RHJI International (in Euros) RHJI BB
June 25, 2008 - 7:57pm EST by
scrooge833
2008 2009
Price: 8.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 690 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

RHJI BB is an investment holding company whose NAV is close to 100% above today's stock price. Timothy Collins,
of Ripplewood is the chairman of RHJI. Together with J.C. Flowers, he bought and turned around Shinshei bank in the 1990s. The company's strategy is to acquire stakes in public or private companies that fall into their expertise, turn them around and keep or sell the businesses at the right price to the right buyer.

I recommend you print and download this presentation and annual report while you read this:
http://rhji.com/01/MyDocuments/Corporate_Presentation_UBS_London_May_08.pdf
http://tools.euroland.com/arinflash/b-rhji/2007/ar_eng/

See old write up by andrew for some introduction
http://www.valueinvestorsclub.com/Value2/Idea/ViewThread.aspx?id=2207&page=0&msgpage=3501

Currently, RHJI has 50% of its portfolio on the automotive parts industry. In my visits with management, they told me they focused on this industry because Japan's skills and edge in global auto parts industry is excellent. The automotive businesses in Japan dominate the global industry. The switching costs and Porter forces make it difficult for an outsider to penetrate the business. Contracts are at least on 3 to 5 year terms. Lead over Chinese competitors is huge and gives them time to operate plants in China before Chinese companies can catch up.

(data from Bloomberg, annual report, presentation)
Portfolio of Holdings:
1. Asahi Tec (Public: 5606 JP)
Effective control taken in May 2003. RHJI ownership: 37%. Makes engineered automotive components in powertrain and chassis parts segment. Major Customers: Daimler-Chrysler,Ford, GM, Mitsubishi,Suzuki,Hyndai,Nissan,Honda, Shin Caterpillar. Acquisitionof Mitsubishi Fuso Techno (2/2006) and US-based Metaldyne (01/2007) transformed company into a global powerhouse. On June 13 2008, RHJI announced it will inject up to as much as 19 Million euros for 40 million shares @ 80 Yen each, raising its equity stake to 44%. This will allow Metaldyne to pay down its debt and lower interest costs. 2005-2007 Operating income per share total growth = 198%
Year ending 3/31/2008
Net Sales 315,885 million Yen
EBITDA 26,541
Cash 6,529
Financial debt 110,000
Diluted Shares Outst 259.5 Million
Implied stock price at 8xEBITDA = 419 Yen per share

2. Columbia Music Entertainment (Public: 6791 JP)
Acquired in October 2001 as part of Nippon Columbia - split to form CME (Music) and Denon(Hardware).RHJI ownership: 25.5%. Music production and distribution in Japan. Number 8 in Japan music (3.4% market share in 2005). Strong position in Enka music (23.3% market share - # 2). 2005-2007 Operating income per share total growth = 0%
Year ending 3/31/2007
Net Sales 142.2 M Euro
EBITDA 13.3
Cash 33.3
Fin debt 2.4
Diluted Shares Outst 270 Million
Implied stock price at 8xEBITDA = 85 Yen per share

3. Shaklee (Public: 8205 JP) RHJI Ownership is 40.7%. Leading provider of premium quality and natural nutrition, personal care, household and air and water treatment products. Shaklee operates in the U.S., Japan, Malaysia, Canada and Mexico. The U.S. is Shaklee's largest market in terms of sales, with Japan as its second largest market. Shaklee uses a sales force of self-employed, independent distributors to sell its products and has over 750,000 members and distributors. 2006-2008 Diluted EPS total growth = 17%
Year ending 3/31/2008
Net Sales 17,262 Million Yen
EBITDA 3576 Million Yen
Cash 4700 Million Yen
Fin Debt 18,177 Million Yen
Diluted Shares Outst 24.7 Million
Implied stock price at 8xEBITDA = 612 Yen per share


