2007 | 2008 | ||||||
Price: | 99.01 | EPS | |||||
Shares Out. (in M): | 0 | P/E | |||||
Market Cap (in $M): | 4,986 | P/FCF | |||||
Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
TEV (in $M): | 0 | TEV/EBIT |
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An
Atypical Player in the Private Equity World – E3bn of value for free if listed
stakes are hedged - 100% Upside For Those Willing To Read Through This Lengthy
Writeup In Its Entirety
Wendel’s
investment case is predicated upon a simple thesis, which is unfortunately (or
fortunately, for value investors like yourselves) disguised by a complicated
corporate structure. The inarguably brilliant management team at Wendel
(for skeptics, read: http://www.bloomberg.com/news/marketsmag/wendel.pdf) has
taken 2 actions over the past months that have somewhat inexplicably sent the
share price from a high of E145 to its lows at E99.
What has happened
or what has management done to warrant this devaluation? (1) Wendel carved out
and IPO’d 20% of world class asset Bureau Veritas (the global testing and
inspection concern), to highlight material hidden value within Wendel, and, in
my opinion, to establish a market value prior to the long-rumored consolidation
involving Bureau Veritas and SGS within the testing and inspection
industry. All good so far; the IPO was a smashing success. The
shares were multiple times oversubscribed and have traded brilliantly in an
otherwise dismal market. Because testing and inspection businesses
are few and far between, it is likely that institutional investors holding
Wendel for exposure to Bureau Veritas exited Wendel and invested directly in BV
post IPO, causing downward pressure on Wendel's shares. It wouldn't
surprise me at all if Wendel used some of these "high multiple"
proceeds to buy back its own shares at 7x FCF, as it has an authorization for
buying back up to 10% of its shares outstanding, and has used this policy
aggressively in the past when Wendel's shares have traded at a 10% discount to
intrinsic value. (2) Wendel has amassed a 17.6% stake in legacy French
conglomerate Saint-Gobain, for a multitude of INTELLIGENT reasons that will be
discussed later in this write-up. The result? Wendel has been de-rated to
a staggering 60% discount to my 2007 fair intrinsic value calculation.
Put another way, the “Wendel Stub” is trading at roughly zero, ascribing no
value to the roughly E3bn of value respresented by the 5 private companies
owned by Wendel. Why you might be wondering. I have read a
multitude of explanations, and will attempt to summarize them as follows: (1)
In simultaneously IPO’ing Bureau Veritas and amassing a stake in Saint-Gobain,
the majority of Wendel’s NAV is now LISTED as opposed to private. In
other words, the publicly traded PE sector in Europe, which trades at a premium
of 15-20% to NAV, is no longer a relevant proxy for Wendel’s valuation.
Instead, the market has ascribed a discount more appropriate for a disorganized
conglomerate of garbage with poor corporate governance and no ambition to
create shareholder value. As absurd as this sounds, I direct you to
sell-side research, which has repeatedly made reference to this “status
change”. (2) The market doesn’t understand what Wendel is doing with
Saint-Gobain. Perhaps they are returning to their roots and recreating a
holding company of disparate stakes? Lafonta keeps a relatively low-profile and
is not often heralded as a genius, a brilliant value creator, a “Warren
Buffet of Europe”, a Sergio Marchionne. But he is. And his recent
actions in amassing a 17.6%stake in Saint-Gobain are brilliant for a multitude
of reasons that will be discussed in greater detail below. (3) Wendel is
a private equity firm, and private equity firms depend on cooperative debt
markets to finance future deals. My take: who cares? My investment case is
predicated solely on the assets that Wendel owns today, liquidation value “if
you will”. Wendel’s current portfolio is comprised of businesses that are
leaders in their respective niches, with high barriers to entry, moderate-to-high
organic growth, attractive bolt-on inorganic growth opportunities (capturing
the significant arbitrage between low purchase prices of fragmented private
businesses, and larger businesses of scale), very high free cash flow
conversion, and restructuring potential/margin expansion opportunities that
will create significant value for shareholders in each
business. Furthermore, Lafonta is choosing not to "pay up"
for auctioned assets with higher cost debt - SMART. Instead, he has
engaged in a highly imaginative and intelligent approach to gain
control over a legacy french empire with enormous upside in the hands of
Lafonta's management team (the process of Wendel/Lafonta gaining effective
control without any further capital outlay and directing Saint-Gobain's
restructuring is detailed below).
