VIPsight - 1st Edition 2021

 

COMPANIES

 

adidas AG: First Announcement of a special Sales opportunity

It´s amazing how long athletes can hold a hot potato. adidas acquired Reebok in 2006. It is probably no exaggeration that this is not the most sensible investment of the otherwise successful group. No wonder that soon after the acquisition investors began to dream of separating the two companies, while the management continued to hop for positive value contributions. But at some point, decisions have to be made, and now the time has finally come for Reebok. 15 years after the fact and as part of the development of its new five-year strategy, adidas confirmed that it might sell Reebok in the context of a strategic overhaul of the group. adidas intends to further focus its efforts on further strengthening the position of the adidas brand in the global sporting goods market. Consequently, Reebok will be reported as discontinued operations from the first quarter of 2021 onwards.

According to the adidas CEO, Kaspar Rorsted, Reebok and adidas are expected to be able to significantly better realize their growth potential independently of each other. The Frankfurter Allgemeine Zeitung indicated that JPMorgan was mandated with this transaction, which could generate a consideration of approx. 1 bn EUR. For the historians among our readers, it is perhaps still interesting that adidas paid more than 3 bn EUR 15 years ago.

 

METRO AG: Balance Sheet Supervisor stumbles upon balance sheet supervision

After the hustle and bustle of the past few months, METRO could certainly use a little rest. But just a few weeks after the start of the year, the next corporate governance bomb is bursting. This time, the DPR is responsible for the disaster. However, we are not looking at balance sheets, but rather people. We owe this attention to the current mishap to the METRO supervisory board member Edgar Ernst. Mr. Ernst is joined the supervisory board in 2017, although he already had another hobby: Mr. Edgar Ernst has been President of the German Financial Reporting Enforcement Panel (DPR e. V.) since 2011. Therefore one wonders, did he perhaps just wanted to try out how badly a massive conflict of interest can damage a company´s reputation?

If so, he at least can claim wise foresight, because the DPR doesn´t need this kind of effort anymore since it´s wirecard debacle. But perhaps it´s more than just coincidence that the appearance of Mr. Ernst before the wirecard investigation committee is also the reason why his unusual understanding of business ethics became publicly known. Unfortunately, the relevant rules have been formulated in such a way that it is hard to get them wrong: The President of the DPR and other high-ranking employees are not allowed to accept any new supervisory board mandates from 2016. But even after the issue became publicly known, Mr. Ernst had to ponder for a long time what the regulations mean, until he finally took the necessary consequences and resigned from his position at DPR. Curious observers are now wondering when he will reach the same level of understanding regarding his supervisory mandates.

 

Daimler AG: Preparing for a friendly Divorce

Maybe someone at Daimler recently watched one of these entertaining films about the fate of dinosaurs. This might help to explain why the company decided to go ahead with a fundamental change in its structure, “designed to unlock the full potential of its businesses in a zero-emissions, software-driven future.” A consequence of this plan is the decision to evaluate a spin-off of its Truck and Bus Division and to begin preparations for a separate listing of Daimler Truck. 

The Daimler Truck business shall have fully independent management, stand-alone corporate governance including an independent chairman of the supervisory board, and it is targeted to qualify as a DAX company. A significant majority stake in Daimler Truck shall be distributed to Daimler shareholders. The transaction and the listing of Daimler Truck on the Frankfurt Stock Exchange are expected to be complete before year-end 2021. Also, Daimler intends to rename itself as Mercedes-Benz at the appropriate time.

This type of spin-offs is usually advantageous for shareholders. But there is also the underlying business aspect. The formation of a zero-emissions portfolio can presumably only take place at different speeds in the Truck and Bus and the Mercedes-Benz entities, requiring a separate positioning in the market. Occasionally you just can´t avoid being good.

 

Deutsche Bank AG: The Story Behind the Story

Last week I was invited to join one of Trump´s golf clubs. What would have looked like an honorable offer under other circumstances is now nothing more than an indication of how ailing this business has become since January 6, 2021. Even the Wallstreet Journal reported that the Capitol Riot threatens Trump´s already hurting business.

No love among these two anymore, one might think. Until recently, Deutsche Bank was considered to be one of a few major financial institutions willing to do business with Mr. Trump. But now it looks like the bank is moving to distance itself from the president´s businesses and is unlikely to lend it more money, the WSJ reported. The bank has lent the Trump organization more than 300m USD that will mature in 2023 and 2024. The bank is therefore probably happy that two employees entrusted with the Trump commitment recently left the institution. After all, they are no longer needed, aren´t they? Well, a few weeks later the New York Times informed its readers that Trump´s banker at Deutsche Bank was “permitted to resign” after the bank learned that she was “engaged in undisclosed activities related to a real estate investment, ”including buying a property” from a client-managed entity.”

 

Aareal Bank AG: No Time for Hibernation in Wiesbaden

Occasionally, all signs point to a storm. The discussions between Petrus Advisers and Aareal Bank are such a process. Both sides already stated last year that they do not attach particular importance to the positions of the other side. And why should you do this if one side wants to dissolve the previous business model and the other wants to develop it further? Hence, the detailed explanations presented at the annual press conference of Aareal Bank on February 24^th are probably not helpful with a view to ending this dispute.

Aareal´s management should also be aware that optimizing what is already there is no answer to the demand for abolition. But it helps to buy time. Also, it is probably a safe bet that the house was swept clean with the 2020 accounts. This should give the bank some breathing space to tackle urgent problems such as the need to strengthen the management. However, the medium-term perspective remains unchanged. This investor wants to achieve something with Aareal that he is currently not getting. So eventually one party has to move to resolve the conflict.

 

Grenke AG: How to misunderstand a Misunderstanding

For many years, events at Grenke AG were ignored by large parts of the media. This is the sad fate of a company with a persistent stream of good news, which I why many press spokesmen would have gladly taken on this agony. But the quiet days have passed since the investor Frazer Perring set off a firework of allegations.

Until recently, the COO, Mark Kindermann, was also able to enjoy this unusual public attention. Unfortunately, however, there seems to have been misunderstandings in the accounting he oversaw. However, the news of his early resignation on February 8^th caught many investors by surprise. What is more, the message about his departure contains a confusing passage: “The preliminary assessments made in the course of the ongoing audits are critical of previous internal processes in the compliance organization and Internal Auditing department. Mr. Kindermann has pointed out to the Supervisory Board that it will be necessary to revise the preliminary assessments once the audits have been completed. Mr. Kindermann decided to resign from his mandates today to avoid any dispute before completing the audit concerning the justification or materiality of these criticisms and to prevent any potential damage therefrom to the Company.”

No wonder that the share price went South. The shareholder´s reaction gave Grenke food for thought too. The result in the form of a statement from the chairman of the supervisory board then reads as follows:

“We have heard your call for more transparency regarding the resignation of our Board of Directs member, Mark Kindermann, loud and clear and would like to respond to it in detail.

In the course of the ongoing audits by KPMG and Mazars, there had already been some qualitative indications and findings regarding the Internal Audit and Compliance organization. The imminent reason for Mark Kindermann´s resignation was BaFin´s criticism of Internal Audit and Compliance processes in the course of the ongoing audits by Mazars.”

See? You can lean back and relax. It´s just the procedures and regulations.

 

 

 

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Buhlmann's Corner

 

DAX40 versus Covid19 - the fat ship?

What is the difference between Covid19 in Berlin and the DAXes in Frankfurt? The answer is with Radio Yerevan: basically nothing. Politicians promise so much that even Freudian slips are no morenoticeable. After the coffers have been emptied due to 9-digit loan payouts the DAXes can magically send Wirecard into insolvency. And they are also able to buy a new company at a price that is higher than their own capitalisation, to then be collectively worth 11-digits less than what they bought (see Bayer & Monsanto).

Politicians in Berlin use other people's money to promote environmentally friendly electric cars, while at the same time being chauffeured around the capital in L-version burning polluters. Thyssenkrupp is doing something similar in America with comparable effort, then taking the lift down to the basement to survive. First, the management spends the money abroad, then it sells off assets that have been collected in generations. K+S, for example, drills for potash in Canada and claims to be worth significantly more than €41 per share, only to see just €5 shortly afterwards and exchange the salt for the soup for borrowed capital.

Then the politicians come along, make themselves important and recommend K+S to continue to write off the balance sheet values. Instead of joyfully and gratefully welcoming the offer, the K+S management seems to spare no effort to impose its position as God-given.

This is just as bad as using taxpayers' money to set up so-called "vaccination centers" which, due to the lack of vaccines, invite people to play cards - always at a distance of 2 meters. With the company doctors of the DAXes, half the population could be vaccinated immediately and within a few weeks while business continues; 40% know a family doctor or pharmacist, and the remaining 10% ...

The stock market can do better. Those who want to borrow shares are also sometimes offered and lent 142% of the available shares, just look at (www.vipsight.eu) - 142% in the historicGamestop case in New York. I recall a 90-day discussion with a bank that was no longer free about the proxy voting of equity investments: after 90 days, the talks broke down because the bank kept its entire holdings ready on the broker's lending platform, frictionless from purchase to sale. The board discovered it after 90 days, after all ....

Politicians come along and promise free Covid tests. Free doesn't exist, "someone else" pays the price. The electric cars agreed in Paris are being pushed into the German car market with a lot of state money, but in the Bundestag's motor pool only 5% of the cars work electrically. Why? The question will be asked later. At present, basic rights and human rights are popular in Berlin. Peoplehope for the judiciary, which can be quite creative.

A recent decision states that because infections mainly occur in private homes, the inviolability of the home may be restricted. Why the same court then does not open up trade and gastronomy, remains as much a mystery as transparency in the leasing business at Grenke.

As always, the old masters do not look beyond their own reflection, be it at Stroeer, Aareal, Osram, BMW, Airbus or ....Daimler. For years they had nothing to do with Dieselgate, only to then redistribute billions of someone else's money, or more precisely the shareholders' money. Just as innocent as the German stock exchange, which made a fortune with CumEx, but doesn't want to have understood anything about it. I am curious to see how ISS (Institutional Shareholder Service), Deutsche Börse's latest investment baby, will deal with this shortly.

... perhaps like the father of the Saint-Exupéry’s Little Prince:

“If you want to build a ship, don't drum up the men to gather wood, divide the work and give orders. Instead, teach them to yearn for the vast and endless sea.”From “The Wisdom of Sands”

 

 

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ACTIONS CORNER

 

LANXESS AG: Company on a Shopping Spree

A good CFO can do a lot with a full wallet. This also applies to the chemical industry, where LANXESS filled the war chest early on at the beginning of the COIV pandemic. The strong balance sheet now helps in a phase in which many players reposition themselves.

Recently, LANXESS was reported as one of the companies on Lonza´s shortlist in the sale of its Lonza Specialty Ingredients (LSI) unit. But LSI was bought by Bain Capital and Cinven for 4.2 bn SFR in early February. At 13.9 times EBITDA, this transaction proved that some buyers are very hungry for acquisitions. A few days later, LANXESS signed an agreement to acquire Emerald Kalama Chemicals. According to LANXESS, the acquisition will already be earnings per share accretive in the first fiscal year after its completion. The enterprise value was set at 1.075 bn USD, while the purchase price amounts to 1.04 bn USD and will be financed from existing liquidity. In 2020, Emerald Kamala achieved sales of approx. 0.425 bn USD and an EBITDA (pre exceptionals) of approx. 90m USD. The US-based company is a manufacturer of specialty chemicals, especially for the consumer segment, and opens up new applications for LANXESS in the food industry and animal health sector. These include preservatives for food, household, and cosmetic applications, flavors, and fragrances as well as products for animal nutrition.

