Description

Benetton (BEN IM) is a dominant 40+ year old European retailer that owns a large portion of their Class A retail locations.  Most of their sales and stores are in Europe, but they are intelligently growing in Asia.  Current book value per share is $8.80, tangible book value per share is 7.42.   The company earned, on average over the past ten years, 66c per share.  EPS in 2007-20010 were .81, .85, .79 and .70.  (This year, EPS is expected to be .43, but this is a bogus number deflated by a management team with designs to takeunder the company.) Insider ownership is 70.6%, the dividend yield is over 5%, and the company has a stock repurchase program having bought 14mm shares at 6.30 per share on average.  The company is reasonably well-managed and cheap. 

On Feb 1, 2012, the company announced the controlling shareholder is offering to buy all the minority shares at 4.60 per share.  The scandalously low price offered represents a 38% discount to tangible book value, a 48% discount to book value, and 7x normalized earnings.  The take-under bid is also a significant discount to the 5.50 euro price the company has generally traded at since the financial crisis. 

The idea is being posted here because this is an interesting risk arbitrage opportunity.  In order to block the takeover bid, shareholders need to acquire 9.1mm shares (5% of total shares outstanding excluding treasury stock).  Over 20mm shares have traded at a premium to 4.60 offer price since the takeover offer.  I believe the deal will be held up until a higher price is offered.  Alternatively, the 95% threshold will be waived and the company will accretively buy in as much stock as possible at 4.60, and then leave the remainder outstanding.  If owners do not benefit from a bump in the price offered, then they may benefit from an Ackman-like activist pursuing a campaign to get fair value, or in the “worst case” they will continue to own shares of a well-run cheap European retailer at about half of book value and 7x earnings.

Note book value is understated, according to the company itself, by approximately 200mm euros or 1.19 euro per share.   The company has 775mm of land and buildings.  The company acquired a large portion of their realty assets over the past decade, but much of their realty has been on the books for more than 10 years.  I have seen many of their sites in Europe, and they are all Class A realty assets—think prime retail real estate locations in the center of Paris, Rome, and other major cities.  These are extraordinarily valuable and marketable assets.

The tender offer documentation is straightforward.  In order to squeeze out the minorities, management needs to obtain 95% of the shares.  There are 182.679,012 shares outstanding.  Edizione owns 122,540,000 shares, and there are 14,201,582 shares in treasury.  They will be starting the offer between March and April 2012, and concluding it by April 24, 2012.  Edizione, the holding company for the Benetton family, owns 122.54mm shares or 67.08% of the gross shares and 72.7% including treasury shares.

The company's Powerpoint presentations provide significant information and are available online.  Note that sell side analysts are very close to the family and will be very discouraging about the company's prospects, despite the facts.  Also, both the CEO and CFO are shills for the Benetton family--they have not been helpful to me and I have covered the company closely for more than a year.

Catalyst