Below I detail
Wendel’s present discount to intrinsic value:
Valuation |
|
|
|
|
|
|
|
|
|
|
|
Listed
Assets |
|
#
Shares Held mm |
Share
Price |
Value |
Per
Share |
Legrand |
|
80.6 |
€ 24.28 |
€ 1,956.97 |
€ 38.90 |
Bureau
Veritas |
|
67.3 |
€ 38.65 |
€ 2,601.15 |
€ 51.70 |
Saint
Gobain |
|
67.3182 |
€ 65.10 |
€ 4,382.41 |
€ 87.11 |
Stallergènes |
|
6.126 |
€ 53.00 |
€ 324.68 |
€ 6.45 |
Neuf
Cegetel |
|
0.28 |
€ 36.00 |
€ 10.08 |
€ 0.20 |
Wendel |
|
0.2 |
€ 100.25 |
€ 20.05 |
€ 0.40 |
Sub-total
Listed Assets |
|
€ 9,295.34 |
€ 184.76 |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unlisted
assets Market Value (net of debt) |
|
2007 |
2008 |
2009 |
(debt
assumed) |
Oranje
Nassau |
|
€ 344.00 |
€ 344.00 |
€ 344.00 |
|
Editis |
|
€ 644.16 |
€ 715.96 |
€ 796.46 |
€ 384.00 |
Materis |
|
€ 859.41 |
€ 977.79 |
€ 1,105.52 |
€ 1,723.00 |
Deutsch |
|
€ 784.68 |
€ 906.16 |
€ 1,039.60 |
€ 520.00 |
Stahl |
|
€ 67.62 |
€ 98.36 |
€ 124.67 |
€ 367.00 |
Total |
|
€ 2,699.86 |
€ 3,042.27 |
€ 3,410.25 |
|
|
|
|
|
|
|
Per
Share |
|
|
|
|
|
Oranje
Nassau |
|
€ 6.84 |
€ 6.84 |
€ 6.84 |
|
Editis |
|
€ 12.80 |
€ 14.23 |
€ 15.83 |
|
Materis |
|
€ 17.08 |
€ 19.44 |
€ 21.97 |
|
Deutsch |
|
€ 15.60 |
€ 18.01 |
€ 20.66 |
|
Stahl |
|
€ 1.34 |
€ 1.96 |
€ 2.48 |
|
Total |
|
€ 53.66 |
€ 60.47 |
€ 67.78 |
|
|
|
|
|
|
|
Total
Market Value All Assets |
€ 11,995.2 |
€ 12,337.6 |
€ 12,705.6 |
|
|
Value
per Share |
|
€ 238.4 |
€ 245.2 |
€ 252.5 |
|
Wendel
Share Price |
|
€ 99.10 |
€ 99.1 |
€ 99.1 |
|
S/O |
|
50.31 |
€ 50.3 |
€ 50.3 |
|
Market
Cap |
|
€ 4,985.72 |
€ 4,985.7 |
€ 4,985.7 |
|
Discount
to Fair Value |
-58.4% |
-59.6% |
-60.8% |
|
History
Wendel is a young
investment company but one that carries on an old industrial tradition. Wendel
was formed in 2002, a result of the merger between CGIP and Marine-Wendel, the
latter which was in financial crisis resulting from its nearly bankrupt steel
mills. The appointment of a CEO Jean-Bernard Lafonta systematically
boosted the performance of the 300-member family’s holding. Since Lafonta’s
arrival, the portfolio has been actively reshaped, cutting old stakes (Cap
Gemini, Wheelabrator Allevard, Valeo) and acquiring fresh blood (Legrand,
Bureau Veritas, Editis). More importantly, the real switch of strategy
consisted in taking operating control of the companies in which it invested, a
sharp break with the more passive approach taken previously. The market
rewarded Lafonta’s work by re-rating the shares at an average 10% premium to
Wendel’s stated NAV (which, has been restated upwards >10-20% each quarter
since Lafonta’s team took over, suggesting investors view NAV as a
hyper-conservative measure of intrinsic value.
Philosophy
I will briefly attempt
to summarize Wendel's investment philosophy, which is fairly Buffet-esque, with
the caveat that they have unique access to companies in France with political
sensitivity that other players would not be permitted to purchase. Wendel
seeks in its investments companies with: high barriers to entry, good pricing
power, leader or leader-potential in a specific niche, capacity to consolidate
their competitive position through acquisitions. In other words, they all
have a significant growth profile, margin expansion potential and strong
free cash flow conversion. For these companies, Wendel's management, together
with these companies' managers, apply a solid, two-pronged strategy: 1)
implementing a determined top line development policy, which consists in
accelerating their organic growth pace and consolidating their market with
acquisitions, and 2) optimizing their free cash flow generation through
good cost and cash control (WCR, capex), as do most other investment
funds. In other words, investing in Wendel gives access to a range of
strong companies with excellent growth prospects and an optimized balance
sheet structure. Interestingly, whereas typical private equity competitors were
drooling over an asset like Pages Jaunes, Wendel would not contemplate
investment in a company facing a potential threat or mutation of its end
market due to cannibalisation risk from the internet. Hedging out listed stakes gives access
to a highly unusual inefficiency of 3bnE of value leakage that will not be
tolerated by a proactive CEO like JB Lafonta.
What will
Lafonta do to eliminate this value leakage? I believe he will prudently repurchase his own shares, up to 10%
(for which he already has authorization), and cancel them immediately.
After all, Wendel's shares are
trading at 6.8x consolidated 2008 FCF, while proceeds from Bureau Veritas were captured at 18X '08 FCF. Lafonta is an intelligent arbitrageur,
and has the cash available to do this
twice over. In
this instance, FCF per share increases from E14.0 to E15.6. Each business
in Wendel's portfolio deserves a premium to the CAC, but to be ultra
conservative, placing a 10X multiple on consolidated FCF figures yields a
target price of E160, 60% higher than current levels. I believe Lafonta
should send a strong message on the repurchase of the first tranch of 10% of
shares outstanding and tender
for these shares immediately. This
would, of course, force repurchase at a premium, and Lafonta is a patient
manager. If he did this rapidly, and got board authorization for a second
repurchase, he could be more patient the second time around. Keep in
mind, Lafonta repurchased and canceled 10% of his shares last year as well.
