Description

Buy common stock in Grivalia

Buyers create a cost basis in a de-risked “good” Greek bank at below 5x EPS as insiders buy in the open market. 

Grivalia has been described twice before on Value Investors Club, once when it was named Eurobank Properties.  Refer to these posts for background. 

A catalyst has emerged that makes investment today compelling  

Grivalia and Eurobank plan to merge, and the addition of Grivalia’s €0.9 billion of equity will allow Eurobank to accelerate the reduction of its non-performing exposures (NPEs) by €7 billion (-43%). Employing an innovative plan, Eurobank will securitize these NPEs, with Eurobank retaining a €2 billion senior note tranche and with Eurobank distributing the junior claims to shareholders at book value.  European banks in general and Greek banks in particular are under pressure from the European bank regulator to reduce NPEs.  As you may imagine, such forced selling creates significant bargaining power for buyers.  But after the securitization and distribution in Eurobank’s plan, the NPEs will be unregulated.  A new special servicer will be unfettered in its pursuit of recoveries. 

1) Buy Grivalia at recent prices = €9.32 per share

2) Receive cash dividend before merger = €0.42 per share

3) Exchange 1 share of Grivalia into 15.8 shares of new Eurobank = €0.56 per share, or 38% of pro forma tangible book value of €1.50 per share

4) Receive dividend in kind for the junior 80% claim (€5 billion) on €7 billion of non-performing exposures, up to €1.84 per share of potential value, which Eurobank currently carries at a value net of provisions equal to €0.32 per share

5) Create cost basis of between €0.25 and €0.56, equal to 20% to 48% of tangible book, in a Greek bank with a reasonable path to a 10% ROTE in 2020

Downside is 100%

Regulators in Germany decide capital adequacy for banks in Greece.  Regulators want NPE reduction.  Eurobank’s target for the end of 2019, pledged to the European Central Bank (ECB) banking supervisor (Single Supervisory Mechanism or SSM), is €12 billion.  If this transaction closes on schedule in early 2019, by itself it will drop NPEs to €12 billion with no capital impairment.  Eurobank will be significantly ahead of plan and should be in good stead with the SSM.  The regulators appear comfortable with a 75% provision of NPEs, based on the securitization plan.  Given a 54% ratio of provisions to NPEs, and stable pre-provision earnings of €0.2 billion per quarter, a further 21% provision would require €2.4 billion, or under three years of pre-provision earnings.  

Upside is 200%+ 

Eurobank has a clear path to €0.10 to €0.15 per share in annual earnings and targets a 10% ROTE.  For context, tangible book per share will fall to €1.50 after the merger, and to €1.20 after the securitization.  Quarterly pre-provision earnings have been stable at €0.2 billion, or €0.05 per share pro forma for the merger.  The expense for credit provisions has been running 3.0% to 4.0% of non-performing exposures.  That implies provision expense of €320 million to €425 million, or €0.08 to €0.11 per share. A P/E multiplier of 10x future EPS of €0.125 suggests upside to €1.25 (+120% upside).  If Euobank’s accounting for the €7 billion in NPEs is accurate, then we will recover another €0.32 per share (+55% upside), though we will have a legal claim to an additional €1.00 per share (+175% upside).  The securitization will begin cash flow positive, with €80 million of interest income.  Some portion of this will be owed to Eurobank as interest expense for the senior notes but some should remain for the junior tranches that shareholders will own directly.  

Corporate governance should be decent.  Shareholders are represented on Eurobank’s board of directors.  Fairfax Financial, which will own 33% of the bank, is represented by Brad Martin directly, and by Richie Boucher indirectly.  Brookfield Asset Management is represented by George Myhal.  George Chryssikos, the CEO of Grivalia, has been an outstanding steward for shareholders.  He will remain a director and will become Vice Chariman.  He purchased stock in Grivalia on November 29, spending over €80,000.

Catalyst

Merger of Grivalia and Eurobank

Securitization of €7 billion of NPEs

Distribution of junior tranches to shareholders

Return to 10% ROTE