TESB.BR - Tessenderlo Group

[Jurgis]

Thanks. I guess from your writeup that there won't be any proxy prevoting for this? I.e. investors have to be physically present at the meeting to vote against? If that is correct, I don't see how "no's" will corral enough people to oppose.

 

Although, "yes's" don't have a point to show up at the meeting either. So "no's" need to corral just 11.5% (assuming Tack won't grab additional "yes's" to the meeting just in case) holders to attend the meeting. Might be possible, but still hard.

 

Disclosure: I am marginally pro-yes. Won't attend the meeting in either case though.

[misterkrusty]

Here's why I think this proposed merger should fail:

 

1) management's valuation for Tessenderlo does not give proper credit to new projects that will impact EBITDA in 2016 and 2017.  They consider a blend of 2015 and 2016 multiples, which gives only half credit to EBITDA gains in 2016 and none to gains in 2017.  Meanwhile, management has identified no projects underway at Picanol to boost EBITDA, and in fact forecasts a decrease in profit for 2016E.

 

Specfically, these Tessenderlo projects are:

 

a) East Dubuque ATS plant - scheduled to go online 2h16

b) French ATS plant - currently under construction, possibly online in 2017

c) massive EBITDA increase at Bio-Valorization in 2016 per management's own projections in the merger docs

d) gold leaching project to reach full capacity in 2017

e) re-start of TC Loos water-treatment plant in 2017 ... they are investing 50m to convert this facility.  At a 20% IRR (similar to my estimated returns on the ATS plants) would be 10m EBITDA. 

 

If I knock off 10m for SOP over-earning but add 10m from TC Loos, then EUR 31.50 equates to 7.2x 2017E EBITDA of 218M.  And that's assuming no more positive surprises to earnings, which seem to happen all the time.  Tack has historically sandbagged estimates for Tessenderlo by a wide margin.  In any case, 2/3 of this 218M will come from specialty chemicals ... take a look at where well-run, growing specialty chem companies trade and ask yourself if 7.2x is fair.

 

 

2) Their valuation for Picanol is somewhere between fair-to-aggressive for a cyclical business whose growth prospects are uncertain.  At 811m EV, it's valued at 14.6x NOPAT - taking the average of 2011-2016E.    2015 sales will likely come in below 2002 sales of 523.9M.  Admittedly, Tack has done a fantastic job expanding margins, but they don't seem to be expanding any further.

 

 

3) Management has essentially admitted their are no real synergies from this deal!!!  without synergies, why would you do it?  I think the only possible explanation is that they are getting better terms than the other parties.

 

Sure, the merger would give Tessenderlo better access to Picanol's free cash flow.  But Tessenderlo doesn't need Picanol's cash.  At 9/30/15, net debt to 2016E EBITDA is only 1.4x!!  (and that's including the 203M of provisions.)  They can easily borrow more.

 

Perhaps one could argue that this deal is simply a way to remove any valuation penalties the market is placing on the Picanol business due to low-float and lack of analyst coverage. But this explanation fails because the merger would simultaneously create a holding company which will be valued with a holding company discount by the market.  I would argue this discount has already been applied with the recent downturn in Picanol shares.

 

Further, the creation of Pica Nobel NV opens the way for Tack to squeeze-out minority shareholders in Pica Nobel without de-listing the Picanol business.  (Tack has frequently cited the need to keep Picanol public as the reason why he would not try to squeeze-out minorities in Picanol, but if the merger goes through, Picanol would continue to be public even if the Pica Nobel NV holdco were collapsed.)

 

 

Conclusion:  Tack is a great businessman but that doesn't give him the right to abuse minority shareholders. 

 

 

[skanjete]

It seems like minority shareholders will, at least partly, have it their way.

Tessenderlo and Picanol are postponing the Shareholders Meeting and considering different terms to the merger...

 

I wonder what the new terms will/could be. Will Tack still end up with a majority in Tessenderlo?

 

What's happening right now is specifically why I chose to own Tessenderlo in stead of Picanol, although Picanol was very undervalued as well. At around 30% ownership, Tack had enough power to change Tessenderlo drastically without having the power to do everything he wanted... 

[thefatbaboon]

Personally I don't agree that this deal took advantage of minorities. Although there are no synergies so in that sense it is a deal that primarily helps the investment structuring of tack and co. It's not of much use to tesb minorities.

 

Krusty above and wittmer in the call make very rosy estimates of future projects. For example bio val is very problematic and gold leach almost totally unproven. Furthermore almost no one gives credit to the impressive fcf conversion of picanol. While tessenderlo has spent the last few years really struggling, picanol has been throwing off a ridiculous amount of fcf. Personally, think the tessenderlo investors should be more excited about having picanol withinthe group. It's a shame that tack did not do a better job of emphasising to the minorities that no one is getting cashed out, that this is a relative value trade. It's  a matter of picanol getting folded in, and if a particular shareholder wants to maintains the identical investment in old tessenderlo they can buy more shares and voila they have same amount of the chemicals business as before.