In the end, it is in long-term shareholders' interest to see Wendel
repurchase the most possible shares at the lowest possible price, so if you are
a shareholder, endure the pain and/or accumulate more shares. If you are
not, this is a very rare opportunity to accumulate shares, indeed.
Description of
Unlisted Businesses
I am going to limit my
business descriptions to the unlisted assets (with the exception of
Saint-Gobain, which requires some probing) for the sake of brevity.
Listed assets are well-covered by the sell-side community.
Editis
Wendel acquired Editis in September 2004,
following its forced disposal by Lagardere (who purchased these
politically sensitive assets from Vivendi during its liquidity crisis) to
conform with European Commission rules on excessive market concentration
(Lagardere owns Hachette, the leading publisher in France). This purchase is an
excellent example of Wendel's competitive advantage in acquiring high quality
assets within France, as many suitors were rejected from this bidding process,
higher offers not withstanding. Editis is the number two book publisher on
the French market (behind Hachette, Lagardere group), with an estimated
market share of 18% (purely on the publishing part, i.e., excluding the
distribution business). On a global basis, it is world number thirteen,
with 2006 sales of EUR755m.
Editis |
2005 |
2005 |
2006 |
2007 |
2008 |
2009 |
Sales |
770 |
704 |
755 |
816 |
840 |
873.6 |
% growth |
|
|
|
8.1% |
2.9% |
4% |
EBIT |
|
€ 58.4 |
€ 72.5 |
€ 89.8 |
€ 93.2 |
€ 97.8 |
Margin |
|
8.30% |
9.60% |
11.0% |
11.1% |
11.2% |
Editis is present
in two core businesses in the book value chain: 1) publishing,
which represents 64% of sales (literature, education and reference books)
and 2) sales and distribution, for its own publications and also for third
part publishers, representing 36%of sales. Editis captures 30-40% of the
value chain contained in the pre-tax selling price of a book. Editis is
present in publishing side (11-20% of the selling price) and in distribution,
marketing and sales (all of which combined amount to around 20% of
the selling price). The size effect and a vertical integration on the
bookís value chain are essential competitive advantages, as,
in publishing, size provides: 1) sufficient financial capacity to invest
in authorsí rights, 2) risk dilution, when split between a large number of
publications, 3) a clear capacity to attract writers, 4) better capacity
to absorb the structureís costs, 5) greater marketing capabilities. This
is even truer in reselling, given the fixed-cost nature of this business.
Reselling is similar to a logistics business, in the sense that it deals
with large volumes to ensure solid profitability.
Importantly,
Wendel was forced to dispose of Larousse dictionaries, which temporarily
lowered the group's profitability. Wendel has quickly gone about
restoring margins; this structural adjustment was mainly achieved through
headquarter rationalisation and the centralisation of editorial staff
(number of sites cut from 19 to 10), the outsourcing of IT costs and
adjustments to Interforumís costs structure. The loss of the
Larousse contract has consequently been more than offset by organic growth
(+7.2% in 2005, +2.6% in 2006)and acquisitions. In 2006, the Larousse had
a negative impact of -11% in Editisís total sales (-EUR85m), and it
probably represented around 30% of Interforumís sales. Given the
fixed-cost nature of the distribution business, Interforum had no choice but
to win new contracts in order to maintain its profitability. Indeed,
Interforum signed close to 30 new distribution contracts in the same
period (Michel Lafon, Panini, Readerís Digest, etc.), which represented
roughly 20% of Interforum's 2006 turnover. With the recently signed Dargaud
and Le Lombard distribution agreements, the Larousse loss will soon be
offset by new wins. In 2007, Interforum will face the termination of
contracts with Dalloz (negative impact of EUR30m est.), but fortunately
signed other significant distribution contracts with Gallimard and Media
Participations at the end of 2006, which should fuel growth in 2007.
General
literature 33% of group sales
In general
literature (fiction and non-fiction), Editis is currently the French leader
in hardback books and number two for paperback books. Paperbacks are
structurally more profitable than hardback books given that their lower
retail price (three times lower) is more than offset by their lower cost
of production (the marginal cost is four times lower for a paperback book,
at a constant number of pages). Editis has an estimated general literature
market share of 22%.
Education
and reference books 31% of group sales
The Education
market is mainly made up of school book publishing. This is a mature and
cyclical market which is largely dependant on 1) changes to the state
scholarship programme, as a new book is almost systematically released
each time the program is changed, 2) the change in the number of pupils in
full-time education (-0.3% in primary and secondary over the last 15 years,
according to INSEE). The financing of these school books varies according
to the scholarship grade: local authorities finance books for primary
schools, the state for secondary school and there is no financing
for sixth form. However, the Education market is much stronger in terms of
profitability, as less discounts are granted in this segment (price is
less of an issue than quality, and the people who order the books, i.e.,
the teachers, push for their favourite books) and return rates are likely
to be lower (easier to forecast print quantities, as it mainly depends on
the number of pupils).