The transaction is a milestone in a buy-and-built strategy for the consumer sector. Given the full war chest and a dynamic M&A market environment, investors may expect more transactions soon.

 

K+S AG: How to create maximum Transparency

The president of the DPR, Mr. Edgar Ernst, is not a member of the K+S supervisory Board. But the DPR drew attention to this company too. However, it was the BaFin here who caused the irritations.

On February 17^th, K+S reported that at the request of the BaFin, the DPR examines the consolidated financial statements of K+S as of December 31^st, 2019, together with the related interim statements as of June 30, 2020. The background to this initiative is an adjustment to its long-term assumptions for the potash business K+S announced in November 2020. Together with an adjustment of the weighted average cost of capital, this resulted in a one-off impairment of approx. 2 bn EUR. This loss was recognized in the financial statements for the third quarter of 2020 and had a correspondingly negative impact on adjusted consolidated earnings after tax and ROCE. 

According to K+S, BaFin informed DPR about the reason for the examination as follows: “Specific indications exist because the assets reported in the consolidated financial statements as of December 31, 2019, and the abbreviated financial statements as of June 30, 2020, in particular non-current assets, may be overstated. According to IAS 36, among other things, assets are to be tested for impairment if facts and circumstances indicate that the book value of such an asset exceeds its recoverable amount. If facts and circumstances indicate that this is the case, an entity shall measure, present and explain any impairment loss following IAS 36.

According to the ad hoc release of K+S Aktiengesellschaft dated November 4, 2020, the assumptions regarding the long-term potash price development are now lower and regarding the cost of capital higher than previously assumed. This resulted in an impairment requirement in the Europe+ operating unit of around 2 bn EUR in the quarterly financial statements as of September 30, 2020.”

This is not the kind of news the market has been waiting for. The immediate reactions are clear. While the share price fell sharply, the company indicated its willingness to cooperate fully in the examination and to provide all necessary documents. This I work in progress from now on. However, in any case, the auditors have already been identified as losers. In a best-case scenario, the market will keep the impression that this is an auditing company where BaFin considers a billion-EUR error to be possible.

 

Commerzbank AG: New Management Style shows Effects

Do you still remember Dresdner Bank? In one of the riskiest takeovers in European banking history, Commerzbank managed to acquire the ailing competitor in 2008. Today, we are better off than the decision-makers at the time. So we know that the transaction was a financial disaster, wiping out shareholder's equity and frustrating employees and customer, while the management was unable to provide a convincing strategic justification for the purchase.

Over a decade later, the bank is still suffering from the consequences of the ill-considered transaction. One of the consequences was the high frequency of restructuring programs. As a shareholder, you didn´t have to remember them because they were often overtaken by a new program before they were fully implemented. But the time of creative self-management of misery may be over now.

The cultural change started already in 2020 when the management was reinforced by people from outside the company. The first tangible results came to light in early 2021 with the announcement of its intention to write off goodwill of around 1.5 bn EUR due to deteriorating market parameters, in particular the level of interest rates in the EUR area and Poland. Also, the risk result of at least minus 1.7 bn EUR exceeded some market expectations. A few weeks later, the details of a restructuring program followed. The remarkable thing about it is not the dimensions. But the bank seems to be sacrificing several sacred cows for its future, which is especially true for the oversized branch network.

 

Bayer AG: Agreement with Plaintiffs´ counsel on class plan

Occasionally you have an early idea of what´s coming up. For example, I had a vision of an agreement between the parties in the ongoing dispute over the Roundup™ cases when I saw new advertisements asking me to join the lawsuit.

What a coincidence that Bayer announced around this time a formal agreement with plaintiffs´ counsel on a class plan designed to manage and resolve future Roundup™ cases. As part of the agreement, the company would be committed to pay up to 2 bn USD, provision was made and disclosed last year, to support the claims and programs covered by the class plan.    

The agreement, which is subject to approval by Judge Vince Chhabria of the U.S. District Court for the Northern District of California, is intended to be one part of a holistic solution designed to provide further closure to the Monsanto Roundup™   litigation. Including the 2bn USD from this agreement, the total amount of this indirect purchase price element for the Monsanto acquisition thus exceeds the mark of 10 bn USD.

 

SAP SE: Insurance is expensive these Days

Occasionally companies have a lucky hand with their investments. The SAP/Qualtrics story looks like a good example. Qualtrics claims it has pioneered a new type of software, called experience management. The basic idea of this concept is to help organizations to design and improve the experiences of customers and employees via its XM software platform, which has approx. 13,000 customers. In 2018, the company went public with an initial valuation of 4.3 bn USD. Just a few days later, SAP acquired Qualtrics for approx. 8bn USD.

SAP announced in July 2020 that it planned to spin out Qualtrics while keeping a substantial part of the equity. Following the IPO filing in December, 56.6 million shares have been placed at 30 USD each. On the first day of trading, January 28^th, the shares closed 51 percent up at 45.5 USD, while the market cap reached 27.3 bn USD (based on the total of 503.4m shares issued). The lucky winner of this transaction is the private equity company Silver Lake, which bought approx. 4.8 percent of Qualtrics in a private placement preceding the IPO. While the consideration for half of these shares was defined as the placement price in the IPO, the remaining half was valued at 21.64 USD per share.

 

 

 

 

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People

 

thyssenkrupp AG: No free Lunch for Liberty Steel

Sometimes you can see an extra burden for the household budget approaching from afar. The state of North Rhine-Westphalia and some municipalities have probably felt the same way over the past few weeks. The reason for this was the talks about a sale of the steel division of thyssenkrupp. But on February 17th, thyssenkrupp ended the talks on a possible acquisition of thyssenkrupp Steel Europe by Liberty Steel.

On a personal note the CFO, Dr. Klaus Keysberg, explained the background to this decision. According to him, the ideas of the negotiating parties about the corporate value and the structure of the transaction were too far apart. Ok, shit happens. But why did he add a justification for the time and efforts spent: “We regret this step because we perceived Liberty Steel as a serious partner in the process.” Interesting, how one can be mistaken these days…

It is not that long ago that the market speculated about several prospects for the steel business. Back then people might have been too excited. But now we are back home again, and there is still plenty of homework to be done. But that´s ok, Germans are famous for their do-it-yourself enthusiasm. And the recent market recovery should provide some momentum. Go for it.

 

Corestate Capital Holding S.A.: Rapid Expansion into Finance

In November 2020, Corestate began a wave of notifications that document a rapid change in the company. It all started with the information that the Management Board has obtained knowledge that several shareholders sold their shareholdings to other investors. The premonition indicated in it was confirmed a few days later when the company announced that it had a new anchor shareholder called Vestiga Immobilien Investments Limited Partnership, which owns approx. 9.9 percent of the share capital. Also, the previous members of the Supervisory Board did resign with immediate effect, while Vestigo proposed new members were unanimously appointed to the Supervisory Board.

The new supervisory board acted quickly. Just one day after its appointment, the supervisory board appointed René Parmantier as the new chairman of the management board. At the same time, the previous chairman, Lars Schnidrig, was repositioned as CFO with immediate effect. Since the position was already occupied now, the designated CEO Klaus Schmitt could not take office on January 1, 2021, as originally planned. On this occasion, the new supervisory board confirmed the corporate strategy adopted in 2020, with particular emphasis on the consistent reduction of net debt and the further development of the investment management focus.

So much for the theory. Here comes the fun part: In mid-January 2021, Corestate announced the acquisition of the debt financing platform Aggregate Financial Services (AFS) to offer debt services across all real estate asset classes. The plan is to strengthen Corestate´s private debt strategy by way of further development and diversification of the real estate mezzanine business with new products, complimentary services, and regional expansion. AFS is expected to generate on a stand-alone basis 15 – 20m EUR EBITDA in 2021 and at least an additional 10m EUR annual run synergies. The acquisition is conducted via a capital increase against contribution-in-kind in the form of 8.5m new shares and 5m EUR in cash. This translates into a total consideration of 113m EUR, taking into consideration the net cash position of 17m EUR. However, a further 1.5m new shares are to be paid as an additional earn-out component if the pre-synergy EBITDA increases by more than 50 percent over the next three years.

AFS is the second element in this segment since Corestate owns already HFS Helvetic Financial Services AG, which acts as an advisor with a focus on real estate investments. In particular, HFS designs and manages special fund products for institutional investors.

 

 

 

 

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Capital News

 

HEIDELBERGER DRUCKMASCHINEN AG: Firmly printed

HEIDELBERGER is back in the news. Not that they wanted to, but sometimes you just have to do what has to be done. The company owes this attention to a brief announcement from the end of January: “The sale of the Gallus Group by Heidelberger Druckmaschinen AG (Heidelberg) to the Swiss company benpac holding ag has not been completed. At today´s scheduled closing, benpac holding ag did not make the agreed purchase price payment of 120m EUR, although all conditions were met. Gallus will remain with Heidelberg. Heidelberg will assert its rights.”

The market took the message relatively calmly, which could have been due to a habituation effect. After all, the closing should take place at the end of 2020 according to the initial plan. And what is more, at the time the company informed the public already about the completion of the merger control clearance process on December 23, 2020, by the German Federal Cartel Office. According to the release, at the time all closing conditions for the sale of the Gallus Group to benpac, which was agreed on July 22, 2020, were met. However, the purchaser informed Heidelberg at the time that it will not be able to close the transaction before the end of 2020. Therefore, the closing was rescheduled to take place by the end of January 2021. While this already looked a little disreputable, Heidelberg still could reassure its shareholders with the information that the owner of the purchaser, Mr. Marco Corvi, has issued personal notarized acknowledgments of debt to Heidelberg in the amount of the total outstanding purchase price of 120m EUR to secure payment of the purchase price. And now what?

 

DEAG Deutsche Entertainment AG: Delisting on the Way

DEAG announced the intention to withdraw from the stock exchange. In this context, the company agreed with its largest single shareholder, Apeiron Investment Group, and the bidder company (Musai Capital), on the submission of a public delisting-takeover offer pursuant to section 10 para. 1 sent. 1 WpÜG in conjunction with section 39 para. 2 sent. 3 no. 1 BörsG. This intention has been published on January 11, 2021, at 3.07 EUR per share. This price is the outcome of a calculation of the bidder and subject to approval by BaFin. On January 19^th, the bidder informed DEAG that following the final decision of BaFin the final offer priced will be 3.09 EUR per share.  The offer, which ends on March 22^nd, has been published on February 22^nd, 2021. As a delisting-takeover offer, the offer shall not be subject to any closing conditions.

In the course of the planned delisting, it is intended to retain the company´s legal form as a joint-stock corporation. Apeiron and other existing shareholders of DEAG have agreed on the key terms of a shareholder´s agreement, according to which they will not exercise joint control over DEAG.

The offer had a remarkable effect on the share price, which fell sharply from approx. 3.6 EUR per share to approx. 3.1 EUR per share. But it seems unlikely that the bidder expected to acquire many shares. Instead, the most important information for the corporate perspective of DEAG is probably the final sentence in the announcement: “In the agreement with DEAG, Apeiron and the Bidder have further committed to supporting DEAG´s further growth strategy after the termination of the stock exchange listing.” Shouldn´t that also tell you something about the future relevance of the minority shareholders?

