I previously wrote-up Bavaria Industriekapital a couple of years ago at 14 Euro a share, it’s at 25 Euro a share now as the main value realizing catalyst has played out (principal asset, a subsidiary called Kienle & Spiess was sold in February of this year). However, I think there is now a short-term opportunity as until the 1H13 financials are disclosed in August, the net proceeds from the sales are unknown (transaction terms not disclosed) and by triangulating a few different data points, I think it’s likely Bavaria is trading at or below the cash it will have on its books let alone all of its other assets. As such, the stock should appreciate well in the short-run and the long-run is also appealing given high quality management and discount to NAV.

As a quick refresher, Bavaria is an investment company based in Munich focused on acquiring highly distressed companies in Europe. They typically have paid literally 1 Euro for each of their portfolio companies and set up each acquisition as its own legal entity so that if the operation can’t be turned around quick enough, the business can simply be shut down with no recourse to the hold co. As such, Bavaria’s CEO Reimar Scholz essentially views Bavaria’s strategy as one of creating a portfolio of free call options. This approach has led to substantial value creation for Reimar and Bavaria – in 2005/2006 through two small IPOs, the company raised 14m Euro. Since then, they have paid out over 50M Euro in dividends and the market cap today is 146m Euro. Reimar owns 67% of the company and the company has a reasonable G&A structure – Reimar doesn’t charge mgmt fees or incentive fees.

The prime driver of this value creation has been Kienle & Spiess (K&S), an electrical motor component manufacturer which Bavaria acquired in 2006. K&S sells electrical motor components and pumps across a diversified range of industries (auto, wind turbine, general industrial use) and the customer base is primarily concentrated in Western Europe. Bavaria turned the business around through implementing its Toyota Production System (TPS) turn-around model and in my estimate company generated about 36M Euro of EBITDA in 2012 (not bad for 1 Euro!) and 12m Euro of net income. Note that the EBITDA number is difficult to ascertain from Bavaria’s segment reporting as K&S is grouped into a broader segment (‘Series Production’ with several other portfolio companies). However, the two main portfolio companies in this division are K&S and a company called Tri-Stone and in Bavaria’s 2012 annual letter to shareholders (available on website at www.baikap.de), they provide sales and net income figures historically for both companies. The total segment EBITDA in 2012 for Series Production was 42M Euro (see 2012 annual report on website, note only in German) and given Tri-Stone’s 2.6m Euro of net income that may be 6M Euro of EBITDA. The other 3 portfolio companies in this segment are break-even to small positive/negative EBITDA so if we net those out to 0 that leaves 36M EBITDA for K&S in 2012. What we do know for sure is K&S 2012 net income as that is detailed in the letter – that was 12M Euro in 2012.  

All this is important as K&S was sold in February but neither Bavaria nor Sumitomo (the acquirer) has disclosed the purchase price and as it’s immaterial to Sumitomo, it’s not in their financial reports. However, in the press release, Reimar discusses how the EBITDA multiple for the transaction was in-line with recent industrial transactions without specifying what the transactions he is referring to are.

As you can see, the difficulty in getting good information may present an opportunity as the company is currently trading for ~ 150M Euro market cap and there is net cash of 13M Euro outside of the sale. The range of values I can see for Kienle & Spiess is anywhere from 8x EBITDA (280M Euro) on the high end to 10x net income (120M Euro) on the low end.  200M Euro is the midpoint which backs into 5.7x EBITDA which I think is in the right place given Reimar’s comment about how the sale went off at a multiple in-line with other recent industrial transactions. After German cap gains tax that is ~ 170M Euro net. There is a 60M Euro pension liability which is almost all at K&S, but net income and EBITDA are after pension expense so it’s unclear if an adjustment needs to be made. However, if we are conservative and assume that Sumitomo demanded a 60M Euro reduction in purchase price, the net proceeds to Bavaria would be ~ 120M Euro.

So if we add up current net cash of 13M Euro with 120M Euro to 170M (no pension adjustment) in net K&S proceeds and compare to the current market cap of 150M Euro, you can see how when 1H13 results get reported in August Bavaria could be trading very close to or potentially at a meaningful discount to cash.

However, the asset value of the company is meaningfully above the cash value. Bavaria acquired one company (TriStone) in June 2009 for 35M Euro in a deviation from their typical strategy. TriStone is a provider of flow technology solutions to the automotive industry and Bavaria has again had good performance in improving the fundamentals (see above referenced shareholder level) so 35M Euro is likely a conservative value. While the business I estimate did 6m EBITDA in 2012 making 35M Euro a reasonable value, Reimar pointed in the letter to a variety of 1x factors in 2012 that should make 2013 and going forward EBITDA meaningfully higher. Finally, you have the portfolio of over 10 other ‘free options’ in Bavaria’s portfolio none of which so far have turned-around but which also are not draining meaningful cash either. So if you assume 0 for those other companies and 50M Euro for Tri-Stone and 150M Euro net cash, you are buying Bavaria at 75 cents on the dollar of NAV.

I think that is an attractive purchase price as the long-run picture for Bavaria is also compelling in my view. Reimar is planning to invest the K&S proceeds in distressed acquisitions in Europe but more akin to Tri-Stone (traditional distressed private equity) vs. businesses performing so terribly they are literally given away. Having fresh capital, a manager with a great track record of value creation in distressed, no fees, and a great time to be a distressed investor in Europe sets Bavaria up well over the next 4-5 years, especially if you can enter at 75 cents on the dollar.