Market shares
tend to remain stable, given the loyal behaviour of the people who
order the books (school teachers), who always tend to recommend the books
that they are used to teaching. Despite the necessary investments
(significant authorsí teams, librarians, drawers, dedicated marketing
teams), this niche segment is quite profitable given: 1) large volumes,
with good visibility (quantities and titles known in advance, given that
figures depend on the number of pupils for a given back-to-school period)
and 2) a potentially very low return rate. (The attractive characteristics of this
business is why we have recently seen such competitive auctions for similar
businesses of Reed Elsevier and Wolters).
The Reference
books market, on the other hand, is a small niche, mainly composed of
dictionaries. As such, its size is limited to EUR55m, i.e., 2% of the
French publishing market. Editis brand, Le Robert, is well positioned, in
both French language dictionaries (29% of the market), and bilingual
dictionaries (30%).
Distribution:
Like the majority of the large publishers, Editis is vertically integrated,
from publishing to selling and distribution, via its branch Interforum. Interforumís
activities regroup the reselling of books to all categories of retailers
and are responsible for all logistical operations (order management,
billing, inventories, deliveries and returns). Interforum currently has
around 100 third-party publishers. Reselling is a logistics business,
i.e., mainly a fixed costs activity, meaning that its profitability
depends largely on the volume handled. Most large resellers
distribute books from their own publishers and also offer this service to
third-party publishers, which are too small to be able to afford the cost
of reselling. Interforum is the second reselling platform in terms of
size, behind Hachette.
Capex
requirements should remain relatively limited (mainly maintenance
capex), as significant investments were made before the acquisition by
Wendel.
What
remains to be done in the mid term? Many
development opportunities in France and Editis should continue to
slightly outperform the market, in spite of its already significant market
shares, thanks to its niche positioning (best-sellers, manga, tourist
guidebooks, etc.) External growth prospects could also support this
strategy, as the publishing market is still quite fragmented, except for
the two leaders (Hachette and Editis). There may still be several
opportunities to be seized in the French market, and Editis has
already bought three publishers since 2004. As the distribution
set-back of the loss of Larousse has been rectified, this analysis estimates
that Editis is able to close the profitability gap with peer Hachette, at north
of 11% in the long run.
Materis
A
strong, niche asset in building materials
Materis was
acquired in May 2006, at a price of EUR2,100m (for 100%). This
included EUR420m in equity and EUR1,680m in debt. Wendel holds 76% of the
capital, representing EUR319m invested in equity. The transaction ratios
were 1.55x 2005 sales and 9.1x 2005 EBITDA. For 2006, the ratios appear
quite attractive, at 1.3x sales and 8.2x EBITDA, in light of recent
transactions in the sector (8-10x EV/EBITDA) and the valuations of listed
peers.
Materis is one of
the leading global manufacturers of specialty building materials, mostly
targeting the renovation and new construction end-markets. Materis has
73 production sites and employs approximately 8,000 people. Materis
is a diversified company, as it is split into four autonomous
divisions: Admixtures (Chryso): 9% of sales and 9% of EBITDA, i.e., a 17%
margin; Paint (Materis Paints): 43% of sales and 32% of EBITDA, i.e., a
12.6% margin; Mortar (ParexGroup): 30% of sales and 30% of EBITDA, i.e., a
17% margin; and Aluminates (Kerneos): 18% of sales and 29% of EBITDA,
i.e., a 27% margin.
As 50% of its
sales come from renovation, Materis benefits from structural growth trends
with a high level of recurring revenues. Residential market exposure (37%
of turnover) is admittedly more cyclical. Materis is mainly active in
Europe (78%, including 40% in France) while having little exposure to the
Americas (14% of revenues). Moreover, Materis is active in markets where
barriers to entry are high: this involves constant innovation in very
specialized products (R&D, especially in mortar, admixtures and
aluminates, less so in paint) and good knowledge of its clients. Moreover,
there are still many family-owned companies in the markets in which Materisis
active, and there may be opportunities for consolidation, as was the case ten
years ago in the USA.