 

Siltronic AG: New Friends in Taiwan

At the moment, there seems to be a race for companies operating in the chip industry. The enthusiasm went so far that even the German government became aware of the industry and announced massive investments. However, the initiative comes a little late, as the M&A boom in the industry shows.

Here´s another example: Siltronic. In November 2020, the company surprised investors with the information that is advanced, near to final discussions on a takeover offer by GlobalWafers Co., Ltd., from Taiwan. A few days later, the Executive Board and the Supervisory Board welcomed a planned business combination with GlobalWafers and the tender offer. This news followed a business combination agreement according to which GlobalWafers was supposed to make a tender offer to Siltronic shareholders at an offer price of 125 EUR per share in cash.

The business idea underlying the offer is simple: The combination of the two companies will create a company with a comprehensive product portfolio and leading technology in the global wafer market. This also explains why the main shareholder of Siltronic, Wacker Chemie AG, contractually committed to tender its entire stake of approx. 30.8 percent in Siltronic into the offer. Other shareholders were not so generous, which is why the offer, which was launched on December 21^st, 2020, had to be amended twice. In a first step, the offer price was increased to 140 EUR per share, while the final offer price of 145 EUR per share was announced on January 25^th, 2021. This looks like a bazaar approach, but it did help to reach the minimum acceptance threshold of 50 percent. On February 15^th, 2021, Siltronic announced that the threshold was reached with 56.92 percent. Shareholders, who have not yet accepted the voluntary public tender offer can still tender their shares until March 1^st, 2021, within the statutory additional acceptance period.

 

Dialog Semiconductor Plc: It only ever hits the good ones

On February 8^th, 2021, dialog Semiconductor announced that it had reached agreement on the terms of a recommended all-cash offer to be made by Renesas for the entire issued and to be issued share capital of Dialog. According to the agreement, each Dialog shareholder will be entitled to receive 67.5 EUR for each Dialog share. Therefore, the acquisition values Dialog at approx. 4.9 bn EUR. The price represents a premium of 20.3 percent to the closing price of 56.12 EUR per share on February 5^th and exceeds the daily volume-weighted average price of 44.5 EUR for the three months ended February 5 by 51.7 percent.

The negotiations for this transaction could recently have come under considerable time pressure given that Dialog had to confirm in a corporate statement that it noted recent press speculation and confirmed that it was in advanced discussions with Renesas regarding a possible all-cash offer of 67.5 EUR per share for its entire share capital on February 7^th.

The acquisition, which is recommended by the members of the Board of Directors, is currently expected to become effective in the second half of 2021, subject to the satisfaction or waiver of the conditions and certain further terms.

 

 

 

 

 

 

VIPsight - 4th Edition 2020

 

COMPANIES

 

thyssenkrupp AG: Waiting for strategic Progress

There are companies whose financials make you wonder what made the COCID pandemic worse about it. thyssenkrupp is an example of this. So as not to be misunderstood, the pandemic had an impact on the fiscal year 2019/20. But was it really necessary to highlight this factor in the heading for the related press release, when the main problems of this group are structural and the pandemic only acted as a fire accelerator? The answer seems to be yes, throwing another question mark about the preciously already dubious outlook for the group.

As expected, the balance sheet could be significantly strengthened by the proceeds from the elevator sale. But only part of the fire can be extinguished with this liquidity. What it did is buying time for the necessary steps to reestablish the remaining activities as leading players in their markets. The CEO statement, therefore, is not a truism, but a bitter necessity put in nice words: “Our strengthened balance sheet gives us the opportunity to systematically implement further necessary steps in our plan for the future of thyssenkrupp. We´re not yet where we need to be and will therefore keep on working persistently.”

The pandemic effects can be quantified. Initially, the group planned to reduce the workforce by 6,000 over three years. The pandemic added additional 7,400 jobs. One has to admit that there is always room to argue about whether the original plan was too conservative and COVID presented a proper scapegoat to raise the numbers. Probably there are already heated discussions with union representatives about this. But these are useless arguments. With these accounts, thyssenkrupp made clear that the struggle is about survival and not cosmetics. And the main culprit is still the same, the Steel Europe division, which contributed an adjusted EBIT loss of 946m EUR. What is more, the forecast indicates a loss in the low three-digit million EUR range.

But at least the report kept some hole alive with the confirmation, that thyssenkrupp is exploring various competing options for the steel business. This is in line with press speculations about talks with Liberty Steel, Tata Group, and SSAB. A fundamental decision on the steel business is expected to be made in spring 2021. 

 

Delivery Hero SE: Korean Authorities prescribe a Diet

It seems the days of the great dreams of borderless international expansion are over in Berlin.

In December 2019, Delivery Hero announced the purchase of shares in, and the establishment of a joint venture with the management of Woowa, the operator of Korea´s largest food delivery platform. At the time the closing of the transaction was expected to occur in the second half of 2020, subject to certain conditions such as financing of the cash consideration and regulatory approvals, including merger control clearance by the Korean Fair Trade Commission.

Although the valuation looked high in the pre-COVID-environment, investors appreciated this news since the transaction would have granted Delivery Hero the dominant position in this important market. This is one of the reasons why the following fundraising activities of the company went smoothly. However, there was a long noticeably silence on the regulatory front until it banged on November 13^th, when the company confirmed receipt of the examiner´s report in which the case team of the Korea Fair Trade Commission recommended that the Commission require the divestment of Delivery Hero´s fully-owned subsidiary Delivery Hero Korea LLC. As a condition to the antitrust approval for the previously announced joint venture with Woowa Brothers Corp. And investors learned from the announcement that it is even worth because there is no certainty whether the Commission will follow the suggestions of the examiner´s report to ask for the divestment or request other remedies from Delivery Hero in its final approval of the joint venture (assuming, it will be approved). 

But wasn´t the strong market position to be achieved through the combination of the activities of Woowa and Delivery Hero the justification for the transaction and the high valuation? In any case, it looks like the time has come for the board of Delivery Hero to get on the plane to Seoul and refresh their knowledge of Korea.

 

 

 

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Buhlmann's Corner

 

Blue or red / Republicans or democrates - who is the star?

The most important annual general meetings in Germany and Europe were held in a shut-up mode - and currently the wave of annual general meetings is spilling over to Australia:

http://vip-cg.com/hv-agenda

In Germany, the owner's right to ask questions became the employee's right to answer,  without any real technical need. Austria and South Africa are not the only countries that have proven that it can be done differently. The German shareholder and share culture is sick. If you take the professional shareholder DWS Group: chora publicum, its respectable shareholder representatives, from Hendrik Schmidt to Nicolas Huber to Susana Penarrubia et al. are struggling to fight and promote shareholder democracy in the big footsteps of Prof. Christian Strenger.  At home, in the virtual AGM of DWS on November 18, 2020, shareholders were not only wearing mouth and nose protection but also a muzzle. 

Eschborn, which has been documented since June 12, 770, has been using its coat of arms since February 8, 1937

The exemption clause will continue to exist in 2021.  However, as in 2020, which is coming to an end, it should apply that management boards do not limit their decision-making responsibility to signatures on consultants' checks, but use it primarily for dialogue. Was it a coincidence that the (first) creditors' meeting at Wirecard could take place on the same November 18 as a face-to-face event (with strict rules)?

A 3-7 minute slot at the microphone at the struggling Deutsche Bank is only slightly more democratic - but such shares will have been avoided in the last decade anyway in respect for one's own heirs. Also the Monegasque casino Société Anonyme des Bains de Mer et du Cercle des Etrangers à Monaco opened the gates in new rooms and instead of giving out money in kind, they handed out a cash attendance bonus again. VIP has consistently refused to re-elect or discharge the organs that practiced pure monologue events.

xxxxxxx
	Rockville, a suburb of Washington DC, was founded nearly 1,000 years later in 1717

In the shut-down state of shareholder democracy, the coordinates are reset globally. Blaming American governance, voting recommendations or governance advice from Rockville was yesterday: today a local call to Eschborn is sufficient. Even hidden behind the (South American) Qontigo, the majority of the ISS (Institutional Shareholder Service), which was also co-founded by Hermes (today Federated Hermes) in 1984, is in Eschborn - that's where the music is playing.
Exciting times. 20 miles separate ISS from Washington DC, 20 km separate the headquarters of the stock exchange from downtown Frankfurt and mile for mile and km for km a new conflict of interest - you can quickly lose sight of the world in front of Chinese walls:  Admiration, Mr. Joachim Faber, here the stars have been remixed - not just the colors blue and red.

 

 

 

 

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ACTIONS CORNER

 

Deutsche Börse AG:  Invest in Corporate Governance

Deutsche Börse announced that it will acquire a majority share of approximately 80% in Institutional Shareholder Services Inc. (ISS). The transaction values ISS at 2,275m USD on a cash and debt-free basis. Genstar Capital LLC and the current management of ISS will continue to hold a stake of approximately 20% of ISS. The transaction is expected to close in the first half of 2021, subject to customary closing conditions and regulatory approvals. Deutsche Börse plans to finance the acquisition with a debt component of 1 bn EUR and cash.

In 2020, ISS is expected to generate net revenue of more than 280m USD (Pro-forma IFRS) and an adjusted EBITDA margin of approx. 35% (pre-transaction effects). The net revenue of ISS is expected to grow organically at a rate of more than 5% p.a. on average until 2023. While this looks expensive, the real incentive for this transaction is the expectation that the partnership with a leading corporate governance, ESG, data, and analytics provider shall help to generate further growth opportunities for Deutsche Börse Group in ESG-based investing. Both businesses are regarded as highly complementary and offer the potential for revenue synergies, which are expected to result in 15m EUR additional EBITDA by 2023.

Considering the strategic potential the transaction looks like a sound investment. But a lot depends on the implementation of the transaction, i.e. the integration into Deutsche Börse Group. ISS is an important participant in the corporate governance world. It reached this position by strictly adhering to certain business principles, including a clear, transparent, and unbiased business execution. As is stated in the Code of Ethics (version November 2020), ISS must always serve the best interest of its clients and not subordinate its client´s interest to its own. This fundamental business principle may also set limits for the scope of the integration and the realization of potential synergies. The parties announced already that in the time following the closing ISS shall continue to operate with the same editorial independence in its data and research organization that is in place today, while the current executive leadership team is expected to remain in place after the closing. Good, then let´s place a bet on a smooth process.

 

Südzucker AG: Digestive Problems in London

Sugar is generally considered to be a reliable source of energy that also helps many fellow citizens to achieve a proper build. But when it comes to financials, the sugar business is rather volatile. This is especially true in the case of a complex group architecture, as the example of Südzucker shows. The first half of the current business 2020/21 year showed a significant earnings increase. Shareholders of Südzucker were therefore relatively satisfied, at least until the company announced on November 12^th the expectation of a significant burden to the Group´s net earnings due to an impairment on its participation in ED&F Man, which is accounted for at equity.

In its recent six months report the company illustrated that ED&F Man holdings Limited (participation of approx. 35%) is focusing on its profitable business. This is a nice phrase, but what it means is the intention to dispose of interest outside of the core business. The execution of these measures has been delayed, in particular, due to the COVID pandemic. Unfortunately, these industrial interests, therefore are still negatively impacting the result. Against this background, Südzucker expects significant negative implications for the at-equity result, most of which will accrue in the third quarter of the business year 2020/21, and a substantial impact from an impairment on the participation in ED&F man. The effect on Group net earnings is expected to be 140 – 180m EUR (note: valuation as of end of February 2020 was 224m EUR), while the effect on the parent companies accounts shall be 200 – 240m EUR (note: valuation as of end of February was 285m EUR).

