Description

Fimalac (Financiere Marc de Lacharriere SA) is a French holding company (Bloomberg FIM FP; Reuters LBCP.PA) with 50+% upside to fair value and a series of clearly defined catalysts to drive the share’s revaluation. Fimalac is a holding company that is in the process of selling / restructuring its four operating subsidiaries to focus on its largest investment, Fitch. In addition to its clear catalysts, the Company has a reasonable market cap (EUR 1.1bn) and trades about EUR 1.2mm/day, making it among the more liquid stocks on VIC. Thus the attraction of Fimalac is not only the inexpensive valuation relative to a reasonable sum of the parts and a clear path to realizing a fair valuation but also the ability to build a reasonable sized position in the stock. Based on conversations with management and potential buyers, I believe that the timeframe for realizing a revaluation is in the next 12-18 months, as the company will take this time to restructure. Importantly, I do not believe that this is yet-another cheap family-controlled European holding company. The Company has stated that it will refocus on Fitch, it has a history of making _financial_ investments (and later divesting them at healthy profits), and Marc de Lacharriere’s is a financial buyer without any personal ties to the subsidiaries.

Divisional Overview

The Company’s major divisions are Fitch, Facom, Beissbarth, Cassina, and LBC. The majority of the Company’s value is in Fitch. Fitch is the third largest rating agency in the world (behind Moody’s and S&P) and specializes in structured products and Europe. Facom is a hand tools business that competes with Snap-On and Stanley-Works. Beissbarth is a garage tools manufacturer (auto lifts, etc.) in Germany and has been undergoing a restructuring for the past 2 years. Cassina is a high-end furniture manufacturer that makes both residential and commercial furniture. LBC is a chemical storage company with sites around the globe.

Fitch (96.6% Ownership)

Fitch is the most important piece of Fimalac and when the restructuring is complete, it is likely to be the only remaining business. Fitch is the third largest rating agency in the world. While Fitch does not have the brand name that Moody’s does, it is arguably at least as attractive of an investment opportunity. Most importantly, Fitch is growing its top-line more quickly than Moody’s due to its exposure to higher growth segments, especially Europe and structured products. This has allowed Fitch to expand its EBITDA margins from the mid-teens to the low-20s. As Fitch continues to expand, it should be able to increase its margins to 30%, which is still well below the 50+% levels posted by Moody’s. In addition, Fitch is less susceptible to a slowdown in the US mortgage market than Moody’s due to its European focus. On the downside, Fitch has a worse brand that Moody’s and lower market share. In addition to refocusing the Fimalac by selling assets, management has also discussed spinning off Fitch, but I believe that they are currently planning to sell the non-Fitch subsidiaries. At the least, I would argue that Fitch deserves a similar multiple to Moody’s. Based on Moody’s 2003E EV/EBIT multiple of 17.1x, Fitch would be worth about EUR 1,725mm. Fimalac’s stake would be worth EUR 1,666mm.

Facom (100% Ownership)

Facom is the second most important piece of Fimalac and consists of two subsidiaries, Facom and Beissbarth. Facom is a hand tools manufacturer competing with Snap-On and Stanley Works. The business concentrates mostly in Europe although it does have a small US presence. Due to its concentration in Europe, Facom’s sales have suffered over the past several years, but it continues to generate a healthy profit. Facom’s struggles have resulted principally from its emphasis on commercial construction and Europe, both of which have suffered relative to US residential construction. Nevertheless, Facom continues to be solidly profitable and should have EBIT of about EUR 24mm in 2003. Based on comparable EBIT multiples for Snap-On and Stanley Works (average of 13.4x), which are less leveraged to an economic recovery, Facom would be worth EUR 322mm.

Beissbarth (100% Ownership)

Beissbarth is a garage tools manufacturer and has many of its operations in Germany. The depressed German economy has negatively affected the operating performance of Beissbarth and the division is expected to be EBIT negative again this year. The division is, however, expected to continue generating cash as management is under-spending depreciation and generating cash from working capital. In order to be conservative, I have valued the business at 0 despite its recovery potential and positive FCF. By way of reference, Stanley Works reportedly offered about EUR 500mm for Facom and Beissbarth in 2000. I therefore view my combined valuation of EUR 322mm(Facom 322mmand Beissbarth 0) as conservative at a 36% discount to the rumored previous offer for the two companies.