4. U-Shin(Public: 6985 JP). RHJI Ownership is 20%. Engaged in manufacturing and sales of automobile components such as key sets, door locks, heater control panels and switches, various instruments for farm machinery, construction machinery and machine tools, other industrial machinery, and housing equipment such as locks for houses, hotels and buildings.
Year ending 11/2007
Net Sales 74,773 Million Yen
EBITDA 6409 Million Yen
Cash 8842 Million Yen
Fin Debt 23128 Million Yen
Diluted Shares Outst 31.95 Million
Implied stock price at 8xEBITDA = 1157 Yen per share


5. Commerical International Bank. RHJI Ownership is 3.2%. Egyptian corporate bank which serves large companies, multinationals, and joint ventures. The Bank operates branches, mostly in Cairo and Alexandria. Commerical International Bank has a minority share holding in Commerical International Investment Company, an investment bank. The Bank offers corporate ledning and securities brokerage services.
2007 EPS 6.59
Implied stock price at 10 x EPS = 66.59 EGP

6. Phoenix Seagaia Resort
• Large resort complex located in Miyazaki Prefecture on Kyushu, the southernmost of the main islands in Japan
• RHJI ownership: 100%
• Original cost in excess of $ 2 billion
• Suitable climate for year-round outdoor activities
• Situated on historic 750-acre pine forest extending over 10 km along the Pacific Ocean coastline
• Includes: one 5 star hotel, 2/3 star hotels, 4 golf courses, renovated spa and fitness facilities, one of the largest
convention centers, indoor water amusement park, tennis club, bowling
Year ending 2007
Net Sales 92.7 M Euros
EBITDA 5.9 M
Cash 6.6 M
Financial debt 54.5 M Euros
51% occupancy rate

7. Honsel
- Acquired original controlling interest of 58.7% in November 2004 (today owns 82% after May & November
capital increase). Primarily designs, manufacturers and sells aluminum and magnesium components and assemblies,
principally to the automotive industry. Leading supplier in Europe of light-metal products. 2007 Sales Growth: 7%
Year ending 3/31/2007
Net Sales 935MM Euros
EBITDA 53MM
Cash 33M
Fin Debt 452MM

8. Niles
Initial interest of 40% in Niles purchased in 04/2001, increased ownership to 96.2% in 03/2003, Manufactures switches and sensors for applications within the interior and exterior of a vehicle. Customers are principally automobile OEMs, such as Nissan and General Motors, and other suppliers to these OEMs. 2007 Sales growth +4%.
Year ending 3/31/2007
Net Sales 355MM Euros
EBITDA 24MM
Cash 31M
Fin Debt 190MM


9. Other undisclosed marketable securities.
RHJI also owns marketable securities in undisclosed companies that are valued at approximately 50MM EUR.

Recent Events:

June 2008 - Divestiture of D&M Holdings. RHJI was able to sell its 49% stake in D&M Holdings to a group controlled by Bain Group at 8 times EBITDA. This was a 104% premium to the stock price on the day RHJI announced that it was seeking bids to divest D&M. This premium is a reflection of the depressed pricing on the small cap companies in the Japanese market. This increases RHJI's holding cash pile to 592 Million.

June 2008 - Asahi Tec is issuing up to 40m new shares at JPY 80/share implying a 12% versus the current share price (JPY 91). The new share will be subscribed by RHJ International for an aggregate amount that is expected to be determined on 14 July 2008. The additional capital injection will increase RHJI’s ownership in Asahi Tec from 36.9% to up to +/- 44%. Asahi Tec intends to use the proceeds to supports its US subsidiary Metaldyne in its restructuring
efforts as previously announced in its “Plan to Win”. Asahi Tec’s capital injection into Metaldyne will further allow the latter to pay down its financial debt and comply with the provisions of its credit facilities.