Compared to the valuation of the participation, this looks like a cautious approach. However, due to the complex structure of the Group one cannot avoid asking whether there will be further intercompany or operational effects. In any case, it is good to know that ED&F Man secured a three-year extension to its existing financing, thereby gaining the necessary time for the strategic realignment.

 

K+S AG: From Heaven to Hell in just four Weeks

Investors in K+S shares recently went on a rollercoaster ride. In early October, the company informed about a definitive agreement to sell its Operating Unit Americas, comprising its American salt businesses, to Stone Canyon Industries Holdings LLC, Mark Demetree and affiliates for a total of 3.2bn USD, representing 12.5x the 2019 EBITDA of 257m USD. 

The proceeds from this transaction exceeded market expectations by far. And with the proceeds coming in immediately upon closing the transaction in summer 2021, it is clear that K+S at the time also will be able to significantly reduce its high debt burden.

No wonder the share price jumped from 5.5 EUR to more than 7 EUR following this news. But at the beginning of November, the shares were back on the previous level. The reason for this was an ad hoc disclosure with the robust title: “Impairment: K+S cleans up balance sheet”. The story is simple: The Executive Board adjusted its long-term potash price assumptions to a lower level than previously assumed. This resulted in a non-cash impairment loss of about 2bn EUR.

Since the consideration for the sold unit is expected only in summer 2021, it is reassuring that the impairment does not result in a liquidity outflow.

 

KION Group AG: How to remove COVID-Effects from the Balance Sheet

The COVID pandemic has left deep wounds on the capital markets. In many cases, government support helped to avoid the worst. But that means nothing else than a solution for the moment. These interim solutions are nothing more than a postponement of a solution, which is associated with costs and restrictions.

Only a few investors and companies are currently asking themselves how this money can be repaid. KION is one of these forward-looking companies. On November 18^th, 2020, the company announced the intention to increase its share capital through the issue of 13,108,647 new shares by way of a rights issue against cash contributions, thereby using a large part of its authorized capital. The subscription ratio shall be 1:9, and the total number of shares after the increase would be 131,198,647. The subscription price is expected to be determined at the beginning of the subscription period, which runs from November 20 through December 3, 2020. The issue proceeds are intended to be used to reduce the level of debt and to provide comprehensive support for growth in the coming years. The planned debt measures include the termination of the syndicated revolving credit facility with a group of banks and KfW, which had been agreed upon in May 2020 to bridge the effects of the pandemic. The growth initiatives include expansion in China, new product developments, the focus on software solutions, and continued efforts to improve performance.

Hmm, the market reacted negatively on this announcement. Has anyone ever thought of how more severely affected companies can remove the COVID patches from their balance sheet?

 

Bayer AG: Overrun by its Enthusiasm?

Bayer looks like a faded seedling. It is only appropriate to look for the associated causes in the agricultural business, namely Crop Science. Of course, some critics point a finger at Monsanto. Business was down in North America in particular in Q3, contributing to a decline of EBITDA before special items at Crop Science to minus 34m EUR (Q3 2019: plus 500m EUR). What is still worrying is the unsolved litigation involving glyphosate-based Roundup™ products and several other legal matters. Even the nice marketing wording in the Q3 report lacks the calming effect: “Though progress is being made, it will take more time to complete this process.” But at least we learn that Bayer took an additional provision of 0.75bn USD.

Do we need more information to realize that the Monsanto-acquisition looks like a classic mistake? But what exactly went wrong? The industrial logic of the transaction still looks convincing. The problems are of a different kind. From today´s perspective, it must be stated that the market development was overestimated and the legal risks underestimated. But let´s remember: At the time, almost all observers were enthusiastic because the deal was classified as the last chance to form a major market participant in this industry. With this perspective, who would still want to deal with questioners?

Being able to correctly assess legal risks and market developments is the basis of M&A transactions. And who in the agricultural industry should have a better understanding of it if not Bayer? Sure, the discussion with the critics of glyphosate must continue. But maybe it is also about time to ask why Bayer was so blatantly wrong about key decision-making factors with this transaction?

 

METRO AG: It´s Crunch Time

Around a year after its first attempt, Daniel Kretinsky´s EP Global Commerce GmbH made a new attempt to expand its position at METRO. It all started with a participation just below the 30% mark. This is a critical size, since crossing the 30% line requires to make an offer to buy out all other shareholders. And when could there be a better opportunity than in times when the share price bobs around at a low level?

On September 13, 2020, the time had come to act. EP Global announced its intention to make a bid, followed by the formal publication of the offer on October 1, 2020. Shareholders were invited to sell ordinary shares at 8.48 EUR per share and non-voting preference shares at 8.89 EUR per share. These amounts more or less matched the market price at the time of publication and are well below the offer price in 2019 (16.0 EUR per ordinary share and 13.8 EUR per preference share).

No wonder the Management Board and the Supervisory Board weren´t pleased with this offer. The conclusion in the prescribed Joint Reasoned Statement of the Management Board and the Supervisory Board to the shareholders of METRO can be summarized in one sentence: “The Management Board and the Supervisory Board believe that the Ordinary Share Offer Price for each METRO Ordinary Share and the Preference Share Offer Price for each METRO Preference Share are inadequate from a financial point of view.”

Fine, everybody can have their own opinion. For example, the outcome of the offer indicates that it is unlikely that the other major shareholder, Meridian Stiftung and Prof. Otto Beisheim Stiftungen (23.06% of the share capital) sold shares. However, now there sits a more weighty investor in the boat with them, since EP Global increased its participation via the offer to 37.09% of the ordinary shares and 10.13% of the non-voting preference shares.

 

LEONI AG: Still a lot to be done

Occasionally exciting news comes along quite unobtrusively. Let´s take LEONI AG for example. The company was already in difficult waters before the COVID pandemic. To improve this unfortunate situation, remedial measures were decided and implemented. The VALUE 21 program deserves a special mention here, the implementation of which is progressing faster than initially thought. In the Q3 report, we find the statement that measures to yield the targeted VALUE 21 gross cost savings of 500m EUR from 2022 onwards already applied by the end of the third quarter, significantly sooner than originally planned.

So we are already ahead of 2021, at least regarding this program. So let´s call it VALUE 2020, won´t we. But maybe this is not just about the time factor. At least there is more interesting information in other parts of the Q3 report. For example, what about the sale of the Wire and Cable Solutions Division? This unit with an annual turnover of 1.8bn EUR was supposed to go public in 2019. Alternatively, a sale was considered. And now? “See below”:

Carve-out: we continue to pursue a partial sale scenario; preparations ongoing to setting up units on a standalone basis.

 

Covestro AG: Growth Accelerator identified

Covestro has made it clear for a long time that they are looking for suitable acquisition targets. A few weeks ago the time had come. On September 30, 2020, the company signed an agreement to acquire the Resins & Functional Materials business (RFM) from Royal DSM. The integration of RFM shall add about 1bn EUR in revenues and an EBITDA of 141m EUR (2019 data) and helps Covestro to expand the revenues of the Coatings, Adhesives, Specialities (CAS) segment by more than 40% to approx. 3.4bn EUR (2019 data Pro-forma).  Covestro expects permanent (“run-rate”) synergy effects to build-up to approx. 120 m EUR p.a. from full integration by 2025.

Considering cash equivalents at RFM, the total purchase price of 1.61bn EUR corresponds to a net enterprise value of approx. 1.55bn EUR, representing a valuation of RFM at about  5.7x EV/EBITDA 2021 including Pro-forma run-rate synergies. Excluding run-rate synergies, the EV/EBITDA multiple would be 10.3x. Closing of the transaction is expected for the first quarter of 2021, subject to regulatory approvals.

Financing is secured through a financing agreement which Covestro intends to refinance with a combination of equity, debt instruments, and own cash generation, consistent with the company's commitment to maintaining a solid investment-grade rating. For this purpose, Covestro is planning to utilize its currently existing authorized share capital for an equity issuance to raise approximately EUR 450 million.

Covestro intends to finance the transaction via a combination of equity, debt instruments, and own cash generation. In this context, the company decided to increase its share capital through the issue of 10,200,000 new shares out of its authorized capital without subscription rights for shareholders. The shares were placed with institutional investors by way of an accelerated book-building process at 43.85 EUR per share, resulting in gross proceeds of 447m EUR. The net proceeds from the capital increase shall be used to partially re-finance the purchase price for RFM.

 

 

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People

 

Deutsche Lufthansa AG: The Finance Division gets a Pilot

Demanding circumstances require special measures. This seems to be the motto of Lufthansa´s supervisory board when it made its decision to appoint a new finance director. Remco Steenbergen is the new member of the Executive Board and will assume the position of CFO on January 1^st, 2021. Until recently Mr. Steenbergen was the CFO of the Swiss Barry Callebaut Group. Following the resignation of his predecessor, the CEO Carsten Spohr took over the responsibilities of the CFO. With the appointment of the new CFO, the Finance Division will be re-established and shall include controlling and risk management, corporate finance, accounting and balance sheets, taxes, purchasing, and mergers & acquisitions.

It is reassuring that Lufthansa has a CFO again, who appreciates challenges. Amidst the background of the COVID-restrictions, the airline´s business has largely collapsed and improvement is not in sight. It is as simple as that: the survival of the company depends on the successful work of the finance division. The company wouldn´t be where it is today without this work, but it is reassuring to investors that a CFO takes control again.

 

Aareal Bank AG: Demanding final Spurt for the 2020 Accounts

News about personnel changes are often very important to those directly affected, but not so much for the rest of the world. Occasionally there are exceptions to this rule. This applies for example to the information from Aareal Bank AG, that its chairman of the Management Board, Hermann J. Merkens, is temporarily unavailable to perform his duties for health reasons for an expected period of three to four months.

The Supervisory Board immediately took the necessary initiative and made arrangements for the performance of the duties of Mr. Merkens for the interim period. At an extraordinary meeting, the Supervisory Board resolved on substitution regulations for the temporary absence of Mr. Merkens. For example, Mr. Marc Hess will assume Mr. Merkens´ responsibilities for the company´s strategy and will represent Aareal Bank vis-á-vis the capital market and the general public. This is not an easy challenge since Aareal Bank is currently in the middle of a private equity deal. In August, the bank entered into a transaction with Advent regarding the sale of 30% of its IT-subsidiary Aareon at a purchase price of approx. 260m EUR in cash, which is expected to close in the fourth quarter of 2020. Aareal´s bookkeeping will probably appreciate a timely execution and the expected extraordinary profit.

 

Siemens Healthineers AG: Largest Acquisition to date is well on the Way

It´s nice when something works as planned. At least that is what shareholders of Siemens Healthineers would have thought when they heard of the approval of the pending combination with Siemens Healthineers at the extraordinary meeting of shareholders on October 16, 2020. This is a main prerequisite for the planned acquisition, which was announced on August 2, 2020.

In its press release, Siemens Healthineers informed that it entered into an agreement with Varian Medical Systems, Inc., pursuant to which it shall acquire all shares of Varian at 177.5 USD in cash. The total consideration would amount to approx. 16.4bn USD, resulting in the largest acquisition since the IPO in 2018.

