Description

Thesis Summary

Compagnie de L’Odet (ODET) is a French family holding company which owns ~64% of Bolloré SE (BOL), together with a small direct holding in Vivendi SE (VIV).  I estimate that ODET now trades at a 74-82% discount to NAV and currently allows you to buy a stake in Universal Music Group (UMG) at a ~23% discount to Pershing Square Tontine Holding’s (PSTH) recently announced purchase price and get ODET’s share of BOL’s other assets for free. 

Despite an exceptional long term track record (ODET is approaching 100-bagger status since its IPO in the early 1990s), BOL & ODET have always traded at wide discounts. However, we are now at record discount levels and there are a number of catalysts and opportunities for value creation which should cause ODET to finally re-rate in the near future: 

• Vincent Bolloré has engineered a John Malone-esque spin-off of Universal Music Group from Vivendi which is set to complete in late September and will unlock the bulk of the underlying value of UMG in Vivendi. The spin-off has been designed so that Bolloré can extract maximum value out of UMG/VIV and so that he can take over the VIV stub using VIV’s own cash post-spin. There is also a chance that UMG ultimately trades even higher than PSTH’s valuation.  

• Due to the resurgence of global trade, high commodities prices and record container freight rates, the group’s core African ports/logistics and freight forwarding businesses are experiencing record growth/profitability after a long period of sluggish growth. 2021 EBIT is likely to be up at least 40% for freight forwarding and 25% for the African division. The market may finally recognise the value in these assets once strong results for the division are posted. It is also possible that Bolloré may sell its highly prized African ports, railways and logistics assets to a price-insensitive buyer in the coming years. 

• A key reason for its persistent discount has been its opaque corporate structure and confusing consolidated accounting which makes ODET difficult to value/model. With Vincent Bolloré’s “retirement” only 7 months away, the group may finally simplify its complex structure in the coming years.   

• Blue Solutions, Bolloré’s persistently unprofitable battery subsidiary, is finally gaining traction and looks set to rapidly increase sales in the coming years. Blue Solutions now provides genuine option value in a rapidly growing battery technology after decades of losses.

Given these catalysts and using fairly conservative assumptions (NAV per share of €4,208, 8% NAV CAGR, 50% target discount), ODET can deliver a 34%+ IRR over the next 3 years.

ODET was previously written up by punchcardtrader in 2018 and BOL was written up by om730 in 2017. Both write-ups and comments sections are worth reading.

Brief Background 

The Bolloré group traces its roots back to 1822 where it ran a paper mill in Brittany and created the famous OCB rolling paper brand (Odet-Cascadec-Bolloré). With the help of Baron Edmond de Rothschild, Vincent Bolloré (aged only 23) and his brother managed to wrestle the struggling Papeteries Bolloré away from under their father. In 1981, Vincent purchased the family business outright from de Rothschild for just a single Franc and has since managed to transform it into a global conglomerate with diverse assets ranging from an African ports monopoly, a 30% stake in French media giant Vivendi (Universal Music Group, Canal+, Havas, Editis, Dailymotion), a global freight forwarding business, an oil logistics business, and an electricity storage and systems business.

Compagnie de l’Odet (formerly Financière de l'Odet) has been the listed entity most closely aligned with Vincent Bolloré and sits above Bollore SE and below Sofibol in the corporate structure. Its primary function has been as a control vehicle for the Bolloré family, however there are indications that it may play a more active role as a holding company going forward.

NAV Discount

On a look-through basis of its 64% holding in BOL and its small direct holding in VIV, my base case NAV for ODET is ~€12.8b net of all debt and capitalised corporate overhead. This NAV uses PSTH’s €33b valuation for UMG, a €10b valuation for the Vivendi stub (excluding UMG) and discounted peer multiples for the logistics businesses. This translates to a €4,208 NAV per share using a net share count of ~3.04m (I estimate net treasury shares are ~54% through BOL’s circular ownership of ODET). At the current share price of €1,105, ODET trades at an extraordinary 74% discount to NAV. Put another way, you can purchase €1,473 worth of UMG for €1,105 and get all of Bolloré’s other assets (worth €2,735 net of debt) for free. More optimistic assumptions increase NAV per share to almost €6,000 (82% discount).

