Description

Thesis

I am recommending a long position in Bollore (BOL FP), a French conglomerate managed by activist investor Vincent Bollore. Bollore over time has created value by acquiring undervalued, underperforming assets and turning around the operations by actively participating in the management. The stock, which is off 30% from recent highs, has compounded at 18% over the past two decades. Currently, it is selling at a 57% discount to net asset value according to my base case calculation and a 46% discount according to my low case calculation. European holding companies trade on average at a 25% discount to NAV. In the case of Bollore, stakes in publicly traded companies account for 45% of my base case NAV and 77% of the current enterprise value.  If it were to trade in line with the average European holding company discount, the stock has 74% upside from current levels based on my “base case” NAV calculation. Longer term, I believe that there is room for the NAV to grow based on: the successful restructuring of Vivendi; long term growth of Africa Logistics; eventual success or shut down of the money losing Energy Storage business.

Why does the opportunity exist?

• Complexity. Bollore’s current corporate structure is a vestige from the acquisition/merger with Banque Rivaud in 1996 which was publicly traded and had a very complex corporate structure with multiple holding companies and cross shareholdings. Management over time has been simplifying the company structure by collapsing one or two holding companies annually over the past several years. However, it remains a very complex corporate structure (see page 35 of the 1H2016 corporate presentation).

• Weakness in Africa Logistics business. The biggest non-public operating asset is Bollore Logistics of which Bollore Africa Logistics represents the bulk of the value. After half a decade of high single digit/low double digit top line growth, this business saw a significant deceleration starting in 2013 due to currency and commodity weakness.

• Continued investment in the money losing energy storage business. The Group has invested EUR 3 billion into the   energy storage business. Of Bollore’s many ventures, this is definitely the one that has not worked thus far. I believe that if the business does not seem viable within two to three years, management will take actions to stem the losses. However, many sell side analysts penalize the company’s valuation because of this business.

• Corporate Governance. The CFO is very forthcoming in stating that, “this is a family business.” Three of Vincent Bollore’s four children have senior management positions at the company. The CFO is Vincent Bollore’s nephew. Vincent Bollore makes it very clear that this is a family business that will be managed by his children when he retires in 2022. I do believe this is a long term concern but not a near term concern for the stock to work in the next few years.

• Opacity. Management complies with all reporting requirements but is not forthcoming with information. They do not make it easy for analysts to get information.

• Vincent Bollore’s reputation. Although he is admired for his successful track record and deal making acumen, many in the French business establishment resent Vincent Bollore’s “aggressiveness.” He is definitely litigious and difficult to deal with. Nonetheless, the company has successful partnerships with third parties such as Maersk in ports. I believe that minority shareholders are reasonably well protected from a creeping takeover by the EU Takeover Directive. I also believe that he is obsessed with his family legacy and wants to leave a relatively well functioning publicly traded company for his children when he retires.

Background

In addition to the company’s annual report and public company fillings, I suggest reading a buy recommendation written by Carson Block of Muddy Waters in February 2015: http://www.muddywatersresearch.com/research/bol/complexity-creating-arbitrage/. At the time, the stock was trading at EUR4.31 per share, and Muddy Waters argued for upside to EUR 8.50 per share. I also recommend reading the December 2015 initiation by Oddo Securities which provides valuable insights into the history of the Group.

Bollore is a holding company whose primary assets consist of a 20% stake in Vivendi (VIV FP), a 60% stake in Havas (HAV FP), a portfolio of minority holdings in seven publicly traded European companies, Bollore Transportation and Logistics, and Bollore Energy Storage and Solutions. In 1981 Vincent Bollore and his brother bought the equity of their bankrupt family business for a symbolic sum. The original business, which dated back to 1822, consisted of writing and cigarette papers and films for electric capacitors. They turned around the business and used the cash flow to acquire a series of companies. Below is a summary of the major acquisitions done by Bollore since assuming control in 1982:

Today Bollore’s most important assets are the following:

Vivendi

In 2012 Bollore first acquired a 1.1% stake in Vivendi through the sale of Canal 8 for stock. He subsequently increased his stake to 20% at an average cost of EUR 20 per share. Since assuming the role of Chairman of the board and appointed a new CEO, the company has paid EUR 6.40 per share in dividends. Through a series of large divestments, he has taken the company from a EUR 11 billion net debt position to a EUR 2.5 billion net cash position and has paid roughly EUR 7 billion in dividends (EUR6.40 per share).

