Rella Holding A/S (“Rella”) has a market value of DKK 808 million despite its 58.2% ownership in Aller Holding (“Aller”) through non-voting, class B shares with a book value of DKK 2.25 billion, or 179% more than Rella’s current market value.  Downside is protected with 6% upside to Rella’s net current asset value of DKK 36.47/sh – 90% of current assets are cash and liquid securities.  Adding Rella’s 58.2% interest in Aller’s DKK 1.24 billion of unencumbered real estate provides a value of DKK 67.28/sh, or 95% upside.  Including Rella’s 58.2% ownership of Aller’s profitable core business at 5x net income results in a share price of DKK 80.33/sh, 133% upside. 

									Value/sh	Upside
Net Current Asset Value									kr. 36.47	6%
Net Current Asset Value + Real Estate									kr. 67.28	95%
Net Current Asset Value + Real Estate + Core Business at 5x Net Income									kr. 80.33	133%
Book Value									kr. 96.23	179%

While many holding companies trade at discounts to their net asset value, we think Rella is special for the following reasons:

1. Rella has been profitable every year as the CEO is a prudent operator and the only major expense, aside from DKK 1.1 million in annual administrative expenses, is interest as Rella draws down a credit line during the year to repurchase stock.  The CEO and his family own 28.0% of Rella and understand the importance of minimizing cash burn and creating shareholder value through stock repurchases.  Historically Aller has been profitable and 2012 guidance points to another year of profitability.
2. Rella’s annual dividend from Aller is well protected as the Aller Trust, which provides needed liquidity to the Aller family through their ownership of A shares, can only receive dividends if declared and paid out to B shareholders.  For this reason, the annual dividend declared by Aller has never been less than DKK 50 million, even when net income fell below that level during the recession.  Therefore, Aller’s annual dividend amounts to the maximum of 35% of net income or DKK 50 million.  Aller recently declared a dividend of DKK 77 million for the year-ended 2011. 
3. Since inception in 1991, Rella has never made an investment outside of acquiring Aller shares.  Rella has no plans to increase its stake in Aller and will not use its capital for anything other than share repurchases or paying dividends to Rella shareholders if the stock trades above book value.  Rella is not an empire builder. 
4. Rella is aggressively repurchasing stock in the open market.  While the company bought back 6.3% of its stock between 2008 and 2010 (averaging 2.1% each year), Rella repurchased 5.1% of its shares in 2011 alone.  Stock repurchases have continued at a similar pace this year as Rella has bought back 1.1% of its shares as of March 23, 2012.  Based on availability under its current facility, we believe Rella will buy another 1,014,042 shares of stock, or 4.3% of its shares, through the rest of 2012.
5. Aller recently began repurchasing B shares in the open market, something it had been prohibited from doing until a recent change in Danish ownership laws.  We believe this brings Aller one step closer to purchasing Rella outright as the B shares can be purchased cheaper through an investment in Rella than OTC.

Why Does This Opportunity Exist?

We believe this opportunity exists because Rella’s financials are not reflective of the significant value of Rella’s investment in Aller.  The only asset on Rella’s YE 2011 balance sheet is its ownership in Aller at a historical cost of DKK 541 million.  Rella’s board has determined that due to the illiquidity of Aller B shares in the Danish OTC market, the only prudent measure by which to record Rella’s investment in Aller is at historical cost.  As a result, Rella appears to be trading at 2x YE 2011 book value when in reality it is trading at 36% of its DKK 2.25 billion book value.  Rella also screens expensively trading at 19x 2011 earnings with no dividend yield since Rella deploys all income into share buybacks. 

Additionally, Aller’s current repurchases of B shares are not public knowledge.  Aller has never publicly disclosed a repurchase program and has always bought stock OTC.  Aller’s recent cash flow statement reflects a different story as Aller purchased DKK 19.9 million worth of stock this year - the most it has ever bought back. 

We also believe this opportunity exists because Rella is a Danish listed, small cap company with limited float and one analyst covering the stock.  In addition, Rella is a holding company with no real business and doesn’t hold earnings calls or attend conferences and neither does Aller.  For these reasons, we believe Rella is under the radar, resulting in a significantly depressed share price relative to its fair value.    

