster.
  • Sharply rising interest rates would impact future cash flows negatively because of the debt dependence of B2. 
  • Key man risk: Nordbrekken, Zahl or both could leave the company. But given their significant exposure, I don't think so.​
  • Effing up by buying the wrong competitor and/or paying too high a price. Hasn't been the case historically, but you never know how the show will go, as the old folks say.
  • Currency risk: NOK could strengthen​ markedly against other European currencies. Hedging may not mitigate this completely.

Sources: Management, company presentations and reports.

I hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.



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