Wed, 30 Jan 2013
The weak European economy is allowing firms to unlock extra value via restructurings and spin-offs, but it's better to invest while firms are still cheap conglomerates, says Evermore's David Marcus.
Russ Kinnel: Hi, I'm Russ Kinnel, director of mutual fund research for Morningstar. I'm joined today by David Marcus of Evermore Global. David is a veteran of Mutual Series funds from the 1990s and early 2000s, and he launched Evermore Global about three years ago.
David, thanks for joining us.
David Marcus: Thank you.
Kinnel: A few months ago you wrote a paper saying, Europe is the investment opportunity of a generation. Can you tell us a little about what you're thinking there?
Marcus: Sure. The situation in Europe is that investors have really been panicking over the last couple of years because of the financial crisis they've been going through. It's a real deep crisis that has really knocked these countries sort of out of commission, but I think they're knocked out in the short run, not in the long run. And I believe that companies are taking advantage of this crisis in unprecedented ways.
There is a restructuring wave that's going on. There are breakups of conglomerates that are deconglomerating. The rules and regulations are changing in different countries to allow the companies to streamline a little easier in a lower cost because the governments have realized whereas in the past they were so focused on employee, employee, employee and put people to work, now they realized if they don't help save their companies, they may not be able to save people jobs. And so the rules are changing, the regulations are changing, and these companies are changing the way they do business.
For example, look at the large company, Siemens, the big German company. They're closing facilities. They're streamlining operations. They're embracing the fact that there is a crisis and taking it to the next level, so that they can be much more competitive versus the global competitors. That's just the tip of the iceberg. It's big companies like that. Its companies like Fiat in Italy. Their factories are working at 25% of capacity, it's not profitable.
So, they're pushing back on the unions, and in this environment they can do it. So, I think it's an amazing time to be looking at Europe because I have less competition than I have had in years because most investors have really run out. They don't want to take the time to focus on it, and that's when you get your best investments when others are in panic mode or they're just not focusing on it.
Kinnel: I know you also own Vivendi, which is another of these companies that people look at and think, "Are you crazy? Look at their 10-year chart." What's attractive there? Why is it no longer the value trap that it seems to have been?
Marcus: You're absolutely right. It's true. When you look at the 10-year chart of Vivendi, I think it hit its 520-week low about five months ago, but there is a game changer. So, Vivendi as you know is a big media and telecom conglomerate, with a $20 billion-plus market cap. It's a huge business.
But now another company in France, a company called Bollore Group run by Vincent Bollore, is a 200-year-old conglomerate. He sold his TV channels to Vivendi; they overpaid for them. They used shares, and he has now amassed 5% of Vivendi. He is a ruthless value creator. He is aggressive; he finds targets. So the game changer is Vivendi is cheap. As you say, it's been a value trap for probably a decade now. But now the game changer is here, and this is a ruthless investor who pushes for change and pushes for breakups, and his track record of value creation is compelling. We've owned his holding company, which is a public stock, for years, and he has compounded his net asset value in the low 20s for almost 25 years now, so he is a great value creator. Now he is getting his claws into Vivendi, and I think that's the beginning of a ton of value coming out of Vivendi.
There is always execution risk. These things don't happen overnight, but you're creating Vivendi truly at $0.50 on the dollar, and the underlying dollar I believe is growing. So it's cheap and there is real value-accretion going on while this restructuring and transformation is happening. They've already started to put some assets up for sale. So the change is here, where in the past there was a lot of talk about how they could change the business and there was a lot of big talk about all the great things they would do, and the prior management never delivered.
Kinnel: What about the United Kingdom? They're not in the euro currency, so are there still some attractive companies there, too?
Marcus: Absolutely. So, in the U.K. we're seeing industrial companies going through lots of changes. One of our largest holdings was a company called Cookson, and the reason I say "was" is because they just broke up into two smaller companies just a few weeks ago. And so, one is called Alent, and that's the largest producer of solder in the world. They're in almost every electronic device.
And the other side, which is industrial ceramics for the steel industry and so forth, I'm not a fan of their name. They call the company Vesuvius Plc. So, maybe they're not the best at picking their name, but you now have two very cheap industrial businesses that are I what I call bite-size because I think they're both targets. And so there were no synergies among the businesses; they've broken up. In the U.K., we've seen M&A activity up almost a 100% year over year. I think we're going to see more of this not just in the U.K., but across Europe because when you have a low-growth environment, we're seeing companies buying growth and adding on pieces.
And so we're excited about these evolving deconglomerations going on in Europe especially in the U.K., and we're seeing it in the Nordic region and other parts, too, as companies are just being pushed by their shareholders who no longer want the businesses that are just so vast. Just one other quick example is in Norway, a company called Orkla. Orkla has a snack foods business. They literally make pork rinds and potato chips and ketchup, but they also have aluminum extrusion and they make coatings for solar panels. No synergies. So this company is breaking up. They're selling 70% of their assets over the next couple of years to focus on the foods and the branded-goods business. So they're keeping the high-growth business and they are dumping the other businesses. And so, this grueling process of change is going on, and it's really creating a lot of shareholder value.
A lot of investors want to come in after it's all done, but when these processes are done and these stocks are pure plays in whatever business they're going down to, they trade at much higher multiples. I want to buy it when it's still sort of in the conglomerate phase because it's so much cheaper then, and that's where we want to focus. We're deep-value investors. We want to get it when it's in that early phase.
Kinnel: And being much more Eurocentric than your world-stock peers means your fund returns since you launched about three years ago are also well behind most of your peers'. So, naturally, I'm sure people [are thinking] "What's the bull case? Why should I bet on this fund that's got lousy three-year returns?"
Marcus: Yes. It's been very frustrating. When you're not performing where you think you should, I think you could chalk it up to one or two things; either you're wrong or you're early. I think by and large we've been early. Stocks that we thought were $0.40 a dollar, in some cases are now $0.30 a dollar, but I believe the dollar is growing. So, that $0.40 a dollar is $0.30 a $1.05. It's been remarkably frustrating. But at the same time when I look through the portfolio and I see what we own, I'm very excited because the valuations are there, the catalysts are there. We really want not just cheap, but we want catalysts. We want restructurings and asset sales and transformation, the things going on that will release the value.
It's at hand. It's in Europe more than anywhere else. But it has taken longer than we thought it would take and probably will continue to take longer for some of these to evolve, but the value is so significant. I think investors should stop to take notice and really start thinking about Europe in a much bigger way, both in the euro-denominated countries and then the peripheral countries because there's a lot going on. And if you're not paying attention you're going to regret it down the line because the values are there.
And I do think that history has proved that when you look at markets and sectors that have been just beaten up and been decimated and you can take advantage of in the midst of the crisis, yes, sometimes you're early. But those people who were early in the long run were very happy, and I think we're going to look back and say "Why didn't we do even more?"
Kinnel: David, thanks so much.