Varian is a leading cancer care business, with innovative solutions especially in radiation oncology and related software. In fiscal 2019, the company generated revenues of 3.2bn USD with an adjusted operating margin of approx. 17%. The company is headquartered in Palo Alto, California, USA, and currently employs approx. 10,000 people worldwide. With this portfolio, Varian is regarded as an ideal fit to Siemens Healthineers businesses in medical imaging, laboratory diagnostics and interventional procedures. A positive contribution to adjusted basic EPS is expected within the first 12 months after closing of the acquisition. The acquisition, which shall be financed with a mix of debt and equity, is expected to close in the first half of 2021, subject to customary closing conditions.

In September 2020, Siemens Healthineers issued 75m new shares at 36.4 EUR each, resulting in gross proceeds of 2.73bn EUR. The net proceeds from this issue shall be used as a contribution to the financing of the acquisition of Varian.

 

Wacker Neuson SE: Differences in Opinion open up Positions for new Appointments

Compared to previous years, companies seem to be thinking a little more beyond the current quarter in 2020. This impression is confirmed by many company news from the second half of the year. Wacker Neuson is one of the outstanding examples of this new approach.

The first step of a management alignment was already introduced in September 2020, when the appointment of Mr. Felix Bietenbeck as a member of the Executive Board in the newly created role of a COO was announced. Measured by the share price development, investors appreciated the initiative, which was designed to enable the Chairman of the Executive Board, Mr. Martin Lehner, to focus even more on the Group´s strategic direction and the further strengthening of its innovative drive.

In November, Wacker Neuson surprised the market with step two. The CEO Martin Lehner informed the Supervisory Board on November 18^th, that he will not be extending his contract with the company, which expires on March 31^st, 2021, for personal reasons. He will leave the Executive Board on December 31, 2020, but continue to serve the Group in an advisory capacity until March 2021. Furthermore, the CFO Mr. Wilfried Trepels agreed to step down from his position ahead of schedule after he informed the Supervisory Board that he would not be available for an extension of his contract as CFO due to differences in opinion over the corporate management. This decision becomes effective on November 30, 2020. As of December 1, 2020, Mag. Kurt Helletzgruber, Chairman of the Audit Committee, has been seconded from the Supervisory Board to the Executive Board until June 30, 2021, in accordance with Section 105 (2) AktG, and will take on the executive responsibilities of the position of the CFO on an interim basis. As of January 1, 2021, Mag. Helletzgruber will temporarily assume the executive responsibilities of the CEO and take on the position of Chairman of the Executive Board.

The share price reaction shows that the second step of the management alignment was not welcomed by all investors. Who wouldn´t want to attend the AGM in 2021?

 

 

 

 

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Capital News

 

Wirecard AG: This Company is beyond Payments

Viewed from a professional perspective, Wirecard certainly deserves many awards. The company is undoubtedly a prime example of failed corporate governance and the failure of supervisory authorities. Therefore it is no wonder that, in addition to the processing and digesting of what happened, the blame game is also running at full speed. This is also the reason why the former CEO of Wirecard, Markus Braun, won a day trip to the German Bundestag.

The only thing unfortunate about his trip out of the penal institution is the timing. After all, Wirecards´s creditor´s meeting is taking place at the same time in Munich´s Löwenbrauhaus. The total debt of Wirecard is expected to exceed 3bn EUR, while the around 11,500 creditors even registered claims of over 12bn EUR.

However, the creditors will probably not expect a high quota on these claims, since the proceeds from the sale of assets to date have been low. Nonetheless, there is an interesting feature of this process many shareholders are not aware of. In the event of bankruptcy, shareholders´ assets are usually lost. But here we are talking about fraud. This means that damage claims from shareholders are also possible. Hopefully, all institutional investors realized this chance to recover a part of the money lost. Because of the critical attention paid to the events surrounding Wirecard, I am sure that BaFin will ask questions about it during the next routine audit, or maybe not, who can already know that today?

 

HOCHTIEF AG: Values realized in Australia

In July, HOCHTIEF informed that CIMIC Group (77.1% HOCHTIEF participation at the time) was in advanced negotiations with funds advised by Elliott Advisors (UK) Limited regarding the potential investment by Elliott into 50% of the share capital of Thiess, the world´s largest mining sector services provider, which would provide joint control of Thiess to CIMIC and Elliott. In October, CIMIC Group (HOCHTIEF participation 77.4% at the time) announced the conclusion of the agreement regarding the acquisition of a 50% equity interest in Thiess by Elliott.

The transaction comes with some interesting peculiarities. The partners will jointly control Thiess under a Shareholders´ Agreement. It also includes future share transfer options including a potential IPO or sale to a third party, and an option for Elliott to sell its interest in Thiess to CIMIC between three and six years from completion at the lower of the sales price or fair market value then, and a guarantee from HOCHTIEF.

The consideration for the sold 50% in Thiess implies an enterprise valuation of approx. 4.3bn AUD, subject to certain adjustments. The transaction will therefore generate cash proceeds of 1.7bn to 1.9bn AUD and is expected to reduce CIMIC´s factoring balance by approx. 0,7bn AUD its lease liability balance by approx. 0.5bn AUD. CIMIC calculates with a pre-tax gain of approx. 2.2bn AUD, and a post-tax gain of approx. 1.4bn AUD.

Following the completion of the agreement, which is subject to customary conditions, CIMIC´s investment in Thiess will be recorded as an equity-accounted joint venture.

Investors reacted positively to the news. However, the publication left one important question open: When do the parties expect the transaction to be completed?

 

Rocket Internet SE: The perfect Application of a Business Model

It had all started so well in 2014. An innovative team presented a convincing business model, and the market cap of nearly 7bn EUR by the end of the first trading day confirmed the prospect of a happy future for all investors. Unfortunately, the business idea soon encountered unexpected challenges, and so did the share price. The company managed to get some interesting transactions off the ground, but from the bird´s eye view, these were just isolated lighthouses that occasionally illuminated the prevailing gloom.

In retrospect, this development was no surprise. Evil tongues have sometimes referred to the business model as a copy machine – identify successful implementations of easy to copy models, and try to make it better. Maybe that´s not the whole secret. Many investors did not realize that Rocket´s business model can also be classified as a copy, and that is falling on their feet now. What exactly should be the particular benefit of providing growth capital for “rocket-fueled” startups in a market already flooded with capital?

It looks like the initiators of Rocket Internet finally found an answer to this question after six years of intense contemplation: Delisting. In September 2020 the company announced the decision of the Management Board to offer to the company´s shareholders to purchase all shares, by way of a public delisting self-tender offer. This offer is designed to satisfy the criteria for a revocation of the shares´ admission to trading on the regulated market of the Frankfurt Stock Exchange. Shares held by Global Founders GmbH (45.11% of the share capital) and Mr. Oliver Samwer (4.53% of the share capital) will not be acquired under the offer. 

There is a good reason for withdrawing from the listing, as the announcement explained: “Rocket Internet is better positioned as a company not listed on a stock exchange. The use of public capital markets as a financing source as essential parameter for maintaining a stock exchange listing is no longer required and adequate access to capital is secured outside the stock exchange.” But here´s my question: Why didn´t they put this information into the IPO prospectus in 2014? Anyhow, investors are reminded that this business model did not create wealth, it only redistributed money.

 

Merck KGaA: Perseverance pays off

Among the three large German chemical companies, Merck KGaA has achieved the top position with a market capitalization of currently over 56 bn EUR, while BASF remained behind with 52bn EUR and Bayer with a market ca of 47bn EUR still has to do some catching up. A keen sense of timing and trends certainly helped shape the recent success of Merck.

But luck and perseverance are also among the success factors, which applies in particular to legal disputes. For example, Merck is involved in a US patent dispute with Biogen Inc. in the US. Biogen sued Merck KGaA for damages in connection with a patent infringement caused by Merck´s product Rebif before the U.S. District Court New Jersey, Newark. Merck defended itself against the allegations and brought a countersuit claiming that Biogen´s patent is invalid. In February 2018 a jury declared Biogen´s patent invalid vis-á-vis Merck. This jury verdict was overturned by the District Court Judge, who upheld the validity of Biogen´s patent. Merck filed a complaint with the U.S. Court of Appeals for the Federal Circuit against this ruling.

On September 28 2020 the U.S. Court of Appeals for the Federal Circuit set aside the decision of the District Court Judge, invalidated Biogen´s patent, and instructed the District Court to reinstate the jury verdict. This decision allowed Merck to reverse provisions for the patent dispute proceedings in the amount of 365m EUR. The release contributed significantly to the rise of the Q3 EBITDA by 0.6m EUR to 1.7bn EUR.

 

TRATON SE: Clear Communication helps to reach a Goal

TRATON´s shareholders experienced a surprising outcome to a poker game. The story begins in January his year when TRATON submitted a proposal to acquire all outstanding shares in Navistar International Corporation at 35 USD per share in cash. At the time, TRATON owned already 16.8% of Navistar, so that the consideration to be paid would have amounted to 2.9bn USD.

Strategically, the takeover offer made sense given that the US-market is currently largely a blank slate for TRATON. For many manufacturers, North America is the most profitable market, but so for TRATON had not had direct access to this opportunity.  In other words, a completely new world was to be opened up here. And that is exactly the logic Navistar understood. This also seems to be the reason why no progress was discernible over a longer time. Finally, TRATON gave in and raised the offer price to 43 USD per share.

Some investors in Navistar still had higher expectations so that for TRATON the question arose as to whether the previous approach made sense, followed by the information that the offer would expire if not accepted by Friday, October 16^th. On this day, TRATON and Navistar reached agreement in principle that TRATON will acquire by merger all shares in Navistar not already held by TRATON at 44.5 USD per share. And since then there has been progress. In November, a merger agreement has been signed, and the closing of the transaction is expected to take place later in 2021 (subject to the usual closing conditions).

 

 

 

 

 

VIPsight - 3rd Edition 2020

 

COMPANIES

 

Wirecard AG: Everybody talks about Wirecard,

...and so do we.

Although there is still a lot of smoke covering the details of what happened, at least one can say that the Financial Times was right that unusual things were going on with Wirecard. The information uncovered so far points into the direction of criminal activities of several people, including members of the Management Board.

Amidst the volumes involved, the case enjoys its share of public attention, and it is discussed from various perspectives, including the usual suspects from politics and lobby groups. Therefore, I am convinced that everything that can be done to uncover what happened and correct mistakes will be done, scapegoats identified and law and order can be expected to be reestablished soon. Except for, well, it looks like two questions need a little more attention:

How could this happen?

Leaving aside the volumes involved, Wirecard is not an isolated event. What happened is a systemic problem of the German financial system and the result of a general lack of responsibility. Or could it be, that BaFin did not know how to address doubts and concerns, but refrained from a clear warning about its limitations? Let´s take a look at the smallest listed company in Germany, KREMLIN AG. In 2016 it turned out that the company had lost control over its assets several years ago, ad hoc-releases and corporate publications where either wrong or misleading, and for several years the company did not even have a managing director. Trading in the shares continued nonetheless, and the auditors issued unqualified audit statements for non-existing accounts for at least two business years. Consequences? Yes, BaFin sent questionnaires. For legal reasons, DPRG could not act, and the prosecutors rummage in this mud even till today without any visible consequences. The way things are, it doesn´t even ring a bell that Wirecard and KREMLIN shared the same notary in 2016. But it should worry about those responsible at BaFin that these problems did not only arise in one large case.