Even though this discount is at the upper end of its historical range, ODET has always traded at a large discount to look-through NAV. The rest of the write-up will focus on how value is being created in the underlying assets and why the discount is likely narrow in the near future.

Universal Music Group / Vivendi

UMG Spin-Off

Vincent Bolloré has made his fortune through corporate and financial engineering, making intelligent use of OPM, buybacks and corporate/tax laws to maximise his returns. Right before his official retirement in 2022, he is pulling off one of the best pieces of corporate deal-making of his career through the spin-off of UMG from Vivendi. 

At a high level, VIV currently owns 80% of UMG. It will distribute 60% of UMG to Vivendi shareholders by way of a special dividend-in-kind at the end of September. UMG will then list on Euronext Amsterdam as a separately traded Dutch company. VIV is also selling a 10% stake in UMG to Bill Ackman’s PSTH in August, while VIV will retain a 10% stake in UMG post-spin. Once you look closely at the structuring of the UMG spin-off and the PSTH deal, it is clear that it has been designed so that Bolloré can extract as much value out of UMG/Vivendi as possible and so that he can use Vivendi’s own cash to take full control of the media conglomerate after the spin. Below are some of the favourable aspects of this deal for Bolloré:

• Tax arbitrage 

The structuring of the UMG spin as a taxable dividend created a unique tax arbitrage opportunity for the Bolloré group and any other tax advantaged Vivendi shareholders. 

• Many Vivendi shareholders will be subject to a substantial dividend withholding tax depending on their tax domicile, e.g. individual French shareholders who hold Vivendi in a taxable account will be subject to a 30% withholding tax on the UMG distribution. This tax treatment has depressed the share price of Vivendi because the full value of UMG cannot be realised by many investors. The Bolloré group however will only pay negligible taxes on the UMG distribution because it can avail of a withholding tax exemption available for entities that own at least 5% of Vivendi’s capital (Art 145/216 of the Code général des impôts/CGI). 

• Bolloré has taken advantage of this through ODET’s purchase of ~6 million Vivendi shares for €170m in the last 4 months. In order to do this without breaching the mandatory bid threshold in France, Bolloré SE merged two of its subsidiaries (Compagnie de Cornouaille & Financière de Larmor) which had the effect of reducing the amount of Vivendi shares with double voting rights that it owns. As the Bolloré group is now again close to the mandatory bid threshold (~29.6% of gross voting rights), I suspect that they will continue to exploit this tax arb through Vivendi buybacks (which will not trigger a mandatory bid if the treasury shares are not cancelled).

• Avoidance of Mandatory Bid for UMG: 

It seems that one of the key strategic drivers for the PSTH sale is the mandatory bid rules in the Netherlands. This perhaps explains why Vincent Bolloré, who is not known for selling anything at a discount, is selling 10% of UMG a slight discount to its sole publicly traded peer Warner Music Group (WMG) (22x 2021 EBITA valuation for UMG vs 23-24x for WMG).

UMG is now incorporated in the Netherlands and will be listed in Amsterdam. Under Dutch law, an entity is required to make a mandatory public offer once it acquires the ability to exercise 30% or more of the voting rights of a Dutch company (subject to some exceptions). All the signs point towards Bolloré taking out (or at least taking a majority stake in) the Vivendi stub after the spin. The Bolloré group will then control ~28% of the voting rights of UMG (just under the 30% threshold). If Vivendi had not sold 10% of UMG to PSTH, Bolloré would have been required to make a public bid for UMG on taking over the Vivendi stub (by gaining control of ~38% of UMG’s voting rights). A number of points flow from this:

• While Ackman had originally wanted to purchase 17.5%, Vivendi is only selling 10%. This amount is sufficient to solve Bolloré’s mandatory bid issue and leaves some room to take advantage of the tax arb at Vivendi pre-spin. There is also a French CGT incentive for Vivendi to hold on to at least a 5% stake.

