Description

Context

Financière de l’Odet “ODET” is the publicly traded holdco solely owning Bolloré SA “BOL” shares (a 64% stake). BOL itself returned 20X in 20 years. Perhaps I will submit a detailed write-up on Bolloré later. I believe ODET is the more interesting of the two, because it trades at an additional “compound” discount layer to BOL, and maximizes alignment with the Bolloré family in

I’ve read quite a few analyses on BOL, with somewhat general arguments of “simplification” as a catalyst. This write-up will dig deeper what kind of simplification I believe is likely next, and why. Note that in my write-up scenario, while BOL will most likely benefit as well as its 50-60% discount to NAV closes in a simplification of the complex structure, ODET is the best long because of a compound discount tightening on top. The 50-60% NAV BOL discount is basically consensus among many buy-side and sell-side notes and my recent analysis.

I believe French regulation can act as a catalyst for a large event-driven return for ODET holders. This probably happens before the 300-year anniversary of Bolloré when Vincent Bolloré steps down. Vincent would be the first to provide us the remaining time until February 17, 2022, as he wears a dedicated countdown watch for that event (as Cuyler forgot to mention, a few months before the LNKD sale, R. Hoffman was famously wearing two watches as well). I quote from the French documentary “Complément d’enquête” on Youtube: “there’s much work left to be done [before passing the reign in ‘22], but I’m not in a hurry”.

Warning: No guaranteed return on invested brain damage. Honestly, I enjoy these structures and any further recommendations are welcome.

Intro

Bolloré is a holding that I’ve been tracking for a long time. In fact, when the excellent Muddy Waters report came out in ‘15 it was good to find matching values on the indirect circular self-ownership. Those numbers have since evolved: Mr. Bolloré has used some of the previously >60% circular ownership to buy out Havas shareholders a few years back. Today, the circular ownership stands at only 53.5% (this interestingly matches approx. the BOL NAV discount). As this circular ownership is apparently assigned zero value, this transaction has “created value out of thin air” as far as Mr. Market is concerned.

My variant view on BOL and ODET is driven by the Florange law that the Hollande administration passed in April 2014. This law grants shareholders in French companies double voting rights “VR” on their shares if they hold on to their shares for 2+ years. This law supposedly helps actors like Bolloré and the French state foster long-term shareholder value. Indeed, it has helped Bolloré SA with its Vivendi activism.

Shareholders that held on to French shares from the moment the law was passed thus got double VR’s in April 2016. BOL and ODET are obliged to publish (varying) total VR’s monthly and from these disclosures it can be deduced that only 14% of public shareholders of BOL (3% for ODET) was long-term (i.e. got double VR’s). Despite the French FTT (those 30 b.p. you’ll see on your brokerage statement) and the Florange Law, it seems public markets still disappoint central planners. This write-up - intended for long-term investors, of course – will do its fair share toward Hollande utopia.

I digress, but not much, as the raison-d’être of the ODET holding for Vincent Bolloré is retaining absolute control over BOL. For an introduction as to why circular structures are useful for control I recommend the Muddy Waters report on BOL.  We can observe how ODET has historically functioned as a vital link to retain absolute control in BOL in the below figure “current situation”.

1 Current situation. Simplified figure for illustrative purposes.

As I will show, the Florange law (combined with high turnover in public markets) has rendered ODET useless as of recently: if ODET were to launch a share-for-share take-out offer on BOL minorities to collapse the two holdings into one NEWCO, both my pro-forma “worst case” and “best case” simulations show that the Bolloré family would retain >50% voting control (through “Sofibol”) as of recently.

Why would the takeover not be launched by BOL on ODET? Because the family holds BOL through ODET and would get new BOL shares in return. Therefore, they would lose double voting rights and get <50% voting control. Conclusion: in an ODET-BOL merger, BOL will not buy ODET, but ODET will buy BOL and will probably change its name (not Vincent’s wife, but rather an obscure river in Britany) into the target’s name.

Before I discuss the merger, I’ll give an overview of previous simplifications of the complex Bolloré.

Recent BOL simplifications

As strange as it sounds, the structure used to be much more complex in the past:

• ODET used to own BOL’s stake in Mediobanca (see Absorption of Interco’s in ‘10 & ’12 below) directly, today all “branched” ownerships have been eradicated and ODET is a pure-play on BOL
• all holdco’s are now debt-free, except for very minor debt at the public ODET level
• the amount of minor public stakes of BOL has been brought down (Mediobanca and Socfin are last major ones)
• both the first step of BOL gaining 60% stake in HAV and VIV buying that stake led to simplification: respectively less circular ownership and deleveraging (see next chapter on share count)

*Both “branched” debt and stakes significantly complicated the calculation of per share NAV, so the above are major simplifications.