Materis
has also enjoyed a nice top-line growth rate of 6.8%
Materis |
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
Sales |
€ 1,165.0 |
|
€ 1,159.0 |
€ 1,191.0 |
€ 1,308.0 |
€ 1,359.0 |
€ 1,622.0 |
€ 1,703.1 |
€ 1,788.3 |
€ 1,877.7 |
€ 1,971.6 |
|
|
|
-0.52% |
2.76% |
9.82% |
3.90% |
19.35% |
5.00% |
5.00% |
5.00% |
5.00% |
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
€ 168.9 |
|
€ 175.0 |
€ 187.0 |
€ 218.4 |
€ 229.7 |
€ 259.5 |
€ 272.5 |
€ 286.1 |
€ 300.4 |
€ 315.4 |
margin |
14.50% |
|
15.10% |
15.70% |
16.70% |
16.90% |
16.00% |
16.00% |
16.00% |
16.00% |
16.00% |
|
|
|
|
|
|
|
|
|
|
|
|
Capex |
€ 40.8 |
|
€ 40.6 |
€ 41.7 |
€ 45.8 |
€ 47.6 |
€ 56.8 |
€ 59.6 |
€ 62.6 |
€ 65.7 |
€ 69.0 |
%
of Sales |
3.50% |
|
3.50% |
3.50% |
3.50% |
3.50% |
3.50% |
3.50% |
3.50% |
3.50% |
3.50% |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
EBIT |
€ 128.2 |
|
€ 134.4 |
€ 145.3 |
€ 172.7 |
€ 182.1 |
€ 202.8 |
€ 212.9 |
€ 223.5 |
€ 234.7 |
€ 246.4 |
Interest
@ 6.5% |
|
|
|
|
|
|
|
(€ 97.5) |
(€ 92.2) |
(€ 86.3) |
€ 0.0 |
EBT |
|
|
|
|
|
|
|
€ 115.4 |
€ 131.3 |
€ 148.4 |
€ 246.4 |
Taxes
30% |
|
|
|
|
|
|
|
€ 34.62 |
€ 39.38 |
€ 44.53 |
€ 73.93 |
Net
FCF |
|
|
|
|
|
|
|
€ 80.77 |
€ 91.90 |
€ 103.90 |
€ 172.51 |
13.00x |
|
|
|
|
|
|
|
€ 1,050.03 |
€ 1,194.67 |
€ 1,350.73 |
€ 2,242.64 |
14.00x |
|
|
|
|
|
|
|
€ 1,130.80 |
€ 1,286.56 |
€ 1,454.63 |
€ 2,415.15 |
15.00x |
|
|
|
|
|
|
|
€ 1,211.57 |
€ 1,378.46 |
€ 1,558.54 |
€ 2,587.66 |
Ownership
@ 76% |
76% |
|
|
|
|
|
|
€ 859.41 |
€ 977.79 |
€ 1,105.52 |
€ 1,835.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multiple |
|
|
|
|
|
|
|
|
8 |
8 |
8 |
Enterprise
Value |
|
|
|
|
|
|
|
|
€ 2,288.97 |
€ 2,403.41 |
€ 2,523.59 |
Net
Debt |
|
|
|
|
|
|
|
|
-1500 |
(€ 1,419.23) |
(€ 1,327.33) |
Value |
|
|
|
|
|
|
|
|
€ 788.97 |
€ 984.19 |
€ 1,196.25 |
Further
Detail On End Markets Materis enjoys strong positions on each of its markets. 1)
Paint (decorative mainly, 44% of Materisís turnover). Materis is the
fourth-largest European player. It is present in France (no. 2 player),
Italy (no. 1), Spain (no. 3) and Portugal (no. 2). Sales represented
around EUR670m in 2006. The global decorative paint market represents
around USD38.6bn (EUR30bn, source: Euromonitor), i.e., 45% of the global
coating market (worth USD86bn). This market is set to grow by 5.5% p.a. by
2010, accelerating from 3.8% on average between 2001 and 2005
(source: Euromonitor). The European market accounts for 28% of the global
market, i.e., around EUR8.4bn. With EUR670m in sales in 2006, Materis
has an estimated global market share of roughly 2%, and around 8.4% in
Europe. Growth in decorative paint more or less follows GDP trends, i.e.,
it is more structural than cyclical. Although the environment is quite
competitive in western Europe (more mature markets), growth is still sustained
by the development of Do It Yourself (DIY) and home decoration
networks. This business is regional and success is based largely on
brand recognition. In that respect, Materis has a competitive advantage
relative to good brands such as Tollens and Zolpan in France, Robialac in
Portugal, Alp in Spain and Max Meyer in Italy.
Organic
growth will focus on emerging markets (aluminates and mortar in China,
admixtures in India), which should help Materis outperform its market. On
the external growth front, it should look at targeted acquisitions. Materis
will benefit from the distribution synergies with the recently acquired
Zoltan network. Note that the leverage on Materis is high (80%), meaning
that there is significant value-creation potential, given that: 1) Materisís
management already knows how to manage the company quite well (EBITDA
margin has improved by 240bp in the last four years), 2) Materis generates
high free cash flow (high margin, capex limited to 3.5% of sales)on a regular
basis, as it is supported by stable markets, with structural growth in
the majority of its sales. Wendel will try to optimize the
revenue synergies in paint distribution, and could use its position of future
control in Saint-Gobain to do so. This potential upside has not been
modeled, but a large call option exists.
Valuation
Above
we have used a peer group to determine a value for Wendelís stake.
As Materis' exposure is twofold (building materials + coatings), the
closest peers are Sika (Switzerland) and Imerys, present in building
materials, and ICI and Akzo Nobel, both coating specialists. Above we
have used a blended multiple of 14x FCF to value Materis.
Deutsch
Wendel
acquired 90% of the capital by investing EUR378m in equity, with
the remaining 10% invested by Deutsch's management. Deutsch was
acquired on the basis of 9.8x 2005 EV/EBITDA, or around 8.8x
2006 EV/EBITDA. Wendel had the best opportunity to buy Deutsch, as
Carl Deutsch, the son of the company's founder, wanted it to be run as a
family business, rather than being over-levered and stripped ruthlessly of its
cost-base.
Deutsch was
founded in 1938 in California, by Alex Deutsch. It is active in
designing and manufacturing connectors for the Aerospace, Automotive
(especially heavy vehicles) and Transport end-markets. Headquartered in
the USA, Deutsch had around 3,500 employees at end-2005, mainly located in
the USA, France and the UK. Deutsch posted 2005 sales of USD502m, with a
22.1% EBITDA margin. Remarkably, margins reflect three times the amount of
corporate overhead necessary, due to triplication of cost structures in Asia,
Europe and the US and other minor offices (discussed below). We expect a
dramatic rationalization of costs over the coming years, in addition to a
segmentation approach to pricing, to extract maximum value for the
mission-critical products Deutsche provides to its customers.