LBC (100% Ownership)

LBC is the chemical storage business of Fimalac and has operations around the world. This is a relatively straight-forward business and consists of holding chemicals that are in the process of being transported to disposal sites, end markets, etc. LBC does not have any publicly-traded comparable companies and is most-likely to be sold to a private equity buyer. The business has many characteristics of a classic LBO – steady and high FCF – but does not have much organic growth. The upside to the business will be through building new storage terminals, primarily in China, an investment Fimalac has indicated that they are unwilling to make. Fimalac had been in negotiation with One Equity Partners (OEP) since this fall, but negotiations recently broke down. The rumor behind the breakdown is that OEP tried to re-trade their initial deal after which Fimalac broke off negotiations. The Company has since announced that they expect to sell the division in Q1 of 2004. I estimate that an LBO can be successfully completed at 9x EBIT with 2% top-line growth and no multiple expansion, which would value LBC at EUR 261mm.

Cassina (80% Ownership)

Cassina is a high-end luxury furniture maker. About 75% of Cassina’s sales are furniture, split almost evenly between home and office furniture. The remainder of Cassina’s sales are lighting (15%) and other (10%). Cassina tends to produce very high end furniture with a recognizable brand name, akin to the name recognition enjoyed by other luxury goods manufacturers. Most of the Company’s sales are in Europe and the company enjoys a cult-like following for much of its office furniture (similar to Herman Miller in the US). Although the residential market has held up well, the office furniture market has been slow. When I spoke with management, they told me that they have received a number of approaches from luxury goods companies and that they were open to selling their stake in Cassina. They also indicated that the family (the minority shareholders) is open to selling. I therefore expect this division to be sold shortly after LBC. I believe that the Company should be valued like a mix of Herman Miller (office furniture) and LVMH (branded consumer luxury goods), which have an average EBIT multiple of 23x, which yields a value to Fimalac of EUR 272mm.

Other

The Company also owns a small subsidiary by the name of CLAL. Management has stated that it is in the process of being liquidated and should have proceeds of about EUR 50mm. There are several investments of inconsequential size that are accounted for using the cost method.

Sum of the Parts Valuation

Fitch (96.6% Ownership) 1,666
Facom 322
Beissbarth 0
LBC 261
Cassina (80% Ownership) 272
Other 50
Holding Costs (50)
Enterprise Value 2,521
Net Debt (852)
Equity Value 1,669

Implied Price per Share 43.95
% Upside 52.5%

Standalone Valuation

While I believe that selling the Company’s non-core divisions will drive the valuation re-rating, the current valuation offers little downside and reasonable upside. In essence, even if the Company does nothing (and the Company has clearly indicated that it plans to restructure), I believe that the current valuation is easily supported. On a consolidated basis, the Company trades at the following levels:

Dividend Yield: 3.6%
Price / Book: 1.1x
2004E P/E: 19.5x
2005E P/E: 14.5x
EV / 2003E EBITDA: 9.5x
EV / 2004E EBITDA: 8.6x

Thus while the standalone valuation is reasonable and probably offers upside to 10-11x 2003E EBITDA based on the high valuation of Moody’s and the luxury goods comps for Cassina and the lower multiples for tools and chemical storage. This would imply a fair value of between EUR 32-38/Share or upside of 10-30%. The standalone valuation is certainly not the reason to own Fimalac but it does give an investor the ability to sleep well knowing that even without asset sales, the current stock price offers protection on the downside and reasonable upside.

Summary

Fimalac is a large, liquid French holding company that is in the process of divesting its non-core operations to focus on Fitch. Over the course of the next 12-18 months, I expect the Company to sell substantially all of its non-Fitch subsidiaries and to close the gap between its sum of the parts valuation and its current value, giving investors upside of 50+%. In the meantime, the Company is reasonably valued on a standalone basis, giving relatively little mark-to-market risk. While the re-rating of the stock could take 12-18 months, there is a near-term catalyst in the upcoming sale of LBC, expected in Q1 2004.

Catalyst

* Sale of LBC
* Management guidance on other asset sales
* Economic turnaround benefits cyclical subsidiaries (Facom, Beissbarth, Cassina Office Furniture)
* Re-rating with complete transformation to Fitch