Absorption of "interco's" & asset swaps

See Bolloré’s real ownership structure for the below mentioned company names:

2006 - Merger of Bolloré Investissements with BOL (previous holding that sat in between FdlO & BOL)

2010 - Transfer of ownership of Fin. du Perguet (owner of Mediobanca) from ODET to BOL. Saga delisting

2012 - Merger-absorption of Financière du Loch (previous owner was FdlO)

2013 - Delisting & absorption of Plantations des Terres Rouges

2013 - Sofibol (private ODET parent) transforms into partnership status with unlimited liability

2014 - Sale of SAFA in exchange for shares in Socfinaf

2016 - Interco’s Fin. Artois and Compagnie du Cambodge sell out BOL stakes to HAV minorities (see later in Management compensation and share count) 

Businesses that have been sold

Sale of shipping business ('06)

Sale of paper business ('09)

In short, Vincent’s kids will inherit the ownership and management of BOL and I believe further (guided) simplification will happen before 2022.  

I put the merger of Bolloré Investissements in green as it highlights a very similar transaction as I am describing in this write-up. Bolloré Investissements was a publicly traded holdco sitting in between ODET and BOL. Interestingly, when Bolloré Investissements was absorbed, the Agnelli's held a stake through Exor.

ODET – BOL merger

I believe that in a merger scenario, there are basically two lines of reasoning that will be applied by Mr. Bolloré’s bankers to determine a fair share-for-share offer to BOL minorities (the 36% float, with the balance being held by ODET itself):

• “ODET worst case” Mr. Market reasoning: observe how ODET trades versus BOL and merge the two entities based on market caps (deduct market-based value of circular stakes to avoid double counting). This means ODET holders get zero credit for the intrinsic illiquidity discount that ODET is trading at as the newco stake assigned is pro-rate to according to current market caps.
• Half-baked reasoning: use intrinsic value reasoning for the opco’s, but then decide for some reason to apply Mr. Market reasoning to account for circular holdings (see some sell-side research). We would obtain a value in between the surrounding “worst” and “best” cases so for the sake of brain damage I will skip this method.
• “ODET best case” Intrinsic value reasoning: follow the money and observe where the money ends up when the entity pays a dividend from the opco’s (or hypothetically liquidates). How much does one ODET share gets you, and how much a BOL share? Then devise the NEWCO share stakes so that both parties end up getting the same piece of the pie after the merger

Current situation

Before we walk through the math, I’ll quickly recap the current situation (economic stakes). ODET owns 64% of BOL, and BOL owns two stakes in ODET: 36% directly (loop 1 in figure), and 88%*55% indirectly (loop 2 in figure). Reality is a bit messier with many private holdcos in between Sofibol and the Bolloré family. In the second figure, I demonstrate why I use 88% and 12% economic stakes of BOL and the family respectively in Sofibol. For this exercise, we must remember 88% of Sofibol is economically held by BOL, while the Bolloré family retains absolute control over Sofibol because of the complex pyramid structure that I omitted in my pictures.

2 Current structure (economic ownerships rounded). 1.6% of share capital BOL treasury shares counted in “BOL public minorities” for sake of simplicity (but properly accounted for in my pro-forma simulation).  

3 Holdco's Omnium Bolloré, Financiere V, Sofibol sitting on top of Sofibol are not shown for sake of simplicity. This is the math to get to 88% economic BOL ownership (indirect circular ownership) in Sofibol as used in the rest of the write-up (bottom-right)

The following images recap the stakes in ODET and BOL (in number of shares and voting rights). These numbers were used in the below scenarios.

ODET worst case

ODET and BOL would form a NEWCO with the % of Newco assigned to each based on their respective current valuations. As ODET is an empty shell without opco’s, the entire NEWCO market cap should be simply BOL’s entire market cap minus two corrections:

• to avoid double counting of market value, we need to subtract the market value of BOL’s stake in ODET (2341 k shares as seen in above table) as the market already account for it implicitly in the BOL market cap
• we need to subtract 318 MEUR of ODET specific debt as it won’t disappear

We then determine that 44% of NEWCO should be ODET minorities by simply multiplying the current ODET share price with the number of shares (excl. BOL’s stake in ODET). The balance is allocated to ex-BOL minorities (excl. ODET’s stake in BOL). From this we can calculate how many new ODET shares need to be issued for ex-BOL minorities to get exactly this stake.