• This is a strong indication that Bolloré will takeover or at least take a majority stake in the Vivendi stub after the spin and that Bolloré intends to hold on to its UMG shares in the near term. Vivendi’s 10% buyback mandate and its 55% public tender (“OPRA” in French) mandate remain valid until January 2023, while there is also a French CGT incentive for Bolloré to hold for at least a 2-year period.

• The Dutch takeover rules put a limit on the level of buybacks that Vivendi can carry out pre-spin.  Vivendi has room to carry out buybacks up until the Bolloré group holds 33.33% of the net shares pre-spin (i.e. so that it does not receive more than 20% of UMG from the distribution). This means that Vivendi can buyback ~9% of its total shares outstanding before the spin, which is conveniently within the 10% buyback mandate that Vivendi shareholders recently passed. Buybacks should start to ramp up once Vivendi receives the €3.3b in cash from PSTH in August.

• Margin Debt: 

As mentioned above, it seems likely that Bolloré will hold on to the UMG shares at least for a couple of years. BOL’s subsidiary currently has margin loans secured against its Vivendi shares and a highly priced UMG IPO will unlock significant liquidity at the BOL level. The publicity generated by this transaction together with PSTH’s shareholder base and Ackman’s strong promotional skills will benefit UMG’s share price and ultimately the Bolloré group.

Bolloré’s Endgame for Vivendi

All of Bolloré’s plans for Vivendi seem to be falling into place nicely. He received a full mandate from VIV shareholders to spin off UMG and to buyback the majority of the float (through both buyback and a public tender offer).  He has managed to force Arnaud Lagardère to change the protected corporate structure of Lagardère S.A. and looks set to pick off strategic media assets from it (Europe 1 & Hachette). He has come to a truce with Silvio Burlusconi and will sell down Vivendi’s stake in Mediaset over the next 5 years (creating more liquidity for buybacks).

I believe Bolloré will fully take-over Vivendi before he retires in February next year. It is likely that Vivendi buys back up to 9% of its gross shares pre-spin with the €3.3b it receives from PSTH in August. Following the spin, I expect the Vivendi stub equity (consisting primarily of Canal+, Havas, Editis, and the remaining 10% stake in UMG) to get dumped by investors and will probably trade for less than €15 per share (~5x EV/EBITDA net of cash, securities and its 10% UMG stake). Vivendi will then launch an aggressive buyback program, culminating in a public tender offer. If there are minorities remaining after the tender offer, Bolloré will then be legally obliged to make a mandatory bid. If VIV holds on to its 10% UMG stake, it will ultimately leave the Bolloré group as 28-30% owners of UMG.

Inflection of Logistics & Batteries Businesses

Freight-Forwarding & African Ports/Logistics 

Bolloré’s two core logistics business are experiencing an exceptional period of profitability and growth after a long decade of mid-single digit growth since 2010.  The market has never been this good for global freight forwarding with freight rates up over 300% year-on-year (almost 600% on the Shanghai to Rotterdam route). Sky-high freight costs coupled with increasing volume is resulting in a bumper period of profits for 3rd party logistics firms. 

Source: Drewry World Container Index

Market leaders DSV Panalpina and Kuehne + Nagel are guiding for 40-60% increases in operating profit this year and trade for 24-28x forward EBIT. DHL raised its guidance for the 5th time in a row last week. I expect Bolloré’s freight forwarding division to post at least a 40% increase in EBIT this year and for EBIT to grow in the double digits over the next 3-5 years as volumes fully recover and freight rates remain elevated vs 2019. Furthermore, we are likely to see continued consolidation in the industry as smaller players struggle with the digital transition in the freight forwarding industry. This is likely to increase margins for the larger players.

With strong commodities prices and recovering African logistics operations, I estimate that the African ports and logistics division will increase EBIT by 25%+ this year. A commodities bull market will act as a strong tailwind in the coming years for Bolloré’s African ports business which has significant capacity to increase volumes. The market may finally give Bolloré credit for its quality logistics assets when it begins to report strong numbers at the end of the month.