May 2008 - RHJI launches Cartica Capital, an alternative fund which is to exclusively invest in companies based in emerging countries. RHJI teamed up with a team of emerging markets and corporate governance experts (some of which come from IFC fund): Teresa Barger (CEO, CIO), Steven Quamme (COO), Mike Lubrano (MD), Carlos Botelho (MD), Thomas Saidy (Senior VP), Eric Kosmowski (VP), Tim Collins and Leonhard Fischer (co-CEOs of RHJI). Cartica will employ a private equity approach to improving the governance of listed and privately-held companies, via investing in
and working with companies whose potential value remains unrealized due to significant shortcomings in its corporate governance. Cartica targets specific emerging market countries in four target regions and plans to become present in 12 countries (Brazil being a major target). Cartica is still being launched, so there are no details regarding its size and RHJI’s equity stake. RHJI will become a General/Managing Partner and will be entitled to an annual management fee and part of the carried interest. No press release has been sent in this early stage, however. Cartica Capital as such as the materialisation of RHJI’s intention to raise 3rd party funds, which had been laid out half a year ago. Both this and the recent forming of a joint venture with Mitsubishi could revitalise investor’s interest in the company and the way RHJI is perceived. It will also provide RHJI with a recurring income stream without affecting its operational run rate.

Feb 2008 - RHJI initiates buyback program of approximately 1% of the shares outstanding

Nov 2007 - co-CEO Lenny Fischer bought approx 100,000 shares at 12 Euros



To recap the original investment merits:
- Shareholder aligned with the management who is a capital allocator and a value investor.
- Chairman has a track record of 40% annual returns in private equity
- Shareholders do not have to pay the 2-20 fee
- Chairman makes 100,000 Euros a year in salary, which is not exorbitant
- Chairman owns 15% of shares
- While the stock traded at a slight premium to no premium, the optimism was that the cash proceeds from the IPO would be invested in deals that would generate satisfactory IRRs.
- Shareholder list of long-term value investors who will sit tight with the position : Third Ave, Rotshchild, Davis Funds, First Manhattan, Franklin/Templeton, etc.

Since IPO'ing at a top price in 2005, the stock has gone nowhere but down.
These are but some of the plausible reasons the stock could be inefficiently priced at this time:
-Momentum selling. The stock has been down every single year, not to mention the tax-loss selling at the end of each year.
-Investors got very tired holding this stock.
-No major deals were done with the pile of cash raised from the IPO when a lot of other private equity deals were announced.
-Japanese markets have also come down a lot, so the market prices of the public holdings have gone down with it.
-Auto parts industry conditions got worse.
-Selling pressure from some of the limited partners who were original investors in the Ripplewood Partnership and received the stock in exchange during the IPO.
-Stock listed in Belgium, but the investees are in Japan.
-Not much analyst coverage.
-Turnaround in the Japanese businesses was taking too long and testing every investor's patience.

Why events are turning for the positive:
-RHJI has a new co-CEO who joined in October 2007 in the person of Leonhard Fischer, a sort of finance wonderkid (see below).
-After announcing the divestiture of its 49% stake in D&M holdings, RHJI BB will have 590 million Euro in cash, which is over 80% of its market cap.
-After staying disciplined with its cash during the private equity bubble, RHJI is looking at several possible acquisition deals. Cash might actually be allocated to a good investment. One of the rumors is they are looking at financial services, a sector right up their alley.
-The turnaround in the Japanese businesses' in RHJI's portfolio is gaining more traction. All of the businesses, including the Phoenix Seagaia Resort, have turned EBITDA positive at least 2 years in a row.
-Today's post-bubble private equity environment is much better for RHJI's value investing style. This is in line with Tim Collins' recent statement on March 1 2008 that "he sees golden age in private equity investing". See link: http://www.depauw.edu/news/index.asp?id=21048
- Share buyback implemented since February 2008
- Fischer bought 99,400 shares in the open market at 12 Euros
- There seems to more effort to raise investor awareness of the company. They are scheduled to have what I believe is their first conference call for 2007 annual results on June 30 9:30 am EST. Investors get a chance to ask management questions.
- Viewed from all angles, there is a much bigger margin of safety in the stock price versus the intrinsic value of RHJI. For example,
Assign zero to the private businesses and adding 590MM Euro in cash + lower of market price or 8 times EBITDA valuation, you still get 20% discount to NAV
- They have quietly formed a private equity fund,whereby RHJI shareholders get recurring management fees and incentive fees.