Aller Background

Founded in 1873 by Carl Aller and controlled by the Aller family through its 100% ownership of Aller voting Class A shares (26.9% of total share capital), Aller is the market leading publisher of weeklies in the Scandinavian market with 60% market share.  Aller publishes 2.7 million copies of its weeklies per week and also publishes over 34 monthly magazines.  With 2,000 employees and annual turnover of DKK 4.03 billion, Aller considers itself a modern media group with a portfolio of assets that includes broadcasting, internet, and mobile platforms.  In an effort to maintain its market share amid continued declines in the weeklies market, Aller has invested in new media platforms, as well as rationalized and modernized its operations in order to keep the company cost competitive.  Despite operating in a tough industry, Aller managed well through the recession and recently experienced improved margins due to its restructuring efforts.  A summary of Aller’s financial performance and market share:

ALLER FINANCIALS (in DKK mil)	9/30/07	9/30/08	9/30/09	9/30/10	9/30/11
Denmark	kr. 1,345	kr. 1,440	kr. 1,412	kr. 1,386	kr. 1,362
Sweden	kr. 1,057	kr. 1,146	kr. 966	kr. 1,085	kr. 1,178
Norway	kr. 1,236	kr. 1,298	kr. 1,079	kr. 1,074	kr. 1,103
Finland	kr. 429	kr. 419	kr. 408	kr. 371	kr. 387
Total Group Sales	kr. 4,067	kr. 4,303	kr. 3,865	kr. 3,916	kr. 4,030
Total Growth Y/Y		5.8%	-10.2%	1.3%	2.9%
IFRS EBIT	kr. 265	kr. 101	-kr. 111	kr. 271	kr. 246
Adjustments	kr. 40	kr. 43	kr. 179	-kr. 116	-kr. 39
Core EBIT	kr. 305	kr. 144	kr. 68	kr. 155	kr. 207
Core EBIT Margin	7.5%	3.3%	1.8%	4.0%	5.1%
Result of Associated Companies	-kr. 9	-kr. 22	-kr. 20	-kr. 23	kr. 13
Result of Financial Items	kr. 104	-kr. 77	kr. 159	kr. 155	kr. 38
Profit before tax	kr. 400	kr. 45	kr. 207	kr. 287	kr. 258
Profit Before Tax Margin	9.8%	1.0%	5.4%	7.3%	6.4%
Cash and marketable securities	kr. 3,209	kr. 2,426	kr. 2,308	kr. 2,748	kr. 2,843
Real Estate (Land and Building)	kr. 366	kr. 375	kr. 1,286	kr. 1,271	kr. 1,239
Total Assets	kr. 5,309	kr. 5,327	kr. 5,161	kr. 5,482	kr. 5,564
Total Liabilities	kr. 1,409	kr. 1,574	kr. 1,459	kr. 1,542	kr. 1,521
Equity	kr. 3,900	kr. 3,753	kr. 3,702	kr. 3,940	kr. 4,043
Weekly Circulation for Weeklies (in 1000's)	9/30/07	9/30/08	9/30/09	9/30/10	9/30/11
Aller Denmark	1,031	996	943	899	846
Aller Sweden	1,159	1,191	1,170	1,145	1,127
Aller Norway	549	555	487	485	457
Aller Finland	421	380	279	254	245
Total Average Aller Circulation	3,160	3,122	2,879	2,783	2,675
Total Nordic Market Circulation	5,100	5,080	4,500	4,500	4,400
Aller Market Share	62.0%	61.5%	64.0%	61.8%	60.8%
Dividend Payout (based on IFRS Net Income)	9/30/07	9/30/08	9/30/09	9/30/10	9/30/11
IFRS Net Income	kr. 277	-kr. 20	kr. 5	kr. 274	kr. 220
Annual Dividend	kr. 97	kr. 50	kr. 50	kr. 96	kr. 77
Payout Ratio	34.9%	N/M	N/M	35.0%	35.0%

Rella Background

Rella (“Aller” spelled backwards) was created in the fall of 1991 when the CEO, Jens Arnth-Jensen, learned that some institutions wanted to monetize 4,501,000 Aller B shares that totaled 25% of Aller share capital.  While the CEO would have liked to purchase all the shares, it was too expensive for his family so he created Rella to buy the shares together with 8 other families.  From 1991 to 1997 Rella collected dividends and purchased 2,247,600 Aller B shares.  Since 1998, Rella has gradually increased its ownership by 2,578,400 shares to a total 9,327,000 shares, or 58.2% of Aller share capital.  Rella has not purchased Aller B shares since Q1 2011 and has no plans to further increase its ownership in Aller as it prioritizes its own share repurchases. 

On June 12, 2006 Rella listed on the Copenhagen stock exchange to provide liquidity for some of the initial investors, but the CEO and his family maintained their stake and currently own 28.0% of Rella shares outstanding.  Unlike most holding companies, Rella has never made an investment outside of Aller shares and has no plans to do anything other than repurchase its own shares or pay dividends. 