Follow the Money

For obvious reasons, everyone is currently looking for the missing 1.9 bn EUR. But think about the likely fate of Wirecard from the perspective of somebody involved in the dubious transactions. Why would you try to take a share of the 1.9 bn EUR? The risk that the authorities would find this money is far too high. It doesn´t take much mind to take a different and safer path. Secure your share in this money through indirect transactions that cannot be linked to you at first glance. Does anybody look into the short-selling activities in the past years from this perspective?

 

Commerzbank AG: Everything has it´s Time

Wirecard currently dominates the news. But somewhere in the past few days, Commerzbank, which recently dropped out of the DAX, sent a call for help. It is not clear to the outside observer whether the announcement made by the bank on July 3^rd was this call, or perhaps already the previous letter from Cerberus pushing for a change.

Many investors were shocked when they heard on July 3^rd that the Chairman of the Board of Managing Directors and the Chairman of the Supervisory Board would step down. Martin Zielke, the Chairman of the Board of Managing Directors, offered to resign early on the basis of mutual termination of his Board membership if such resignation is in the interest of Commerzbank. On July 8^th, the Supervisory Board of Commerzbank has agreed to the mutual termination of the appointment and contract. Mr. Zielke did agree to continue to perform his duties until a successor has been appointed. He will step down from his office at the latest on 31^st December 2020. Stefan Schmittmann, the Chairman of the Supervisory Board, has announced to resign from office with effect from August 3^rd, 2020.

The timing of the letter from Cerberus and the bank´s subsequent publications probably came as a surprise to most observers, the content, however, less so. Since the strategically and economically disadvantageous takeover of Dresdner Bank, Commerzbank has taken a leisurely path under the care of the German government. A small step here, a little correction there, and from time to time a rebranding of the same thing. The results were a disaster. A course correction was urgently needed. And as it turned out later, the German Finance Ministry maintained close contacts with Cerberus.  But the question remains, why only now and not much earlier?

 

Deutsche Bank AG: For a good Friend a Bank sometimes puts its Hand in the Fire

…just to learn later that it can burn. Deutsche Bank also had this experience. But banks are not abstract data and money stores, and they need someone to act for them. All too often, perpetrators can hide behind the walls of the institution without fear of consequences. But times are changing.

In early July the New York Times informed that the New York Department of Financial Services and Deutsche Bank agreed that the bank shall pay a 150 million USD fine for its dealings with Mr. Epstein, etc. Epstein is a sex criminal and financier, and Deutsche Bank was one of his financial enablers. The article quoted the department´s statement that Mr. Epstein`s bankers “created the very real risk” that payments through the bank “could be used to further or cover up criminal activity and perhaps even to endanger more young woman”. Linda A. Lacewell, the department´s superintendent, summed it up as follows: “Despite knowing Mr. Epstein´s terrible criminal history, the bank inexcusably failed to detect or prevent millions of dollars of suspicious transactions”.

On July 13^th, the New York Times added important information. According to the paper, Deutsche Bank executives approved Mr. Epstein as a client in 2013 and then kept working with him, even though employees worried in early 2015 in internal communications about Mr. Epstein about the fact that “40 underage girls had come forward with the testimony of Epstein sexually assaulting them”. Deutsche Bank declined to publicly identify any individuals involved, and the authorities didn´t demand it. However, the New York Times claims that based on descriptions of the employees in the consent order and interviews with current and former Deutsche Bank officials, it was able to identify nearly every person anonymously described in the order. Furthermore, the paper stated that at least one high-ranking executive remained in her position: Jan Ford, the bank´s head of compliance in the Americas.

Interesting. How does Deutsche Bank intend to improve its reputation if it continues to employ people with such a track record, and is it really necessary that the costs fall entirely on shareholders?

 

Airbus SE: Is the Deck now clean?

Airbus and Boeing have been throwing stones at each other for many years. The main war zone is allegations of allegedly unclean trading and subsidy practices. Therefore, the EU and the US have interfered regularly in these processes. More recently, however, it became apparent that Boeing´s management was not up to the task and massive strategic errors have maneuvered the company into difficult waters. In contrast, Airbus has systematically worked up deficits in the past few years.

Another important milestone was reached this month to deal with the difficult past. Airbus announced that it has reached an agreement with governments of France and Spain to make amendments to the A350 Repayable Launch Investment (RLI) contracts so that it no longer qualifies as subsidies. This step means that after 16 years of litigation at the World Trade Organisation (WTO), this is the final step to end a long-standing dispute.

Airbus even claims that it removes any justification for US tariffs imposed by the United States Trade Representative (USTR) and the company considers itself in complete compliance with all WRO rulings. The move was welcomed by the EU amidst the expectation that the US would lift the punitive tariffs on EU goods amidst the compliance of Airbus in this case. Investors shouldn´t relax yet, though. The US administration has moved slowly in recent years. While this is primarily a corporate governance problem in the US, it is now a problem for Airbus and its investors as well. What is more, Boeing is considered to be a cornerstone of the US economy. While after 16 years Airbus found a way out of a dead-end, Boeing´s options for action currently seem to be rather limited despite the EU´s WTO action against Boeing still running. Investors should therefore not have too great expectations until the US elections.

 

RHÖN-KLINIKUM AG: The Takeover Battle is over

The fierce struggle for control over RHÖN-KLINIKUM is over. A lot was at stake for everyone involved, not least the future strategic positioning of their own. The decisive phase was the weeks before the Extraordinary General Meeting of shareholders, and the meeting itself.

The anomalies begin with the fact that there were two requests to convene the meeting. RHÖN-KLINIKUM invited shareholders at the request of the two shareholders B. Braun Melsungen AG (April 18^th) and Asklepios Kliniken GmbH & Co KGaA (April 20th), who called for this meeting to be convened independently of each other in connection with the voluntary public takeover offer published by Asklepios. Hence, the Board of Management of RHÖN-KLINIKUM was placed between two chairs. On April 27^th, 2020, the Board decided to allow in full the request made by Asklepios, and in part the request by B. Braun, as regards the organization and agenda of the meeting.

B.Braun invoked the local court in Schweinfurt with several matters related to the meeting, including authorizing the convening of the EGM, the addition of additional items to the agenda of the meeting, and asking the court to determine the chairman of the meeting. The local court confirmed the position of RHÖN-KLINIKUM, however, and an appeal to the higher regional court by B. Braun failed.

The agenda of the extraordinary shareholders´ meeting on June 3^rd, 2020, comprised a discussion and where appropriate resolution on the takeover offer of Asklepios, a proposal to raise the quorum for AGM-decisions to a three-quarters majority, and several votes on members of the Supervisory Board. After all, this meeting was more about information rather than decision making, since it allowed the parties to measure their strength. On June 17^th, 2020, B. Braun informed via press release that it accepted the voluntary public takeover offer by Asklepios and submitted its shares in RHÖN-KLINIKUM.

 

thyssenkrupp AG: Who scared this Flock of Sheep?

July 17^th, 2020, is a day the investor relations team of thyssenkrupp will probably not forget so quickly. In the German market, the story of the day was the “news” that the company faces a deep loss in Q3 due to coronavirus effects. According to the press reports, this information was disclosed in a letter of thyssenkrupp to its employees. The sensation received considerable media. Consequently, the shares tanked in an otherwise positive market environment. At some point, thyssenkrupp shares even lost 2.5%.

But wait a minute, did you notice the audience? The letter was addressed to employees, not investors, analysts, or financial journalists. But wouldn´t you think that investors should have received this news first?  So didn´t  investor relations address shareholders properly (i.e. timely), or what else happened here?

I´m not sure if every journalist would like to hear the answer, but here it is. Let´s go back for a few weeks. Mid-May would be the right timing when thyssenkrupp informed about the Q2 data and business development. And of course, that includes the outlook for the following quarter. Not everyone will remember the details disclosed at the time to analysts, journalists, and investors. But the internet can help to refresh memories.

For example, we can still find the presentation “newtk and Q2 FY 2019/20 Facts and Figures June 2020” here: https://d2zo35mdb530wx.cloudfront.net/_binary/UCPthyssenkruppAG/de/investoren/berichterstattung-und-publikationen/link-2020602_Charts-on-Q2_19_20_Presentation_June_FINAL.pdf 

No scroll down to page 20, and you´ll find the Q3 outlook information as follows: “In Q3 – given the currently unforeseeable effects of the pandemic on demand and supply chains and depending on the speed of production resumption by our customers – a loss in the high 3-digit million EUR range is likely and up to a good 1 bn EUR cannot be ruled out.”  

I guess it would be unfair to blame the delayed response by some media on COVID, wouldn´t it?

 

Linde plc: Exceptions prove the Rule

With the recent closures of consulates, relations between China and the US have reached a new low. This is not a conducive climate for economic cooperation, not at all. A current initiative from Linde is therefore all the more surprising. In July, the company, that emerged from the merger of Praxair and the German Linde AG, surprised market participants with two new initiatives towards the Chinese market.

Linde and China National Offshore Oil Corporation´s subsidiary, CNOOC Energy Technology & Services, announced the intention to jointly develop the hydrogen energy industry in China. The partners will explore the option to invest in hydrogen and filling facilities, and further the use of hydrogen in industrial applications, particularly mobility.  While Linde expects that the partners will leverage the complementary strengths and work towards a more sustainable. Low-carbon future for China, CNOOC is looking forward to collaborating with Linde´s “industry-leading expertise in hydrogen and hydrogen refueling technology”. I couldn´t have put that better.

Another cooperation with a Chinese company was announced a week earlier. Linde signed a Memorandum of Understanding with Beijing Green Hydrogen Technology Development Co., Ltd., a subsidiary of China Power International Development Ltd, to jointly promote the application and development of green hydrogen in China. The partners plan to collaborate on a variety of green hydrogen initiatives, including hydrogen technology research and development, and the implementation of green hydrogen mobility solutions during China´s inaugural hosting of the 2022 Winter Olympics.

That reads interesting at first glance. But the main obstacle for the success of the initiatives will probably be found in the political environment rather than at the business level.

 

MTU Aero Engines AG: Everything stays the same

The German language is known to be precise, but also complicated. Here´s an example:

- Alles bleibt beim alten (everything stays the same)

- Alles bleibt beim Alten (everything stays with the old man).

Google translate doesn´t even realize the small difference, and the pronunciation is identical. But even if you know the different meanings, there are occasions where one cannot assign the meaning of a publication. A perfect example of such a dilemma is a recent Ad hoc-release by MTU. Mid-June, the company informed that Klaus Eberhardt will continue to lead the Supervisory Board. This was decided unanimously by the Board.

Well, let´s see. The purpose of an Ad hoc-release is to disseminate information that has not been available to the public yet, and which potentially might trigger a relevant share price movement caused by actions (buy or sell) of investors.

Accepted, this information was new to the market, but which investors will buy or sell shares on a larger scale? Perhaps the reason for the Board decision might help to find an answer to this question. “Maintaining continuity at the helm of the Supervisory Board is a response to the special challenges by the coronavirus crisis.” Sounds fine to me. But this argument would only be valid if the response is adequate to the challenges. One can only speculate what kind or specific challenges arise by the coronavirus crisis, that required an ad hoc-release regarding this decision.