Another possibility that may emerge in the coming years is the sale of the group’s much sought-after African assets to a price-insensitive buyer.  There are reports that Vincent Bolloré no longer has a particular attachment to the African continent following a corruption probe relating to a port concession in Togo which resulted in him being arrested and detained in 2018 and ODET having to pay a €12m fine earlier this year. If sold, it is likely that Bolloré’s unrivalled logistics assets consisting of 16 container terminals (Ivory Coast, Ghana, Nigeria, Cameroon, Gabon, Congo, Togo, Guinea-Conakry), 7 Ro-Ro terminals, 3 rail concessions (Sitarail, Camrail and Benirail), 2 wood terminals, warehouses, dry ports, and other logistics assets would command a very large price tag due to their political and strategic importance (probably well in excess of my bull case value of €9.75b).

Batteries

After almost 30 years of investments and many years of losses pursuing car-sharing and mobility solutions, Bolloré’s Blue Solutions is finally gaining momentum. While relatively unknown, Blue Solutions is the only industrial scale manufacturer of solid-state batteries for commercial use in the world. Solid state batteries have generated massive interest in recent years with the promise of solving the environmental and safety concerns that persist with the current generation of lithium-ion batteries. While the group has admitted that its solid-state lithium metal polymer (LMP) battery in its current form is not yet suitable for the car market, it is now having significant success supplying batteries for municipal buses, trucks and power systems. The most notable recent contract is to supply solid state batteries for Daimler’s eCitaro buses (40 of which have already been delivered to municipalities). Bolloré‘s sales from Electricity Storage and Systems grew 24% in Q1 to €80m despite its terminals business being severely affected by COVID restrictions. I expect more large battery supply contracts to be announced with European customers as has been alluded to in the press by Blue Solutions’ managing director.

As this division is the Bolloré group’s industrial link to its native Brittany, there is almost zero chance that it will ever be sold off completely. However, it is possible that they will relist a minority stake (potentially even through a SPAC) in order to take advantage of the high level of investor interest in solid-state batteries. It is also worth noting that Daimler is spinning off its trucking and bus business and may pursue future JV opportunities with Blue Solutions. The division is beginning to inflect and has a head-start over its competitors in commercial production. Bolloré has not gotten credit for Blue Solutions from the market, but there is now genuine option value here in this rapidly growing battery technology.

Corporate Simplification

Bolloré’s opaque corporate structure is one of the key reasons why BOL and ODET trade at persistently large discounts. The complex web of circular and cross-shareholdings makes net asset value difficult to calculate, while the consolidated financials obscure things even further. Despite holding a 63.9% stake in BOL and only a 19.4% look-through stake in VIV, both are fully consolidated in ODET’s accounts. The accounts state that ODET has 4.24m net shares outstanding, while the true net share count adjusted for all cross shareholdings is ~3m.

ODET’s Stated Shares Outstanding (p.244 of 2020 Annual Report)

The opaque corporate structure has served Vincent Bolloré well over the years. It has allowed him to increase his ownership through value accretive buybacks at multiple levels of the structure. More importantly, it allows him to control ~94% of the voting rights of ODET, while ultimately owning only ~18% of the underlying economic rights (and only ~12% of the economic rights of BOL). Therein lies the beauty of the Breton Pulleys system (‘capitalisme sans capital’).

Investors have been calling for the simplification of Bolloré’s corporate structure for many years now, but it has never really materialised. There have been some incremental steps over the last 15 years such as the merger of Bolloré and Bolloré Investissement in 2006 or the take-out of minority shareholders in Plantations des Terres Rouges in 2013. Outside of these developments and buybacks, the Bolloré Galaxy still looks fairly similar to what it looked like 15 years ago:

La Galaxie Bolloré in 2006 

La Galaxie Bolloré in 2021

There are now signs that some form of simplification may finally happen. Vincent Bolloré will officially retire as Chair and CEO of ODET on 17 February 2022 (the group’s 200th anniversary) and will hand the reins to his children. While it is likely that Vincent will continue to pull the strings, his youngest son Cyrille will be the official successor and will be in charge of the group’s industrial holdings. His 2nd son Yannick will be entrusted with the management of the group’s media interests. Many see Vincent’s upcoming retirement as the perfect opportunity to finally simplify the group in accordance with his succession plans.

