Few investors know the Byzantine world of European holding companies as well as Evermore Global Advisors’ David Marcus. Marcus has been working in the space since the 1990’s, and has developed methods for separating signal from noise in a landscape where familial allegiances, outdated corporate practices, and political lethargy can often create both confusion and value opportunities. In our interview with Marcus, he gives two names that offer according to his analysis intriguing risk-reward: a French conglomerate with a storied history and a visionary leader and a young German company with razor-keen eyesight for deals.
Despite all the tears and tearing out of hair, the U.S. presidential election failed to dent the markets as predicted. After a severe tremor on election night, U.S. equities have continued their roaring bull run. The post-Trump rally only points out how overheated equities are at the moment. Whether you think we are due for a meaningful correction or not, it’s hard to find value propositions. And this is not just the case stateside. Emerging markets are facing some very ugly forward growth pictures. China is battling its own internal economic realities. Where, then, to look?
David Marcus, of Evermore Global Advisors, says Europe. That may sound unlikely at first, given the big gains European stocks have made recently despite the economic uncertainty around Brexit. But Marcus is a student of the legendary value investor Michael Price who rose through the ranks at Franklin Mutual from intern to manager of more than half the fund’s assets, and he has a compelling take on the markets across the Pond. As Marcus describes his new fund’s approach: “We’re not sector analysts. We are only looking for certain kinds of investments with certain kinds of characteristics.” Some of these characteristics belong to a certain kind of holding company. These companies, which are found more often in Europe than in the U.S. for a variety of structural reasons, offer deep value through discounts — in good times around 10 to 15 percent and in tougher times as much as 60 percent — and are often headed by generational leaders from families who hold significant stakes in the firm. Such companies realize value by selling assets or by consolidation. Evermore holds a few of its biggest positions in conglomerates with strong historical roots, again often owned by families with owners passing through the generations and headed by what Marcus calls “dynamic value creators.” For Marcus, the management and the CEO especially are at least as important as a tempting discount in price or the right set of potential catalysts to close that discount. As he puts it, “Even though we are value investors and driven by the numbers, just as important is the softer side. Who are the people? Are these people we want to bet on?”
While traditional discounts have narrowed, there is still some opportunity to be found. Evermore’s approach is a mechanism that allows the fund — and other market participants, presumably — to see beyond the equity landscape of the past few years. And it has led Marcus and Evermore to focus on two holding companies, one with a storied past and one of much newer vintage, as good bets. One is France’s Bolloré, under the stewardship of legendary raider Vincent Bolloré, which owns everything from a majority stake in media big Vivendi to chunks of ports along Africa’s coasts. Another is Aurelius, helmed by the innovative former management consultant Dirk Markus. Aurelius is unusual in that is a publically traded firm acting more or less like a highly skilled private equity outfit.
Bolloré has a rich history. It started life as a maker of thin films in the paper products space — think cigarette papers and the pages in Bibles — in 1822 in Brittany under the rule of the Bourbons. Its thin paper business grew explosively and over the ensuing century-plus — and after a turbulent period in 1970’s following its expansion into polypropylene films — the company branched out into diverse other areas. These range from port logistics to shipping to energy distribution to media. That diversification strategy is the signature of its current CEO, Vincent Bolloré, who took over the company in 1981 after repurchasing it for a token one franc from Edmond de Rothschild. Vincent Bolloré is just the sort of value creator Marcus sees as essential to opportunities in this space. His investment and acquisition picks across industries have helped build Bolloré into the giant it is today, with a market capitalization of €9 billion and nearly 30,000 employees around the globe.
Vincent Bolloré has bought stakes in a wide variety of companies and concerns, from Britain’s OTAL to France’s globe-spanning ad agency HAVAS to ports up and down the west coast of Africa to its stake in Vivendi. His track record is impressive. Consider as one example his acumen the company’s investment in steel-tubing maker Vallourec: after investing €160 million in 2002, they recouped in the neighborhood of €1.86 billion when they sold off most of their stake three years later. Another is the company’s acquisition of a stake in the Rivaud Group: in 1988 and 1996 they invested a total of €480 million and sold off a decade later for €1.5 billion. Many of these acquisitions took place in the corporate atmosphere of Old Europe: “Bolloré didn’t have a lot of capital,” says Marcus, “so you had a structure where they would buy businesses and stakes in companies, small stakes where they would have a fulcrum piece of equity or security to try to take control of the business. In Europe, especially in France, you had a lot of companies where there were different share classes or different structures, so they always found a way to work their way through the process, to make enough of a wedge to get in there.”
Evermore’s analysis sees a significant upside in Bolloré — their base case puts per-share NAV at €6.79. That means the current share price of €3.29 offers as of press time a 52 percent discount. The fund’s blue-sky case sees Bolloré’s NAV hitting €8.49 per share, upside of close to 160 percent — almost a triple. Those cases assume market values of the stakes Bolloré owns, with the exception of Vivendi. This they see itself trading at a significant discount. If the Vivendi stake is factored in at current market value, the discount narrows to 19 percent.