Connectors are an
approximately USD35bn market, of which aerospace represents around
USD2.5bn and grew by an average of 7% p.a. over the past five years.
The market is still highly fragmented, offering Deutsch acquisition
opportunities. Deutsch is exposed to three main markets, Aerospace (42% of
sales), Automotive (47%) and Offshore (11%). Moreover, Deutschís turnover
is relatively well balanced between the USA (46% of sales), Europe (48%,
of which France accounts for around 20%) and Rest of World (6%).
Visibility in the
Aerospace segment is high, as 2006 was the second year in a row in terms
of peak orders. Moreover, the next cycle peak in deliveries is not expected
to take place until 2010, providing suppliers with several years of growth
and visibility. Moreover, the automotive segment, which was sustained in
2006 by the US truck market, should be boosted in the future by the Chinese
truck market, as more and more regulations (ex: European Union) push for
increased security equipment, which should boost demand for
connectors.
The strategy for
Deutsch is three-pronged:
1) Organizational
streamlining: thus far, Deutsch has not been structured as a single group,
but as five companies acting separately. They are likely to be regrouped
to benefit from a group structure, in terms of best practices, and also in
order to achieveeconomies of scale. This is the case in particular in terms of
purchasing power. In the longer term, Deutsch could also reorganize its
production tool business, which currently has nine factories throughout
the world. 2) Revenues: the goal is to strengthen relationships with the
most important customers, and to implement synergies in marketing and
sales. Deutsch actually has a large presence in aerospace in Europe
(Airbus, Dassault, etc.) but lacks a presence with Boeing in the USA. It
is seeking to develop relationships with this strategic
client. Moreover, Deutsch will try to grow in Asia, particularly in
China, in order to address the heavy vehicle segment, which is poised to
be a medium-term growth driver, backed by regulatory constraints (new
equipment required by the European Union). 3) External growth: opportunities
will be examined in a still fragmented market. Deutsch could acquire
companies with less than USD50m in revenues, and could spend
around USD100m. Of course, should an interesting opportunity arise, Wendel
could contribute, providing additional financial power.
Valuation
Closest
peers are Molex and Amphenol, both US players, trading at >10X EBITDA.
We have simply chosen to value it at acquisition multiple, 9.8X EBITDA.
|
2002 |
|
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
Sales |
€ 326.0 |
|
€ 369.0 |
€ 460.0 |
€ 497.0 |
€ 545.0 |
€ 588.6 |
€ 635.7 |
€ 686.5 |
%
growth |
|
|
13.19% |
24.66% |
8.04% |
9.66% |
8.00% |
8.00% |
8.00% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
€ 58.0 |
|
€ 66.8 |
€ 100.7 |
€ 109.8 |
€ 119.9 |
€ 132.4 |
€ 146.2 |
€ 161.3 |
%
Margin |
17.80% |
|
18.10% |
21.90% |
22.10% |
22% |
22.500% |
23.000% |
23.500% |
|
|
|
|
|
|
71 |
€ 83.4 |
€ 97.2 |
€ 112.3 |
Multiple |
|
|
|
|
|
€ 48.9 |
9.8 |
9.8 |
9.8 |
EV |
|
|
|
|
|
|
€ 1,297.86 |
€ 1,432.84 |
€ 1,581.11 |
Net
Debt |
|
|
|
|
|
|
426 |
426 |
426 |
Net
Equity |
|
|
|
|
|
|
€ 871.86 |
€ 1,006.84 |
€ 1,155.11 |
%
Ownership |
90% |
|
|
|
|
|
€ 784.68 |
€ 906.16 |
€ 1,039.60 |
Stahl
A
stable asset with high FCF generation; Stahl is a Dutch company that specialises in providing high-quality
coatings for leather, flexible and non-flexible substrates, textiles and
related products. Stahl also produces chemicals and dyes for leather
processing. Stahl consists of five divisions (leather finish, colours and
tanning products, shoe finish, permuthane and picassian polymers), each
offering a broad range of high value-added formulated products and
services oriented towards specific customersí requirements in leather
processing and in selected niche markets for performance coatings. Stahl
operates nine manufacturing sites and 26 strategically located technical
service laboratory facilities worldwide and employs some 1,400 people in
more than 28 countries, many of whom are engaged in basic research and
development of new products and processes.
Stahl
achieved 2006 sales of EUR316m, up 4%, of which 1% organically and 3%
linked to exchange rates. Note that over the last 20 years, Stahl has
experienced average sales growth of 4-5%, with limited cyclicality. This
can be explained by the diversity of the end-markets, in leather as well
as in permuthanes: leather goods, automotive, furniture,
garments, flooring, shoes, etc. Due to small impact on gross NAV,
we've opted to curtail description of Stahl. Additionally, the strong
long-term track-record of organic growth speaks for itself. We have employed a
conservative multiple, looking at peers HB Fuller, Rohm&Haas, although no
companies track record of consistent growth across cycles matches that of
Stahl.