There are a number of steps they could take to simplify the structure in the coming years:

• Merger of ODET & BOL: 

Punchcardtrader’s write-up from 2018 does an excellent job of exploring the mechanics of the potential exchange ratio in such a merger. However, I believe this merger is unlikely to be pursued unless Sofibol (which sits on top of ODET) owns at least 50% of the capital of the merged entity (control through double voting rights are probably not secure enough for the Bolloré family). Another possibility would be to make an offer for ODET minorities to exchange their shares into BOL shares.

• Removal of Minorities from Banque Rivaud Subsidiaries: 

There are 6 more obscure publicly traded entities sitting under BOL in Bolloré galaxy. These companies came into the group through the takeover of Banque Rivaud in the 1990s. They all have low single digit public minority ownership and could be taken out inexpensively and merged into BOL. The minorities in one such entity (Plantations des Terres Rouges) were taken out in 2013. 

• ODET as Holding Company for Separate Logistics, Media & Batteries Pure-Plays: 

A compelling simplification thesis that has been put forward is for the 3 business lines to be listed as separate publicly traded entities, with ODET sitting on top as the listed holding company. Bollore SE (headed by Cyrille) would become a logistics pure-play, Vivendi (headed by Yannick) would remain as a listed entity (or be distributed to Bollore shareholders if it is taken over by BOL), and Blue Solutions would re-IPO as a solid-state battery play (potentially even through a SPAC). This structure would maximise the market valuations of the businesses while also keeping family control in place.

An interesting development is that ODET recently changed its named from Financière de l'Odet to Compagnie de l’Odet. Vincent Bolloré remarked on this at ODET’s general meeting at the end of May:

“Our name has been Financière de l'Odet since the creation of the company, but it has been decided by the Board for our 200th anniversary to opt for ‘la Compagnie de l’Odet’ which is less financial and is more responsible to its stakeholders…this is important in terms of the mindset of our company.”

It is impossible to say whether this name change is significant or merely symbolic, but perhaps it points towards ODET playing a more central role in the Bolloré group rather than just sitting as a control vehicle in the Breton Pulleys structure.

Expected Returns

In a base case scenario where the discount narrows to just 50% by 2024 and NAV compounds at 8% year (conservative given the track record of value creation and the favourable economic outlook for UMG and the group’s logistics businesses), the target price is €2,650 which provides an upside of 140% and an IRR of 34%. There is proper multi-bagger potential if there is meaningful simplification of the group structure and the Bolloré family can continue to compound the underlying assets at high rates of return. 

Conclusion

With the Bolloré group approaching its 200th anniversary on 17 February 2022, this is the most compelling time in decades to own this unique family holding company.  The upcoming spin-off of UMG, potential corporate simplification and inflection of its core logistics and batteries businesses provide strong near-term catalysts for ODET’s NAV to grow and its discount to narrow. While ODET is up 120% from its COVID lows, there is a clear path to a 34%+ IRR over the next 3 years.

While BOL is also attractive at these levels, I believe that ODET remains the more attractive of the 2 because it trades at a bigger discount and provides closer alignment with the Bolloré family (particular in the event that ODET becomes the main group holding entity or a merger of ODET and BOL).

Risks

Capital Misallocation – The group will have lots of capital to reinvest over the coming years. Capital allocation has been exceptional over the long term, however there have been some mistakes too (see in particular Vivendi’s sale of Activision in 2013). 

Succession – While it is likely that Vincent will retain control of the group from behind the scenes, he is officially retiring in 7 months. There are obvious succession risks here with his 3rd son Cyrille who is unproven. However, Cyrille is the son most like his father in terms of temperament, has a strong background in finance, and has managed the group’s logistics businesses very well in recent years. 

Squeeze-Out of ODET Minorities 

Failure of UMG IPO 

Global Recession

Catalyst

UMG spin-off / Vivendi takeover

Vincent Bolloré retirement on 17 February 2022

Simplification

Market recognises inflection of logistics & batteries businesses

Sale of African ports and logistics assets