Both cases as well asssume significant value to be added by the continuing consolidation and collapse — ongoing since 2000 — of the complicated share relationships created by Bolloré’s layered and cross-linked network of acquisitions, increasing the per-share value by reducing the number of so-called “treasury shares.”
For those bullish on Africa due to the very tempting (especially viewed against the rest of the world) potential for growth there, let it be noted that some 50 percent of Bolloré’s pre-discount €11-billion-plus NAV as a whole is exposed to Africa, though that exposure is also not without its risks.
Evermore’s take on Vivendi shows a double discount there — they calculate Vivendi’s current (as of press time) €18.55 share price as being a 38 percent discount to its correct per-share NAV at €30. Tack on the 52 percent discount assigned to Bolloré and that’s a whopping 90 percent. As for their thinking on how that value gets realized, it’s more or less the Bolloré theory writ small: Vincent Bolloré is now at the helm of Vivendi and poised to apply the same strategy that’s made his eponymous company so valuable. They foresee a combination of consolidation and smart acquisitions, as well as an incredibly successful program of fiscal discipline; under Bolloré’s leadership Vivendi has gone from carrying a massive €11 billion in net debt to holding €2.5 billion in cash in under three years. This was done in part by a aggressive program of selling the company’s underperforming assets, including their telecom businesses in Brazil and Morocco.
Aside from the catalysts particular to Bolloré — i.e. the “treasury share” effect that consolidation will have and Vincent Bolloré’s unmatchable style of leadership — Marcus noted in our interview that in general the European corporate landscape is starting to change, that shareholders are now demanding old-line, old-school companies get as lean and mean as possible. On that note — leanness and meanness — let’s turn to the other name Marcus floated: Aurelius.
The company, which is currently poised to buy Office Depot’s European business spun off in the wake of the failed Staples merger, is run by McKinsey veteran Dirk Markus. Unlike Bolloré, Aurelius is young. It was established in 2006 by Markus and two colleagues and has since grown from a Munich-based firm into a multinational with offices in London, Madrid, and Stockholm and subsidiaries in Germany, the U.K., France, Poland, the Netherlands, Switzerland, Norway, Belgium, Luxembourg, Slovakia, Slovenia, the United States, China, Malaysia, India, Thailand, and South Korea. David Marcus outlines their basic business model as one of buying “cast-offs”: “It’s fantastic what they do. They talk to companies and say, ‘Well, if you’re a company that has a noncore division, maybe it’s got a lot of people, a lot of revenue, but minimal profits, then come to us, we’ll work with you, we’ll take it off your hands.’” These fragments they then put into turnaround — a process that can include, unusually for the space, taking them through bankruptcy. They have a focus on smaller deals. Their average purchase price is €8 million; they’ve paid as much as €15 million and as little as less than nothing — effectively getting paid in some instances to buy.
These are intensive, high-touch, closely managed transactions with absolutely terrific yield. Aurelius realizes, per its latest results, an average multiple on transactions of an astonishing 9x cash invested — and Marcus cites cases where it has ranged as high as 50. They’ve bought companies from a huge cross sector swath of European firms, including high-end audio big Blaupunkt, auto giant Daimler, and media titan Bertelsmann. Marcus’s recommendation of Aurelius is based, as well, on his personal view of Markus. “He’s very hungry, very driven. I spoke to him recently, and he and Aurelius are echoing what I’m talking about: Europe is the place to be. Breakups, spinning off restructurings, management changes — all of these things are going on and that is wonderful news for guys like Aurelius. There are really very few players like them.” Evermore expects the Office Deport acquisition to be a big catalyst for Aurelius, which they see as very significantly undervalued, largely because the market — though the company’s stock price has been rising steadily since the dark days of the financial crisis — has not yet really figured out how to price the company. Aurelius currently trades at €59; Evermore’s upside case puts their actual per-share NAV much higher, at €88. Closing that discount means realizing almost 50 percent upside.
Both companies, despite their differences, look poised to benefit from a changing corporate landscape in Europe. Even if economic reforms on the political side seem ever farther off, that should not be a bar to private industry looking to streamline. Whether the play is a bet on Vincent Bolloré’s strategic vision or on Aurelius as a firm uniquely placed to profit as the terrain shifts, both represent interesting risk-reward. As Marcus expresses it, “Europe is still not even close to being a highly competitive situation. Especially when you have companies that are not just pure domestic players, they’re global players that happen to be based in Europe. And there’s less tolerance for ‘tomorrow’ stories, meaning you have to fix these businesses now. You have to get them cleaned up. The excuses that have been made over the years are no longer accepted.”