At the same meeting, the news goes on, the Supervisory Board also decided unanimously to raise the previously valid age limit for its members in general to 75. This is a forward-looking decision. We all tend to get older on a year-by-year basis and early retirement is not everyone´s cup of tea. The release used different wording, though: “Given a general increase in life expectancy, this step will contribute to being able to secure valuable expertise and experience…”.

In an attempt to apply the aforementioned experience, the release closes with the following statement: “The Annual General Meeting of MTU Aero Engines AG will be held virtually on August 5, 2020. Re-election of Eberhardt is not necessary, since his Supervisory Board mandate lasts until 2023.”

 

LEG Immobilien AG / TAG Immobilien AG: The little ones are always hit a little harder

When you open the TAG investor relations pages on the TAG website, the first page provides “five reasons to invest”. The presentation is clear and straight: This is the stock you should by. Nowadays, such a hardcore selling approach is rarely used by investor relations. Despite being a bit outdated, it still seems to work occasionally. And perhaps it is even the reason, why LEG Immobilien AG and TAG Immobilien AG started to flirt with each other in May this year.

More or less nothing is stated on the TAG Immobilien site about this event. Which, in a way, makes sense considered that TAG Immobilien was probably the more discreet partner and dealt with information for investors much more cautiously than LEG Immobilien. On the other hand, LEG Immobilien is almost gossipy, but also reliable and precise: “The Management Board of LEG Immobilien AG confirms that it is in talks with TAG Immobilien AG about a potential combination of the businesses of both companies. For this purpose, LEG would offer to the TAG shareholders to exchange their shares into LEG shares. At this stage it is uncertain whether an agreement will be reached and whether a transaction will be announced.”  

The uncertainty didn´t last long. Just four days later the public learned that the Boards of the two companies decided to terminate the talks on a possible combination of the two companies, as no agreement could be reached particularly about a possible exchange ratio. We don´t know the details of why the two didn´t come together. But many investors saw the potential of the combination, which can be described by referring to the complementary location of the two property portfolios and economies of scale. If you follow this logic, it is no surprise that the termination of the talks put the share price of the smaller partner, i.e. TAG Immobilien, under pressure.

 

 

 

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Buhlmann's Corner

 

"questionable balance sheets"

Thus, DER BETRIEB on 8 January 1948 overwrites its title story in Volume No. 1 and Issue No. 1 with the subtitle "Vermögensdarstellung oder richtige Erfolgsmitteilung" (presentation of assets or correct notification of success). At that time, the magazine was published under licence No. 42 of the British military government and in the aforementioned article, the company considered the problem of a congruence between the principles of creditor protection and accountability. Is the magazine (https://www.der-betrieb.de/), which still exists today, still up-to-date with the topic?

Deutsche Bank shares had a market value of 55 billion in 2000. Since then, the bank has raised more fresh money on the stock exchange than its current market value - so it would have been rational in retrospect to liquidate the bank back in 2000. At Wirecard, the balance sheet margin was "only" one third of the balance sheet total or just the entire equity capital. At the last Annual General Meeting, I asked in this respect, among other things, why there were no reserves, but only provisions, and how much of the auditor's fee has already been repaid or would still be paid because of this mistake? It is difficult to estimate how many employees participated AND remained silent and for how long. The sharpest weapon in German stock corporation law is not only the right to ask questions according to § 131 - which seems to be de facto no longer valid since March 2020 - but the combination with § 400, which punishes misrepresentations with arrest.

From what we know today, some of the answers in the Daimler-HV of recent years (concerning Diesel-Gate) were simply wrong, and the worst thing is that the wrong answerer Dieter Zetsche (still) dreams of being chairman of the supervisory board. This grievance is surpassed at VW, where even today the man who served as CFO until 2015 does not give up his position as chairman - to protect himself, of course. Soon not only he, but also his old misdeeds will be time-barred.

As much as China is now regarded as God-be-with-us by Western agitators, communist capitalists have internalized the rules of Wall Street with great conviction. Alibaba founder Jack Ma announces that Alibaba part-financier Ant Financial will be floated on the stock market for 200 billion (whether USD or €). To this day, no one knows exactly where Alibaba is based and whether it is a real share or an artificial product of a share, i.e. whether it remains will-less or whether it has voting rights. Even serious registered companies (like Experian) are based in mainland Britain, have their AGM on the island of Ireland and refuse to register non-British shareholders in the share register: Give me your money and keep quiet!

Some would have done better to keep quiet: Carsten Spohr (Deutsche Lufthansa) said as recently as 19 March 2020 that "our balance sheet is stronger and our debt-to-equity ratio much lower than that of most competitors". Only a little later, however, the company appears to have a market value of 5 billion, 40 times less than Alibaba's Ant Financial, and needs 9 billion to avoid becoming illiquid. And this as the owner of more than 760 aircrafts. By the way, the market value of the "largest German bank", whose loans tend to end up in Donald Trump's secret tax returns, amounts to 10 billion today.

For times of crisis, it has remained secret for far too long how schnitzels, AGM sausages and other delicacies are produced: until a whole region around the Toennies slaughterhouses practice their 2nd lock-down. As entrepreneur Clemens Toennies said so aptly on 26 June 2020 (https://www.rainews.it/tgr/tagesschau/articoli/2020/06/tag-Clemens-Toennies-Deutschland-Coronavirus-Fleisch-SChlachten-172704be-152d-4cd1-8754-caf7dad802d6.html) we will change the industry: probably 25,000 pigs had to be slaughtered daily in the home office.

They can flee from the responsibility, the unsuccessful Commerzbank board administrators, the Audi diesel offenders from the heart centre of the VW group (Audi was the holy centre of the blessed Ferdinand Piech!), the wirecards (no matter whether Burkhard Ley, Markus Braun or Russian secret services), the Carsten Spohr or Jack Ma and Hans-Dieter Pötsch: Responsibility is not a water under the bridge, we should call attention to issues that are questionable, like in 1948!

 

 

 

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ACTIONS CORNER

 

Continental AG: Is this Braking or the Pause Button?

With carefully selected bits and pieces of information and advice, Continental achieved to get a fair amount of attention for the planned spin-off of its powertrain business Vitesco Technologies. But investors who want to buy the stock now have to wait even longer, since Continental´s Executive Board decided in late April that the planned listing of the powertrain business shall no longer take place this year due to ongoing economic uncertainty. The idea behind this decision is that the plans for Vitesco Technologies to become independent thus can be implemented with greater flexibility in response to market conditions.

The Board also decided to continue preparing the powertrain business for the intended spin-off at a later point in time, thus ensuring that this step can be implemented with the shortest possible lead-in time and great flexibility once the market conditions change.

Consequently, the company no longer pursued the approval of this years´ AGM regarding the planned spin-off. While many shareholders might not have missed this item on the agenda, other COVID-related topics had a direct impact, such as the lowering of the proposed dividend to 3.0 (initial proposal: 4.0) EUR per share and the information about a salary waiver by the Executive Board members and for executives in March 2020. For the members of the Board, the waiver resulted in a reduction of the fix salary for the Months from April through July by 10 percent. This initiative was made in solidarity with employees who have been affected by short-time work and other curtailments.

 

Steinhoff International Holdings N.V.: Settlement Proposal submitted

Have you ever dreamed of waking up one morning holding a significant stake in a South African company? Such a dream could come true for Steinhoff shareholders. The SDAX company recently surprised with an extra-long ad hoc-release, proposing a settlement to conclude the complex legal claims, and ongoing and pending litigation proceedings, arising from the legacy accounting issues first announced in December 2017.

Even before you learn which proposal the company would like to make, readers are informed about the limited possibilities of the company as a precaution. Does one wonder whether this order is prescribed by the lawyers, or is it the result of a bad conscience? In any case, we learn that any settlement needs to be considered against the background of the financial position of Steinhoff and its significant levels of financial indebtedness. Also, the Group´s underlying businesses have been impacted by COVID 19 which, together with the effect of adverse currency movements, is likely to negatively impact current valuations. What is more, the proposed terms will require financial creditors´ consent.

According to the announcement, approximately 90 separate legal proceedings have been commenced against the company in the Netherlands, Germany, and South Africa, claiming more than 7 bn EUR. If all such claims were ultimately established in the amounts asserted, the net asset value of Steinhoff would fall far short of the amount required to satisfy them in full.

The proposal distinguishes three groups of claims:

- Market purchase claimants shall receive 133 million EUR in cash, plus shares in Pepkor Holdings Limited (the Group´s South African retail subsidiary). Steinhoff estimates that approximately 173 million shares (or 4.6 percent of the total issued share capital of Pepkor) will be transferred to MPC claimants so that the total settlement consideration would amount to 266 million EUR.

- Contractual claims against Steinhoff International Holdings N.V. shall be settler at the same relative recovery rate. Hence, this group shall receive 52 million in cash and 67 million shares in Pepkor (or 1.8 percent of the total issued share capital of Pepkor), resulting in a total settlement consideration of 104 million EUR.

- Contractual claims against Steinhoff International Holdings Proprietary Limited (the former South African holding company of Steinhoff) shall receive a total compensation of 482 million EUR, comprising a cash component of 241 million EUR and 345 million Pepkor shares (or 9.3 percent of the total issued share capital of Pepkor). The number of shares assumes that current employees and managers of Pepkor be entirely paid in the form of Pepkor shares.

Does anyone have an idea of how to carry out a reliable assessment of a retail furniture retailer in den days of COVID 19?

 

CTS EVENTIM AG & Co. KGaA: What if Disaster strikes twice?

No doubt, the COVID pandemic has hit CTS EVENTIM hard. No show – no ticket sales. This is a simple formula, and the share price trend since mid-February shows that it works. The company had to amend its proposal for the appropriation of profits to the AGM, and the outlook for 2020 was withdrawn.

Everything moved within expectations amidst the current business environment. But in mid-July investors received a wake-up call. The company informed via Ad hoc-release that the Austrian Financial Market Authority FMA prohibited Commerzialbank Mattersburg im Burgenland AG from continuing its entire business operations with immediate effect. The emergency administrative order dated July 14^th, 2020 also established a special auditor as an expert supervisor (government commissioner) of the bank. An important consequence of the order is that the bank is currently not allowed to make payments out of deposits.

Ok, from now on shareholders in CTS have heard of this so far little-known banking institution and press their thumbs for more and hopefully better news. This is because Barracuda Holding GmbH, in which a subsidiary of CTS EVENTIM has a 71% shareholding, holds deposits with Commerzialbank Mattersburg of approximately 34 million EUR.

The effects on the accounts of CTS are hard to predict. But the event highlights a particular risk of COVID. Nearly all sectors and industries suffer from the effects of the pandemic. All businesses are hurt - some more, some less. Those hit a little harder are also more vulnerable when unexpected additional challenges pop up. CTS had to take a hit, but that´ should be manageable. However, the event underlines that risk monitoring and good governance are much more important in the days of the pandemic.

 

DEPFA Bank plc: Equity for Sale

The name DEPFA BANK has long been reminiscent of times long past and forgotten crises.  And many remember the surprising move of the company to Ireland shortly before the onset of the financial market crisis. That did not help, though, and in the end, the German taxpayer was nevertheless held responsible for this invoice.

But this is not the end of the story. A first attempt to sell the bank for 320 million EUR failed in 2014. But Reuters reported in October 2019 that Barclays was mandated to find a buyer for DEPFA. The article highlighted the strong capital basis of DEPFA, which is a result of de-risking its portfolio (read: shrinking the business) over the last decade.