Rella is cash flow positive and profitable every year.  Given the DKK 77 million dividend announced by Aller for 2011 and payable in February 2012, Rella will continue to generate cash flow for share repurchases throughout 2012.  A summary of Rella’s performance and buybacks:

RELLA FINANCIALS (in DKK mil)	12/31/07	12/31/08	12/31/09	12/31/10	12/31/11
Dividends from Aller Holding A/S	kr. 57.1	kr. 49.6	kr. 25.7	kr. 25.8	kr. 49.5
Net Financial Expenses	kr. 5.5	kr. 6.1	kr. 6.2	kr. 4.8	kr. 5.4
Profit Before Admin Expenses	kr. 51.6	kr. 43.5	kr. 19.5	kr. 21.0	kr. 44.1
Admin Expenses:
Directors' Fees	kr. 0.0	kr. 0.1	kr. 0.1	kr. 0.1	kr. 0.1
Manager's Remuneration	kr. 0.2	kr. 0.2	kr. 0.2	kr. 0.2	kr. 0.2
Social Security Contribution	kr. 0.0	kr. 0.0	kr. 0.0	kr. 0.0	kr. 0.0
Listing Fee NASDAQ OMX Copenhagen	kr. 0.3	kr. 0.2	kr. 0.2	kr. 0.2	kr. 0.2
Shareholders' Register	kr. 0.2	kr. 0.2	kr. 0.1	kr. 0.1	kr. 0.2
Danish Commerce and Companies Agency Fee	kr. 0.0	kr. 0.0	kr. 0.0	kr. 0.0	kr. 0.0
Auditor's Fee	kr. 0.1	kr. 0.1	kr. 0.1	kr. 0.2	kr. 0.1
Legal Fees	kr. 0.1	kr. 0.0	kr. 0.0	kr. 0.0	kr. 0.0
Other Expenses	kr. 0.3	kr. 0.4	kr. 0.4	kr. 0.4	kr. 0.3
Total Administrative Expenses	kr. 1.3	kr. 1.3	kr. 1.1	kr. 1.2	kr. 1.1
Profit Before Taxes	kr. 50.3	kr. 42.2	kr. 18.4	kr. 19.8	kr. 43.0
Taxes*	kr. 0.0	kr. 0.0	kr. 0.0	kr. 0.0	kr. 0.0
Profit After Tax	kr. 50.3	kr. 42.2	kr. 18.4	kr. 19.8	kr. 43.0
* No taxes on dividend income in Denmark if own >10% of share capital.  Rella actually has NOLs due to tax
deductibility of expenses and non-taxable income.  NOLs not on Rella books since won't be used.
LT Debt	kr. 119.0	kr. 117.0	kr. 113.0	kr. 122.0	kr. 130.6
ST Debt	kr. 3.0	kr. 3.0	kr. 4.0	kr. 2.0	kr. 1.7
Total Debt	kr. 122.0	kr. 120.0	kr. 117.0	kr. 124.0	kr. 132.3
Shares Repurchased	-	612,963	343,005	654,429	1,306,574
Avg Repurchase Price Per Share	-	kr. 63.30	kr. 37.50	kr. 35.80	kr. 38.00
% Share Capital	-	2.4%	1.3%	2.6%	5.1%

Net Current Asset Value:

Downside is well protected by Rella’s DKK 36.47/share in net current asset value, 6% above Rella’s current share price.  90% of Aller’s current assets are cash and liquid securities that, according to management, are 80% invested in government and mortgage bonds and 20% equities.  Management claims they can convert the entire portfolio to cash in 48 hours.

Cash	kr. 543.3
Accounts Receivable	kr. 203.5
Inventory	kr. 113.3
ST Securities	kr. 7.4
LT Securities	kr. 2,292.3
Total Current Assets	kr. 3,159.9
Total Liabilities	-kr. 1,211.8
Pension	-kr. 302.3
Minority Interest	-kr. 6.7
Net Current Assets	kr. 1,639.0
Rella Own %	58.2%
Rella Share	kr. 953.8
Rella Current Net Debt	-kr. 100.0
Rella Net Current Assets	kr. 853.8
Shs Out	23.4
Rella Net Current Assets/sh	kr. 36.47
Upside	6%

Our current net debt is inclusive of Aller dividends received in February 2012 and shares bought back YTD. 

Rella YE 2011 Debt	kr. 132.3
Rella Dividends Received	-kr. 39.9
Net Debt Before YTD Repurchases	kr. 92.4
YTD Shares Repurchased	kr. 7.6
Current Net Debt	kr. 100.0

Management has confirmed that there are no off-balance sheet liabilities or commitments.