 

Now obviously they can't buy more chemical without getting more picanol. Which they may not want. In that sense I do understand the minorities. If we want picanol we can buy it already. So if you, tack, want this deal for your own reasons then you need to pay up.

 

Personally I don't take this position because I think the relative valuations are fair and because I am not being disadvantaged in the relative values I am happy to vote to help out tack even though it doesn't benefit me. I feel no need to take a pound of flesh the way I would if I were being cashed out. I am very happy that he has not forced any going private deals on us. Which would be horrendous. Even if they were to occur at a multiple that Krusty and wittmer thought more "fair". I don't care a damn about a one off cash out multiple! it's about being able to stay in business with a wonderful partner who pays himself nothing and runs these businesses like a wizard. Who Cares about 9 times or 10 times or 11 times. It's so short sighted and stupid. And I can't believe wittmer immediately started insulting tack on that call. It's embarrassing- and as a Berkshire shareholder I would have hoped one of my directors was a little more politic and understanding of what will truly benefit the long term shareholder.

 

 

 

[misterkrusty]

My estimates are not "rosy" at all-

 

With respect to Bio-Val, I am using management's own estimate of 30.3M EBITDA for for 2016, and the exact same amount for 2017.

 

With respect to their gold-leaching product, I am using management's own estimate of 43.8M EBITDA for Industrial Solutions in 2016, and increasing that number by a whopping 2.9M to reach 46.7 million in 2017 as gold-leaching reaches full production in that year.  Even if this were a total flop, my 2017 EBITDA number would only drop by 6M (management's estimate of gold-leach EBITDA at full production) to 212.2M.  It's almost immaterial.

 

I think you're putting too much emphasis on FCF conversion ... yes, Tessenderlo is investing heavily right now and thus FCF is depressed.  But so what?  These are projects that should yield good returns - >20% IRRs in most cases.  Why should this be considered a negative?  By 2018 the announced projects will be completed and Tessenderlo will produce much more FCF.  (Unless Tack finds more worthy projects, which would be a good thing.)

 

Tack is a great operator/capital allocator, but that doesn't make it OK to abuse minority shareholders.  The opposition to this deal is completely logical and will likely result in Tessenderlo minority shareholders getting a better deal.  They can still "stay in business with a wonderful partner."

 

By the way, this "wonderful partner" is not paying himself nothing if he manages to grab an undeserved % of the merged companies.

[netnet]

So, am I hearing that Tesb is a better buy now that the combination is being rejiggered?

[NeverLoseMoney]

For Barron's Roundtable, Meryl Witmer made a recommendation for Tessenderlo (you can Google the article title to get access): http://www.barrons.com/articles/barrons-2016-roundtable-part-3-12-stocks-that-could-outperform-1454131664

[netnet]

So here is a mental model (courtesy of Sanjay Bakshi), buying a company run by a an intelligent, honest fanatic.

 

Well it seems to me that is what we have here.  I must say that I'm not all that attracted to the European industrials in general, but there is a huge amount of fat in the sector* and we seem to have a

• Reasonable valuation
  
• A reasonable runway, lots of sleepy industrials
  
• and an intelligent fanatic
  

 

*3G shows that there is considerable fat in even parts of the Anglo American consumer sector, where you might think chubby, but not profound obesity.

 

[thefatbaboon]

Another very impressive fcf year from picanol. With outlook for record year in 2016.

 

As the tesb minorities 1) seem so anti a picanol merger and 2) the tesb share remains low, I don't see why doesn't tack just keep buying tesb using the picanol fcf

[60North Investments]

Full year results, very good indeed. Q4 comparable sales +17%, comp. EBITDA +100% (excl. forex +86%, EBITDA margin 10.2%). For the full year, sales excl. forex were up 6%, with EBITDA up 19% (headline numbers +11% & +34%, so big impact from forex).

 

FY EBITDA 192m€, guiding +15-20% for 2016 (220-230m€). EV is currently at 1.33b€, so 7x 2015 EBITDA or 6x 2016 mid-guidance.

 

[skanjete]

Both companies had quite a stunning 2015, thanks to Tack & co.

 

Both are undervalued by the market as well. Tack and his team have a history of creating value, lots of it.

Whatever the result, a merger or not, shareholders will do very well in future.

 

 

[skanjete]

The merger proposal has been withdrawn.

 

I'm not sure if this has to be considered as good news.

[mateo999]

Any thoughts on the quarter?

[kysr]

Tack has been indirectly loading up on shares the last three weeks.