|
2006 |
|
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
Sales |
€ 316.0 |
|
€ 328.6 |
€ 341.8 |
€ 355.5 |
€ 369.7 |
€ 384.5 |
€ 399.8 |
€ 415.8 |
%
growth |
4% |
|
4% |
4% |
4% |
4% |
4% |
4% |
4% |
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
€ 57.0 |
€ 60.8 |
€ 65.1 |
€ 69.5 |
€ 73.0 |
€ 76.0 |
€ 79.0 |
%
Margin |
|
|
17.3% |
17.8% |
18.3% |
18.8% |
19.0% |
19.0% |
19.0% |
|
|
|
|
|
|
|
|
|
|
EBIT |
€ 44.0 |
|
€ 47.0 |
€ 50.6 |
€ 54.4 |
€ 58.4 |
€ 61.5 |
€ 64.0 |
€ 66.5 |
%Margin |
13.9% |
|
14.3% |
14.8% |
15.3% |
15.8% |
16.0% |
16.0% |
16.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutiple |
|
|
8 |
8 |
8 |
|
|
|
|
|
|
|
€ 456.0 |
€ 486.7 |
€ 520.4 |
|
|
|
|
Less
Net Debt |
|
|
318 |
286 |
266 |
|
|
|
|
Equity |
|
|
€ 138.0 |
€ 200.7 |
€ 254.4 |
|
|
|
|
49%
stake |
|
|
€ 67.62 |
€ 98.36 |
€ 124.67 |
|
|
|
|
AND
FINALLY....SAINT-GOBAIN: WHAT ARE THEY DOING? Creating tremendous value
for Wendel Minority Shareholders
Wendel
has now amassed in total 17.6% of Saint-Gobain's share capital. In 2 years,
Wendel's voting rights will be 2x its shareholdings, an obscure rule present in
some french companies. It didn't require clairvoyance to see that
Saint-Gobain was a sitting duck with no major shareholder for an activist investment. The Belgium
billionaire Albert Frere now holds c15% of Lafarge and 2005 witnessed the
German billionaire Adolf Merckle take control of HeidelbergerCement.
Wendel's potential to crystallize value through asset disposals is assessed
in detail below.
Standalone,
Saint-Gobain was in the midst of management transition and an independent
(albeit painfully unambitious) restructuring program. Incoming CEO, the
former COO, has indicated that shareholders should expect 300mmE of cost
savings accomplished by 2010. This uninspiring figure didn't do much to
rally existing shareholders, as the average annual cost cutting over the last 5
years amounting to greater than 200mmE per annum, or north of 1bnE over the past 5 years. Reading
between the lines, incoming CEO is suggest cost-cutting potential is tapped
out, and is guiding to a major deceleration in cost-cutting.
Wendel
has made no secret of its view that management's cost-cutting ambitions are
wholly insufficient. We believe Wendel's entry into the shareholder base of Saint-Gobain
represents a golden opportunity to improve returns. Growth and returns
have lagged the sector since 1993 primarily due to the business mix. The
Building Distribution, Interior Solutions and Building Materials divisions
have attractive prospects but the rest of the portfolio is non core, in
our view. We think, for instance, the group could engineer a re-rating in
stages: 1) dispose of Pipe, Packaging, Flat Glass and High Performance
Materials for €20bn in total; 2) return €4bn to shareholders and repay
€4bn debt; and 3) invest the remaining €12bn in
Interior Solutions/Distribution markets accretively, where barriers to
entry and leadership positions are strong. We estimate this would increase
organic growth from 4.8% to 6.9% and improve returns. The conglomerate
discount should disappear. The revised group would have the following profile:
SGO
analysis |
2007
Standalone |
Disposals |
|
Share
Buy-Back (@68E) |
|
Acquisitions |
|
2007
Pro-Forma |
|
|
|
|
||
Proceeds |
|
|
|
€ 19,755.0 |
|
€ 3,955.0 |
|
|
|
|
|
|
|
|
% use
of Proceeds |
|
|
|
|
40% |
|
60% |
|
|
|
|
|
|
|
Assumed
Buy-Back Price |
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
EV/EBITDA |
|
|
|
|
|
|
7.5X |
|
|
|
|
|
|
|
Marginal
Interest Rate |
6% |
|
6% |
|
6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
€ 5,586.0 |
|
-€ 2,715.0 |
|
|
|
€ 1,582.0 |
|
€ 4,453.0 |
|
|
|
|
Depreciation |
|
-€ 1,671.0 |
|
€ 1,053.0 |
|
|
|
-€ 475.0 |
|
-€ 1,093.0 |
|
|
|
|
EBIT |
|
€ 3,915.0 |
|
-€ 1,662.0 |
|
|
|
€ 1,107.0 |
|
€ 3,360.0 |
|
|
|
|
Interest |
|
-€ 775.0 |
|
€ 1,186.0 |
|
-€ 474.1 |
|
-€ 712.0 |
|
-€ 775.1 |
|
|
|
|
Other |
|
-€ 230.0 |
|
-€ 230.0 |
|
|
|
|
|
-€ 230.0 |
|
|
|
|
PBT |
|
€ 2,910.0 |
|
|
|
|
|
|
|
€ 2,354.9 |
|
|
|
|
Tax |
|
-€ 1,015.6 |
|
|
|
|
|
|
|
-€ 821.9 |
|
|
|
|
Tax
Rate |
|
€ 0.3 |
|
|
|
|
|
|
|
€ 0.3 |
|
|
|
|
Other |
|
€ 86.0 |
|
|
|
|
|
|
|
€ 86.0 |
|
|
|
|
Minorities |
|
-€ 45.0 |
|
|
|
|
|
|
|
-€ 45.0 |
|
|
|
|
Net
Profit |
|
€ 1,935.4 |
|
|
|
|
|
|
|
€ 1,574.0 |
|
|
|
|
#
Shares |
|
€ 357.0 |
|
|
|
-€ 58.2 |
|
|
|
€ 298.8 |
|
|
|
|
EPS |
|
€ 5.4 |
|
|
|
|
|
|
|
€ 5.3 |
|
|
|
|
Resultant
Multiple Expansion |
|
|
|
|
|
|
|
Share
Price Upside |
Current
Px |
Upside
to Shares |
Wendel's
Leveraged Upside |
|||
1.0x |
|
|
|
|
|
|
|
|
|
€ 5.3 |
|
65 |
8.1% |
18.2% |