Vivendi currently consists of Universal Music Group, Canal+, and a stake in Telecom Italia. Sell side analyst focus on the structural challenges of Canal Group in France. In reality, Canal Group consists of two businesses, a French Pay TV business losing about EUR 300 million and a profitable and rapidly growing African pay TV business. Bollore sent a letter to Canal+ employees, the money losing division, earlier in the year stating that Vivendi would be taking measures to get the French business to breakeven by 2018. If he is successful, Vivendi would be left with: a healthy, growing Africa business; Universal Music Group which has the rights to 35% of all music ever recorded; and, a stake in Telecom Italia which itself is a turnaround. I think UMG has a lot of upside. For those interested, Merrill and GS have done some good work on the evolving music industry economics.

Havas

Havas is a publicly traded advertising agency. Bollore began acquiring shares in the company in 2004 and now controls 60% of the company. Just like with Vivendi, there was a lot of skepticism about his ability to create value at Havas. Since he took over management control of Havas, net margins have doubled to 8%. I do not see a lot of room for further margin upside here but see further room for consolidation in this space.

Bollore Logistics

Bollore Logistics is an integrated logistics business that generates roughly EUR 750 million of EBITDA. The fastest growing and most valuable part of the business is the Africa Logistics division which dates back to the acquisition of SCAC in 1986. It is the leading integrated logistics business in Africa with a foothold in 45 African countries. It operates seventeen port concession and three railway concessions. It also provides freight forwarding, multimodal transportation, customs and excise, regulatory compliance, and global supply chain management services. After growing in the high single/low double digits for almost a decade, this business experienced a slowdown starting in 2013 which has continued and is partly responsible for the derating of the stock.

Bollore Energy Storage and Solutions

Over the past decade Bollore has invested almost EUR 3 billion into this business. This business emerged from a legacy of the paper business, a polypropylene film and metallized plastic film business supplying the electric capacitor industry.  In 2001 Bollore began producing LMP (lithium-metal-polymer) batteries and supercapacitors. This is a money losing business which is ultimately dependent on the evolution and success of LMP battery technology. After doing some research, I do not have a strong view whether or not this technology will ultimately succeed. I value the business at zero in my low case and at EUR 1 billion in my base case. The following article provides some background: https://www.nytimes.com/2015/06/13/business/international/vincent-bollores-long-bet-on-solid-state-batteries-for-electric-cars.html?_r=0.. After speaking with the CFO, I believe that management will determine in the next few years whether this business is viable or not. Should they determine that it is not viable, I get the sense that they will take steps to reduce losses and curb the investment in the business.

Circular Ownership

Bollore Group (BOL FP) has 2.9 billion shares outstanding. However, as I mentioned earlier, the company has a very complex corporate structure. Please see page 35 of the 1H2016 investor presentation. Over the years, Bollore, instead of buying back its own shares, has primarily bought back shares of the publicly traded holding companies that control it, in some cases ultimately buying the entire float and delisting them. It has done so to take advantage of the holding company discounts. As a result, Bollore (BOL FP) owns close to half of itself through stakes in holding companies that control it, the biggest one being its 33.2% stake in Finaciere l’Odet (ODET FP). To adjust for the circular ownership I simply calculate the market capitalization using half of the shares outstanding. The other approach would be simply to add the value of the shares that it owns in the holdco’s, but in doing so we would just be applying a discount on a discount and not necessarily capturing the economic reality that the company owns half of itself. Please see the table below:

Valuation

Below is a sum of the parts valuation for Bollore Group. Stakes in public entities are valued at market. The logistics business is valued based on comparable company multiples, mostly port and logistics operators. The value of energy storage solutions is a guesstimate.

I have not adjusted for capital gains, because of the following information provided by the company:  “Under French corporate tax rules on capital gains, a company may benefit from a tax shield if 1) it owns at least 5% the subsidiary's capital 2) for at least 2 years. If those 2 conditions are met, tax on capital gains following the disposal of the subsidiary shares is limited to 12% of the capital gain amount. The amount is added-back and taxed at standard Corporate  Income Tax (38% in France 34% + social taxes) which implies and effective tax rate of 4.56% (12%*38%) on capital gains. Should those conditions not be met, capital gain will be taxed at standard Corporate Income Tax (i.e. 38%). In Europe, tax rate applied to capital gains (depending on local tax rules and conditions) are in a range of 0% (in Luxembourg, the Netherlands, Spain, the UK, Germany) to 4.56% (France). Italy stands at ~1.375% and Belgium at 0.412%.” Furthermore, I do not believe that they intend to sell Vivendi or Havas, the two major positions, any time soon.  Since Bollore has owns more than 5% of most of its major subsidiaries and has held its stakes for longer than two years, the lower tax rate would apply. Over time, they have been very tax efficient in disposing of equity stakes.

Conclusion

Bollore stock is very inexpensive relative to the value of the assets and could be a very good investment if Vincent Bollore continues to create value like he has over the past two decades.

Catalyst

• Value creation at Vivendi
• Resumption of growth in Bollore Africa Logistics
• Ongoing simplification of the corporate structure. 
• The passage of time. Reversion to the mean.