Crucially, each new share is only allocated one vote. In the newco, we find that the Bolloré family retains 55% of voting power (bottom right) in this worst-case scenario. Zero credit has been given to ODET’s additional discount layer.

ODET best case

In the worst-case scenario, we valued BOL’s direct stake in ODET (36%) and ODET’s stake in BOL (64%) at market prices and created a NEWCO without those circular holdings. In this scenario, we are going to do the same using different valuation logic. I drew the NEWCO structure in the figure below.

Whatever the allocation to ex-BOL minorities “BP%” will be (in the worst-case scenario above = 55.7%), ex-ODET holders get the balance. Indeed, the two complicated blue formulas sum to “100% – BP%”. The only thing these formulas do is account for the new anti-dilutive reality of remaining ex-ODET holders after deleting BOL’s 36% stake in ODET.

4 Pro-forma structure: "NEWCO" through an ODET share-for-share offer on BOL minorities. BOL’s direct 36% stake in ODET is cancelled in this transaction. The unknown variable is “BP %”, or how much ex-BOL public minorities should fairly get.

The question remains: how much should BP% be from an intrinsic value standpoint?

I decided to solve this puzzle numerically:

Assume the opco’s completely liquidate at estimated NAV in the current structure (figures above). How much does a BOL minority share get? We should then choose the BP% in the new structure so that this hypothetical distribution remains unchanged.

Parts of the liquidation distributions flow through the circular loops back to BOL and NEWCO (two loops as shown by the arrows in the current structure and one loop in the new structure). Every iteration the money “passes” through BOL and NEWCO, the minorities get an incremental share of the remaining pie. This means we need to sum over many iterations until the distributions become negligible.

The result of the exercise can be seen below. We find that BOL public minorities proceeds total 11 051 MEUR, and I control “BP” to get the same number in the NEWCO structure through “Goal seek”. Note this exercise involved estimating the fair value of Bolloré opco’s. My estimate is 15 448 MEUR (this corresponds to a BOL intrinsic value discount of 62%).

5 Intrinsic valuation of BOL public minorities in NEWCO: total value distribution in liquidation should remain the same.

I find that “BP” should be 46,3% and allocate NEWCO shares accordingly. We find that the Bolloré family obtains 62,9% of voting rights in NEWCO.

Conclusion

If ODET were to take out BOL minorities in a share-for-share exchange, the Bolloré family would retain absolute voting control thanks to the new Florange law. Hence, the original rationale to keep the public ODET vehicle (control) is gone and Vincent Bolloré has previously guided for further simplification by 2022. I believe ODET and BOL will merge. In a worst case, no credit is given to ODET’s compound discount on top of BOL’s discount. This is unlikely as we are aligned with the Bolloré family that is financially incentivized to get the maximum stake for the parent holdco in NEWCO. A best case intrinsic value merger scenario shows us that ODET should get 53.7% of NEWCO shares, in contrast to 44.3% in a worst-case scenario.

This represents a best case 21.2% event-driven absolute return over and above any returns that BOL holders get: any tightening of the NEWCO discount to Opco NAV that consensus and I estimate at 50-60%. If the discount tightens from 50% (conservative estimate, mine is at 62%) to say 40%, that yields another 20% event-driven return.

If the merger offer retains 70% of “best case” return economics, we get 14.8% return. We multiply by BOL NAV discount tightening return of 20% and get a grand total of 37.8%.

• base case (60% probability) I model merger happening in 2 years (out of 3.9 remaining years to Vincent Bolloré stepping down) and
• worst case no event (40% probability)

P-weighted event-driven 2-year excess CAGR is 10.4% (60% * (1+37.8%)^(1/2years) + 40% * 0).

This is multiplicative on any Vincent Bolloré value creation in the interim in the actual business. We started by mentioning BOL returned X20 in 20 years. That represents 16% CAGR and the perfect storm of commodity headwinds for Bollore Africa Logistics seems over.

References

Voting rights on company websites

Annual reports "corporate history" for previous simplifications

French Insiders Trading database [Les Transactions]

Catalyst

ODET - BOL merger: two discount layers tightening at the same time