Brief summary of Leonhard Fischer:
- Dad was a manager in IBM – Lenny oldest son of 3
- Politically interested as a young student
- Founded a student newspaper with a friend with a circulation of 25.000 pieces in 80 schools
- Studied economics in Bielefeld, Master in Athens – University of Giorgia
- 1987 trainee with JP Morgan, 24 years old – soon Co-Head of global markets
- Kurt Viermetz at that time Vice Chairman of JP Morgan stated “incredible intellectual capabilities to analyse, find conclusions and decide”
- 1994 Chief Executive of JP Morgan Germany
- 1995 joins Dresdner as Responsible Treasury and proprietary trading, only 32 years old – “excellent risk-taker, able to earn money, excellent contacts in New York and London” – a former chief stated
- 1998 Board Member of Dresdner Bank for Asset Management and Investment Banking
- Biggest mistake in his career: buys M&A house Wasserstein Perella for 1.4 billion USD before severe downturn
- After takeover by insurer Allianz becomes Board Member
- Wanted spin off of Investment & Corporate Banking at Allianz, lost 880 million € in 2002, was sacked by Allianz
- After this he said: “I lost it. You cannot lead a successful life and earn good money if you never take some risk”…”I think the American way: You must comeback, because the world is full of opportunities.
- January 6, 2003 at his 40th birthday: takes role as Chief Executive of troubled Swiss insurer Winterthur, group of Credit Suisse – break even in 2003
- June 14, 2006: sells restored Winterthur for 12.3 billion SFR to AXA and makes Credit Suisse happy.
Other links: http://csg.gr/governance/en/pop_s_cv_fischer.html

- With effect from May 1, 2007, Mr. Leonhard Fischer was appointed Co-Chief Executive Officer
together with Mr. Collins. Mr. Fischer is engaged full-time with the Company for an indefinite
term. Mr. Fischer will receive an annual salary of EUR 100,000. In connection with his
appointment as Co-Chief Executive Officer, entities controlled by Mr. Collins granted Mr.
Fischer 282,000 shares of RHJI. These shares are subject to a lock-up agreement that ends on
May 1, 2010. The Company has also agreed with Mr. Fischer to make a grant of 513,333 shares,
or the economic equivalent, which rights will become vested after two years and may not be
transferred, pledged or otherwise disposed.

- On September 18, 2007, Leonhard Fischer has been appointed as a director by the Board of
Directors until the Annual General Shareholders’ meeting to be held on 16 September, 2008.

Valuation

It is difficult to value the private companies, especially since they are so highly levered. What I have done
is to assign 2 valuations for each portfolio holding. If it is public, I put the stock market price, and the implied stock
price at 8XEBITDA (Trailing or FY 2007 whichever is available) or 10 times PE for Cairo Bank. If it is private, I put
the book value(from the 2007 Annual Report), or the implied equity value using 8xEBITDA. I also have a third column
which is the lower of the 2 valuations for each holding. I will use this table to build my worst case scenario valuation and
add them up to see the potential range of valuations. Note that while Phoenix Seagaia has positive EBITDA, I assign zero
to the equity value in the implied equity value at 8 x ebitda, because the ebitda just turned positive for 2 yrs in a row. In truth, however, Phoenix Seagaia owns a valuable piece of real estate and the cost of building the resort was 2 Billion USD. Secondly, some of this positions are control positions so they deserve a control premium (as in what we saw in D&M holdings).

167 JPY = 1 Euro

# shares owned
Mkt Price/Book Value
Implied Price 8xEbitda
Value of RHJI Stake @ Market / Book
RHJI Stake @ Implied Price 8xEbitda
Lower of the 2
Higher of the 2
Shaklee 8205 JP
10,074,000666 JPY 612 JPY 40.2MM Euro
37MM Euro
37MM40.2MM
Asahitec 5606 JP
77,065,68485 JPY 419 JPY
39.2MM Euro193MM
39.2MM193MM
CME 6791 JP
66,503,000
77 JPY 85 JPY
30.7MM Euro33.8MM
30.7MM33.8MM
U-Shin 6985 JP
6,400,000887 JPY 1157 JPY
34MM Euro44.3MM
34MM44.3 MM
COMI EY10,876,35782 EGP 66 EGP
61MM Euro50MM
50MM61 MM
Honsel
81.8%