Net Current Assets + Real Estate Value:

Our net current asset + real estate value includes Rella’s 58.2% ownership in Aller’s DKK 1.24 billion of real estate.  While we haven’t personally diligenced Aller’s real estate, we note DKK 800 million of the DKK 1.24 billion in real estate is the cost of Aller’s recently completed (August 2009) corporate headquarters on the Copenhagen water front.  Information about the building from the architects:http://www.plh.dk/eng/eng/projects/architecture/office/aller-media-building

To be conservative, we award zero value to Aller’s DKK 778 million in other tangible assets and zero value to the profitable core business.  The resulting value is DKK 67.28/sh, or 95% above Rella’s current share price. 

Rella Net Current Assets	kr. 853.8
Real Estate	kr. 1,239.4
Rella Own %	58.2%
Rella Share of Real Estate	kr. 721.3
Net Current Assets + Real Estate	kr. 1,575.0
Shs Out	23.4
Rella Net Current Assets + Real Estate/sh	kr. 67.28
Upside	95%

Net Current Assets + Real Estate + Core Business at 5x Net Income:

Given Aller’s history of profitability, we think it’s reasonable to award value to Aller’s core business.  At the mid-point of Aller’s DKK 125–175 million in 2012 EBIT guidance and applying a 5x earnings multiple, Aller’s business is worth DKK 525 million, 58.2% of which is DKK 306 million.  While comps trade at higher multiples, given the declining nature of Aller’s core weeklies business we think 5x is prudent.  Management informed us that Aller charges rent to subsidiaries and records rental income below EBIT as financial income; therefore, we are not double counting by including the value of the real estate (if you don’t trust us you can simply apply a 5-6% cap rate to the RE value and deduct that from our EBIT).  We feel comfortable adding the core business to the net current asset value since 90% of our current asset value is cash + liquid securities and we are excluding DKK 778 million in other tangible assets from our analysis which more than offsets any working capital we may be double counting.  The combined value of Rella’s share of Aller’s net current assets, real estate, and core business is DKK 80.33/share, 133% above Rella’s current share price. 

Net Current Assets + Real Estate	kr. 1,575.0
Aller 2012 EBIT (midpt of guidance)	kr. 150.0
Tax Rate	30.0%
2012E Net Income	kr. 105.0
Multiple	5.0x
Value of Aller Core Business	kr. 525.0
Rella Own %	58.2%
Rella Share of Core Business Value	kr. 305.5
Rella Net Current Assets + Real Estate + Aller Core Business	kr. 1,880.5
Shs Out	23.4
Rella Net Current Assets + Real Estate + Aller Core Business/sh	kr. 80.33
Upside	133%

This is 17% below Rella’s book value of DKK 96.23/sh, which based on our experience and European brokerage reports (GS and SCCO) is an average discount to book value for a profitable and shareholder friendly European holding company.

 

Aller BV	kr. 4,042.8
Rella Own %	58.2%
Rella % of Aller BV	kr. 2,352.6
Rella Net Debt	-kr. 100.0
Rella BV	kr. 2,252.6
Shs Out	23.4
Rella BV/Sh	kr. 96.23
Upside	179%

 

Risks

The largest risk to an investment in Rella is the continued decline in Aller’s core weeklies business as consumers and advertising dollars continue to shift online.  We think this risk is mitigated given one can purchase Rella today at prices that award negative value to Aller’s business.  While the weeklies business isn’t a great business, it is worth something, and certainly not a drag on value given its profitability.

Another risk is that Aller invests heavily in new media companies in order to offset declines in its core business.  While possible, Aller has passed on previous opportunities and appears content to build its cash balance.  Our understanding based on conversations with management is they do not intend on pursuing large or transformative transactions, but will pursue smaller tuck-ins.  Preserving cash is important since most of the Aller family is dependent on the value of Aller.

Other risks are that Aller is family controlled and will most likely run the business in the interest of the family.  Additionally, Rella is a holding company and can invest in other assets, but management has made it clear that Rella has no interest in making other investments.

Summary

Trading below net current asset value and substantially below liquidation value, we believe an investment in Rella is a very compelling and asymmetric risk-reward.  This is not lost on either Rella or Aller as both are repurchasing shares at a record pace.  Value will accrete over time from share repurchases and, while impossible to predict the future, it’s logical for Aller to purchase Rella.

 

Rella shareholders are starting to make some noise and a silent activist recently sent a letter to the Chairman of Aller highlighting the value of acquiring Rella given the large discount to net asset value.  With shareholders highlighting the value of a Rella buyout and with Aller allowed to repurchase as many B shares as it wants in the open market for the first time, it’s possible that the current discount to net asset value won’t last long.  Rella’s CEO Jens Arnth-Jensen can be reached at rella@rella.dk or +45 45 42 45 17 if you would like a copy of the letter sent to the Chairman of Aller.  Additional information is at http://www.rella.dk/default.asp?id=61