[bonkers]

kysr, can you fix the link, please. Where can you see insider buying in Belgium?

[farbelow]

kysr, can you fix the link, please. Where can you see insider buying in Belgium?

 

The proper link is http://www.fsma.be/nl/Supervision/fm/ma/trans_bl/TransactionsSearch.aspx?s=1&from=&until=&c=tessenderlo

[namo]

There's this site as well - not the official website, but also more user-friendly: it displays the number of shares bought each time.

[kysr]

Tack keeps on loading up on shares:

 

http://www.fsma.be/nl/Supervision/fm/ma/trans_bl/TransactionsSearch.aspx?s=1&from=&until=&c=tessenderlo

 

Slowly gaining a majority stake in Tessenderlo and then realizing the Picanol merger?

[skanjete]

If one looks at the results and share moves of Tessenderlo and Picanol today, one can't help but wonder whether the proposed merger was a fair deal or not... ;-)

[skanjete]

Results at Tessenderlo were better than first view suggests :

- EBITDA : +15%

- Book value over the past year : +15%

- bio valorisation EBITDA positive again

- they're pushing the pedal in : investments more than doubled to 47m

- cheap : EV/EBITDA about 6

- EBITDA margin now of about 14%. Cfr. my third post on this thread about the possible EBITDA margins...

 

And this with challenging conditions :

- difficult year for Kerley

- importantly : currency movements were an important headwind

 

What will happen in prosperous conditions???

[skanjete]

And Picanol's results were again, well, stunning...

 

No more needs to be said.

[kab60]

Hi Skanjete

I really appreciate the work you've done. Do you have a take on maintenance capex? And what's the reason for the increased finance costs in H1 2016 (pension obligations?). Did you do a relative valuation; ie who are the peers, and what do they trade at?

[skanjete]

Hi Skanjete

I really appreciate the work you've done. Do you have a take on maintenance capex? And what's the reason for the increased finance costs in H1 2016 (pension obligations?). Did you do a relative valuation; ie who are the peers, and what do they trade at?

 

Maintenance capex : it is difficult to make a clear distinction between maintenance and expansion capex. The situation at the moment Tack took control was that a lot of the necessary maintenance capex had been postponed under the previous management and plant & equipment was really worn out. Which in turn lead to the fact that Agiolis f.e. (bio valorisation) wasn't competitive anymore. Thus Tack started an extensive maintenance capex campaign to rectify this. A lot of the capex is thus maintenance, but leads clearly to more efficiency and higher EBITDA, just as expansion capex would do.

 

 

Finance costs H1 2016 : interest costs are clearly lower than last year due to the refinancing last year. But in finance costs are also (unrealised) currency revaluations of inter company loans. This is a delta of about (by heart) -29m€. This is a reason why I said they had an important currency headwind.

 

Competitors : I referenced to them in my third post on this thread. An EV/EBITDA of 6-9 is common. But 6 is for companies with lower margins and lower quality. The quality and margins of Tessenderlo are definitely higher than it was 2 years ago, so they gradually deserve a higher valuation as well.

 

By the way : all my assumptions from that third post 2 years ago have been met or surpassed already in 2015 and 2016, if one takes into account the rights issue of end 2014 which I hadn't counted on. For me, this is sooner than expected. EBITDA margin now at 14%, EBITDA per share at an equivalent of 6€/sh (before rights issue). Also the market cap has followed, albeit at a still low valuation. The share price is somewhat lower than expected, because of the rights issue. But the return is still the same since shareholders had the opportunity to participate in the rights issue at 16,5€/sh.

[mateo999]

Skanjete,

 

At the risk of being hugely obnoxious (my wife is used to this, but perhaps not the board here), would you mind sharing your updated valuation framework for TESB?  Also, given the dynamic whereby Tack may want to keep a lid on TESB's share price while PIC can buy more (and perhaps punish Witmer at the same time), how do you see catalysts (or the lack thereof) playing out over the next 12+ months?  Is there a price where TESB just becomes a no-brainer buy, even in these challenged ag markets?

 

Thanks in advance,

Mateo

[farbelow]

...given the dynamic whereby Tack may want to keep a lid on TESB's share price while PIC can buy more (and perhaps punish Witmer at the same time), how do you see catalysts (or the lack thereof) playing out over the next 12+ months?  ....

 

My take on Tack is he is not in the share price manipulation game. He just tries to run his companies well and doesn't care about what the market thinks it is worth. If the share price goes up, great. If it goes down, great too, because then he buys stock. And it does not matter whatever Witmer said, or what the plans with Picanol are. He would be buying on a low price regardless: through private account, his holding company, share repurchase or through Picanol.

 

Tack is in it for the long haul. That is why I believe he would be buying whenever he can.