126MM Euro
126MM
126MM126 MM
Niles
95.3%


106MM Euro
128MM
106MM128 MM
Phoenix Seagaia
100%


138MM Euro
0
0138 MM
Other Securities



50MM Euro
50MM
50MM50 MM


Ranges of Valuations
1. Worst Case
Add cash, other undisclosed securities, and the public securities at lower of market price or 8 x EBITDA implied value, and assign zero to private securities.
Cash = 592MM Euro
Undisclosed Other Marketable Securities = 50MM
Public portfolio at lower of market prices or 8xEBITDA = 191MM
Private businesses = 0
Total = 784 Million Euros
Fully Diluted Shares Outst = 86 Million
Per Share Value = 9.7 Euros
2. Valuation #2
Cash = 592 MM
Other Securities = 50 MM
Public Portfolio at lower of market prices or 8xEBITDA = 191MM
Private business at lower of Book Value or 8xEBITDA = 232 MM
Total = 1016 MM Euros
Fully Diluted Shares Outst = 86 Million
Per share value = 12.4 Euros
3. Valuation #3
Cash = 592 MM
Other Securities = 50 MM
Public Portfolio at higher of market prices or 8xEBITDA = 332MM
Private businesses at higher of Book Value or 8xEBITDA = 392MM
Total = 1366 Million Euros
Fully Diluted Shares Outst = 86 M
Per Share Value =15.9 Euros
You can toy with various combinations/permutations and your range of values will be between 12.4 to 15.9 Euros. So you are getting a 35% to 50% discount to NAV.


Extra optionality:
What are they going to do with the cash?
They are sitting with 592 M Euro of cash, which is 80% of market cap. If they can compound this cash at 15%, (about 1/3 of annualized compounded returns achieved by Tim Collins in the 90s), you are basically buying a stock at half of NAV compounding at 15% returns. The rumor is they are looking at financial services firms in Europe. The subprime meltdown has created opportunities. I give it high odds that they should be able to achieve 15% returns on the cash. Say it takes 3 years to narrow the 50% discount gap on the NAV plus the 15% annualized IRR on this cash, and you get an annualized IRR of 40%.

What if the private companies turn out to be better than we gave them credit for?
Due to lack of data, I conservatively valued the private companies. Phoenix Seagaia, one of their 100% wholly owned private companies, for example, is valued at 0 on an EBITDA multiple basis, but it has a lot of real estate assets situated along the Pacific Ocean. It cost more than 2 billion USD to build the resort. RHJI has hired real estate developers to look into developing the real estate for other business purposes.

How much can they raise for the Cartica and joint venture with Mitsubishi they started?
As a shareholder, one gets to participate as a GP for these 2 funds recently formed. This is recurring fee income. The start date comes at a very opportune time after RHJI has shown that they have been disciplined in the buying process and is now ready to attack.

Further divestitures of the other holdings?
D&M could be the first of a few more divestitures of other non-core holdings. Columbia Music comes to mind ... This would raise more cash. If deployed in higher ROC businesses like financial services or the emerging markets in the Middle East, this could only increase the compounding rate.


If the optionalities result in anything positive, plus a capital allocator at the helm, this stock could be a home run, generating annual IRR's in the 50% range for the next 5 years.

On June 30, RHJI will have a conference call of its results. In my many years of following the stock, I believe this is the first time they are doing this.



Catalysts
Just Cheap
The recent divestiture of one of the holdings.
Announcement of acquisition or use of their cash
Starting its first conference call on annual results
Investor relations activities starting to take hold
Lenny Fischer, the new co-CEO

Catalyst

Just Cheap. The recent divestiture of one of the holdings. Announcement of acquisition or use of their cash. Starting its first conference call on annual results. Investor relations activities starting to take hold. Lenny Fischer, the new co-CEO. Share buyback.
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