2.0x |
|
|
|
|
|
|
|
|
|
€ 10.5 |
|
65 |
16.2% |
36.5% |
3.0x |
|
|
|
|
|
|
|
|
|
€ 15.8 |
|
65 |
24.3% |
54.7% |
4.0x |
|
|
|
|
|
|
|
|
|
€ 21.1 |
|
65 |
32.4% |
72.9% |
5.0x |
|
|
|
|
|
|
|
|
|
€ 26.3 |
|
65 |
40.5% |
91.2% |
The
group could engineer a rerating in three stages:
- Dispose
of Flat Glass, Packaging, Pipe, Reinforcements and Ceramics, Plastics
& Abrasives. We estimate proceeds of €20bn assuming 7.2x 2007F
EV/EBITDA.
- Return
€4bn to shareholders via a buyback and use €4bn to repay debt.
- Invest
the remaining €12bn in Distribution and Interior Solutions markets. We
believe that this transformation is achievable because:
- There
are buyers for the non-core assets. Private equity is likely to
be interested in Flat Glass, Packaging and Pipe. The High Performance
Materials assets could be attractive to industrial competitors.
- There
are ample acquisition opportunities. We believe there is €35bn of bolt-on
opportunities in European Distribution and €90bn in the US. SIG,
Eagle Materials, Rockwool and Wolseley US could be appealing.
Acquirors
We
believe the most likely acquirers for the High Performance Materials
assets would be trade competitors. Most of these markets are fragmented
and there are a number of major industrial groups that could be
interested. These could include 3M,
Imerys,
Owens Corning or emerging market players such as Nippon Electric
Glass, CPIC, Noritake or Kyocera. It is unlikely that a competitor would
acquire the entire division, in our view, but specific brand or asset
sales are possible. The strong cash generation of Flat Glass and Packaging
could be attractive to private equity. These are businesses with strong
brand names and good market shares. Falling energy costs should boost
margins over the next 18-24 months. A trade buyer could also look at
parts of Packaging (eg Owens Illinois, Rexam in Europe) but the
consolidated nature of Flat Glass following NSG’s acquisition
of Pilkington probably rules this out in the float market. Flat
Glass could be attractive from an IPO perspective, given improving
profitability and the market’s appetite for such assets. A new
entrant is possible for either business if customers start to vertically
integrate (eg consumer groups or brewers looking at Packaging, automotive
manufacturers
buying
Flat Glass). The Pipe business is unique. Saint Gobain is the world’s
leader in cast-iron piping. The dominant market position could be of
interest to private equity. An IPO is also possible, in our view. A new
entrant would most likely be a vertically integrating utilities group
focused on water assets.
Acquisition
Targets
In
most countries the Distribution industry is dominated by five or six major
brands then a very long tail of small or medium-sized independent outlets.
The major distribution markets in Europe are still fragmented. We
believe this market structure provides ample opportunities for bolt-on
acquisitions in this industry. To put the scale of opportunities into
perspective, we estimate that independent outlets in France and Germany
alone have annual sales of over €30bn. Assuming an EV/sales multiple of
0.65x (above the long-term average acquisition multiple of 0.52x) implies
potential acquisitions of nearly €20bn. If Nordic and other European
markets are included this figure rises to over €35bn, in our view. There
is also a possibility that Saint Gobain could look to enter the US market,
where more positive long-term demographic trends support better growth
across the cycle. Wolseley estimates the North America distribution market
is worth £460m a year, of which £187m is attributable to building
materials. Assuming 50% of this work is done by small-medium firms and
assuming an acquisition multiple of 0.65x sales, this implies acquisition
opportunities of over £60bn (€90bn).
We
don't pretend to know what Wendel has in mind, but the aforementioned actions
would certainly create material value for Saint-Gobain shareholders, and
roughly 2.25x that for Wendel Shareholders, based on the estimated leverage
structure employed in the acquisition of Saint-Gobain shares.
If the
rather superficial case built above for a restructuring of Saint-Gobain is
appealing, one could hedge all listed stakes in Wendel except Saint-Gobain. If concerns
about SGO's end-markets dilute the restructuring case and potential multiple
expansion opportunities post divestiture program and cash return plan outlined
above, one should simply neglect our attempt to estimate Wendel's strategy, and
hedge the Saint-Gobain shares aswell.
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