The bank is believed to be an attractive target for institutions that can make use of additional capital, including German institutions. However, the bait comes with a catch. According to the Irish Times, the bank is structurally loos making. In February this year the paper quote Moodys: “Given that Depfa´s recurring revenue is insufficient to cover its cost base, we believe that – without outside assistance – Depfa has limited scope to engineer a sustainable turnaround and will therefore likely remain lossmaking in the medium to long term, although there may be potential to reduce losses.”

Equity ratios used to be a strange game for accounting nerds. When they were first introduced, the idea was to set risk limitations. But soon thereafter a race started for particularly creative constructions, creating unhealthy entities more concerned about equity ratios rather than profitability. This development contributed significantly to the financial market crises, and DEPFA BANK was one of the unlucky victims in those days.

But no DEPFA is back on the market. On July 14^th, DEPFA BANK informed via an Ad hoc-release that the FMS-Wertpapiermanagement AöR, the German state-owned wind-down agency has announced the launch of the sale process for 100 percent of the registered share capital of DEPFA BANK plc.

 

 

 

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People

 

Pfeiffer Vacuum Technology AG: How to set the Management Board in Motion

Occasionally, news of board members saying goodbye can give cause for thoughts. Take for example Pfeiffer Vacuum. On June 10^th, investors could read: “Supervisory Board adopts new Management Board and expanded management structure and sets the course for a rejuvenated management team with new Chief Executive Officer.” Ups, ones may start to wonder who creates these marketing slogans. Or did this accident only happen because the message was to be distracted with many keywords? We´re still looking, though.

Effective January 1^st, 2021 the Management Board of Pfeiffer Vacuum will look slimmer. The new structure takes into consideration the Relationship Agreement with the Busch Group. The new structure only provides for two board members, namely a CEO (who is also the Chairperson of the Management Board) and a COO. The board will be assisted by a Group Executive Committee, which in addition to the members of the Management Board will include in particular the CFO, the Chief Sales Officer, and the CTO.

Unfortunately, the release did not explain why the new structure reflects the agreement. So while we are sitting in the dark here, the release further illuminates the perspective for changes on the Management Board. The Supervisory Board has also appointed Dr. Britta Giesen as a new member of the Management Board as of October 1^st, 2020. She is the designated Chairwoman of the Management Board and will take over this function from the current Chairman Dr. Eric Taberlet, who is expected to retire on January 1^st, 2021.

Would that be a restructuring-related retirement, after all? And just by the way we learn that the CFO, Ms. Nathalie Benedikt, “currently a member of the Management Board and Chief Financial Officer”, will leave the company by mutual agreement upon the regular termination of her appointment at the end of the year. I love marketing blabla, but not so much in ad hoc-releases. So is she leaving the company by mutual agreement, or is she leaving the company upon the regular termination of her appointment? And while we´re at it, the Chairwoman of the Supervisory Board of Pfeiffer Vacuum and Co-CEO of Busch SE, Ms. Ayla Busch, thanked Ms. Benedikt for her dedication and commitments to Pfeiffer Vacuum over the past three years. Ms. Benedikts´ first term as CFO started in 2013. But we don´t need a CFO on the Management Board, right?

 

 

 

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Capital News

 

Bayer AG: When the Rooster crows on the Manure too early

What a success. After a long period of bad news flow, Bayer was finally able to present a result that was expected to end the long and expensive disputes related to Glyphosate. Bayer inherited this can of worms with the acquisition of Monsanto. At the time, many investors thought that Bayer had a good understanding of the legal and social problems associated with Monsanto. Given the price paid, the expectation was not completely unfounded. But perhaps wrong, as later developments show.

On June 24^th, 2020, Bayer announced a series of agreements that should resolve major outstanding Monsanto litigation, including U.S. Roundup ™ product liability litigation. In particular, the Roundup ™ resolution was supposed to bring closure to approximately 75% of the respective litigation, involving approximately 125,000 filed and unfiled claims overall. Bayer intended to make a total payment of 10.1 bn USD to 10.9 bn USD to resolve current and address potential future Roundup ™ litigation. The resolution also provided for a mechanism to resolve potential future claims. The total payment can be broken down in 8.8 bn USD – 9.6 bn USD to resolve the current litigation, and 1.25 bn USD to support a separate class agreement to address potential future litigation.

This was good news for the bond market. For example, we could read on GlobalCapital:   “Bayer investors shrug off major settlement with 17.5 bn EUR of demand for new bonds. Bayer, the German life sciences company, enjoyed blow-out demand for its 6 bn EUR multi-tranche bond issue on Wednesday, days after agreeing to pay up to 10.9 bn USD to settle a lawsuit over claims its weedkiller, Roundup, causes cancer.”

Just a week later reality kicked in. The class agreement is subject to approval by Judge Vince Chhabria of the U.S. District Court for the Northern District of California, and the judge might have some concerns. On July 8^th Bayer announced that “it is in agreement with counsel representing the proposed Roundup settlement class on their decision to withdraw the pending motion for preliminary approval of the parties´ issue class agreement. The withdrawal will enable the parties to more comprehensively address the questions recently raised by Federal District Court Judge Vince Chhabria of the Northern District of California, who presides over the federal Roundup litigation.”

 

Deutsche Lufthansa AG: Determined Shareholder worries Politicians

These were exciting days for Lufthansa´s shareholders. The group was no exception in its industry. Official requirements, airport closings, and a serious drop in demand amidst the COVID pandemic led to an existential crisis. As part of the measures to deal with the financial impact, the company and the German government had agreed on a financial rescue package. And as it happens occasionally when you are in a particular hurry to get things done, the shareholders did not receive enough attention.

Well, at least one shareholder made clear that he did not like this ignorance towards him. Heinz Hermann Thiele, who at the time owned 15% of Lufthansa, demanded a second look at the planned measures. Apart from excited public reactions of uninformed politicians, this led to hectic communication, at the end of which the parties were ultimately able to communicate. After all, this is a kind of result, although one may doubt that the investor acted solely on the entertainment value.

On June 25^th, the mood had already calmed down and the EGM approved the capital measures proposed by the Boards. The package provides for stabilization measures and loans of up to 9 bn EUR. The Economic Stabilisation Fund of the Federal Republic of Germany will make convertible silent capital contributions of up to 5.7 bn EUR. It will also establish a 20% stake in the share capital of Deutsche Lufthansa AG by way of a capital increase.  The conversion rights of the silent capital can be exercised in case of a takeover bid for Lufthansa and to secure the interest payments on the silent capital contributions, resulting in a further five percent capital increase. The package is supplemented by a loan of up to 3 bn EUR by a group of banks, including KfW.

By the way, a few days ago Lufthansa informed about a reduction of Mr. Thiele´s position in Lufthansa´s equity from 15.52% to 12.42%. But this is just a relative effect, due to the issue of new shares to the Stabilisation Fund.

 

K+S AG: Adjustment of the Dividend Proposal to maintain the Eligibility for KfW Support

The handling of the effects of the COVID pandemics also places new demands on CFOs and shareholders. A good example is K+S AG, which had to adjust the dividend proposal for 2019 to the legal minimum dividend of 0.04 EUR per share. The previous dividend proposal was 0.15 EUR per share. The decision to adjust the proposal was made to maintain eligibility for a KfW state-secured loan.

At first glance, this is a good and convincing argument. The effects of the COVID pandemic are obvious, and a cautious approach is appropriate. This applies all the more when looking at the balance sheet ratios. And the continuing uncertainty on the capital and financial markets about the economic consequences of the crisis is probably not helpful for the planned sale of the American salt business either. But there is light to see at the end of the tunnel. At the AGM, the CFO confirmed that the sales process is going well so far and the company still is expecting to sign a contract in 2020, while the closing will take more time. Shareholders still have to hold their breath for a while.

 

Aareal Bank AG: Approaching a Separation from its IT-Subsidiary

Amidst strong shareholder pressure, the Management Board of Aarela Bank decided to enter into discussions with financial investors on the sale of a significant minority stake in its subsidiary Aareon AG. Aareon is a leading consultancy and IT systems house for the European property industry. The goal of the structured sale process is to join forces with a partner in to strengthen growth prospects and to further expedite its growth program. Aareal Bank intends to remain Aareon´s majority shareholder.

According to the bank, the process should be carried out quickly and without prejudice to the outcome. Besides the commercial aspects of a potential transaction, key criteria will include support for Aareon´s growth strategy, particularly in terms of stepping up M&A activities, and the potential partner´s specific transaction and sector expertise. According to press reports, Aareon should be valued around 0.5 bn EUR. In 2019, Aareon contributed to 37 million EUR to the group result.

At first glance this sounds like a logical step in the right strategic direction to strengthen the long-term perspective for the business. But not every shareholder appreciated this initiative. According to Reuters, the activist hedge fund Teleios Capital called for a dual-track process for both a majority and a minority sale of the software business. Teleios holds a 6.5% stake in the bank. This pressure might prove helpful to speed up the sale process. But will it be enough to encourage the management to expand the target group for the sale?

 

QUIAGEN N.V.: Good News can be bad News

This is good news for shareholders: On July 13^th QUIAGEN announced earnings above prior expectations and improved growth and earnings prospects amidst the growing demand for its products and services due to the COVID pandemic. But perhaps not everybody was happy to learn how strong the business developed in recent months.

Following several months of back-and-forth over a potential acquisition of QUIAGEN, Thermo Fisher finally launched its proposal to acquire QUIAGEN at 39 EUR per share on May 18th, 2020. This proposal valued QUIAGEN at approximately 11.5 bn USD (including the assumption of approximately 1.4 bn USD of net debt). The Managing Board and the Supervisory Board of QUIAGEN unanimously recommended accepting the offer. Interested shareholders could do so until July 17^th, 2020, while the additional offer period shall start on July 31^st and will end on August 13^th. The offer was subject to a minimum acceptance threshold of at least 75% of QUIAGEN´s issued and outstanding ordinary share capital as of the end of the acceptance period.

Sounds good, but not yet good enough. The strong performance and improved outlook of QUIAGEN in recent months encouraged several shareholders to request a higher offer price. And this time Thermo Fisher acted swiftly. On July 16^th, the offer price was increased to 43 Euro per share, while the minimum acceptance threshold was lowered from 75% to 66,67%. This sounds better, although it comes with a catch: If the minimum acceptance threshold is not met, Thermo Fisher shall receive a 95 million USD expense reimbursement payment.

 

ams AG: Succesful Closing of the OSRAM Licht AG Acquisition

It was not only the COVID pandemic that temporarily raised doubts about the success of the ams takeover bid for OSRAM LICHT. It is therefore all the more pleasing to see a positive message in these rather demanding times. And this is such a message: ams announced on July 9^th the successful closing of the OSRAM LICHT AG acquisition. The takeover offer has been fully settled today and the offer price paid to the holders of the tendered shares.

Following the closing, ams holds 69% of all shares in OSRAM LICHT (excluding treasury shares) based on the result of the takeover offer and additional purchases equivalent to a transaction value of approximately 2.7 bn EUR. It goes without saying that ams expressed its understanding that it expects to gain representation on the Supervisory Board of ORAM LICHT based on its shareholding and plans to announce further steps towards the integration of the two companies in due course.

But the story is not yet off the table. Only a few days later, ams informed about the issue of 200 million EUR senior notes and an additional 50 million USD senior notes “in connection with the OSRAM LICHT AG” in the second half of July. We better expect further news from this transaction.