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 24th 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 8th 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.
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”
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 17th, K+S reported that at the request of the BaFin, the DPR examines the consolidated financial statements of K+S as of December 31st, 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 28th, 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.
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.
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 19th, 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 22nd, has been published on February 22nd, 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 21st, 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 25th, 2021. This looks like a bazaar approach, but it did help to reach the minimum acceptance threshold of 50 percent. On February 15th, 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 1st, 2021, within the statutory additional acceptance period.
Dialog Semiconductor Plc: It only ever hits the good ones
On February 8th, 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 5th 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 7th.
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.