RKET - Rocket Internet

[writser]

Opening a modest topic about this because I don't want to hijack the Jumia thread every once in a while. Rocket internet was founded by the German Samwer brothers and is described by the FT as a "clone factory". Basically, what they do is shamelessly copying internet-based businesses, growing them and eventually selling them to the public. The company is a bit controversial due to aggressive business practices. Just google 'Rocket Internet controversy' or whatever and you can spend all day. Anyway, my interest was piqued by this article in the Economist last year. Recommended read.

 

For a detailed history of the company I lazily refer you to their wikipedia page as a starting point.  Rocket was founded in 2007 and went public in 2014 at a price of E42.50.  Shares traded close to E60 before going on a slump and are trading around E21 now. Last year there were several rumours that one of the Samwer brothers wanted to take the company private. What does the company currently look like? I'm taking their latest presentation as a starting point and adjusted them for a share exchange executed since then.

 

Pro forma the company has:

E2520m: cash

E1200m: the valuation of their portfolio of private companies

E300m: loans to startups

E300m: public portfolio. Rough guess. 600m in their presentation but they sold E240m worth of United Internet. Of their remaining holdings is disclosed: 8.9m Jumia ADR's, 2.8m Home24 shares, 38.9m GlobalFashionGroup shares), together ~E150m.

 

Sharecount should now be ~136m shares (151m minus 15m received in the share exchange). So: cash and public stock per share: ~E20.80. Loans and private companies: ~E11. Do I know what the private portfolio is worth? No, absolutely not. But at this point you basically get it for free.

 

According to the latest ownership filing Global Founders GmbH (a Samwer vehicle) owned ~61.2m voting rights or 37.1% of the company. However, since then the company has been buying back shares and that number of shares now represents a ~45% stake. On top of that, in the 2018 annual report these transactions are disclosed:

In June 2018, Oliver Samwer (CEO) acquired shares of Rocket Internet SE in an off

market transaction with a volume of EUR 40.8 million for EUR 27.18 per share.

In July 2018, Oliver Samwer (CEO) acquired shares of Rocket Internet SE in an off-market

transaction with a volume of EUR 29.0 million for EUR 29.00 per share. After this transaction, Oliver Samwer directly holds approximately 3.0% of the company’s shares.

I'm not completely familiar with disclosure rules in Germany but it seems to me that Samwer now owns ~47% or even a bit more and is close to triggering a 50% ownership threshold where he would be required to file a notification (but wouldn't be required to bid for the company, afaik).

 

On top of that, despite Oliver Samwer denying that he wants to take the company private, the company has been taking some steps that one could interpret als preparation.

- cash has been piling up on the balance sheet

- they've been buying back shares

- they have retired all their convertible debt

- they have closed out their cross-holding of shares with United Internet, with Oliver Samwer personally guaranteeing to buy back any shares of Rocket Internet held by United that would not be accepted in the Rocket Internet tender offer.

 

At this point, assuming Samwer owns close to 50%, buying out the other shareholders at E28 or a 30% premium, would cost less than E2000m. Taking this thing private can easily be financed by the cash on the balance sheet. Not to mention that the free float is relatively small and that other large holders might actually join Samwer in consortium.

 

So, there you go. The startup market did not have a good year in 2019. Nobody likes Rocket Internet. You can buy their private portfolio basically for free. The founder of the company has accumulated close to a 50% position and has been simplifying the corporate structure. A bid at a ~30% premium might be a win/win for everybody involved.

 

Do I hold share? No :P . Or at least, not yet. The main issue is that I'm not quite sure whether I want to own this in case it stays public for a few more years. I don't know how to value the private portfolio and my thesis is basically "it's cheap crap but it might be taken private" and I think that that is a bit too weak. Still, the balance sheet looks quite compelling to me.

 

Any thoughts? Did I make any stupid mistakes or oversights?

 

FWIW ValueAndOpportunity wrote a nice blog post about German Startups Group KGaA, a similar setup but a microcap company. I do own a few shares of that one.

[Jurgis]

I'd probably be interested to buy, but there's no ADR and I don't have a tax deferred account that can trade on German exchange (yeah, I know IB would probably allow this, but I'm not setting up IB IRA just for RKET). And this is not a stock that I'm interested to buy in taxable account since the likely positive outcome is going private with possible short term taxable gains.

 

Edit: Apparently there is RCKZF symbol but Fido is not happy: "Securities flagged as Rule 144A cannot be traded through this electronic channel." ( https://www.investopedia.com/terms/r/rule144a.asp )

 

So I'm not gonna look in more depth.

 

Thanks for the thread though.  8)

[alwaysinvert]

It's an intriguing idea going by just your post.

 

Did you adjust the cash on the books for the outlay in buybacks?

 

What's to say they will favor making a takeover offer vs continuing the slower buyback route? There's only so much room for a premium when the bulk of the company is cash+stocks.

 

Why did they go public in the first place? Just a matter of price, or to grant liquidity to owners, etc? If those reasons have changed, then the takeover thesis is strengthened. I remember Kinnevik holding a stake in this company earlier (also co-investors in Jumia, Zalando).

 

It's the type of situation which is not generally wildly mispriced (good transparency on assets and stock seems relatively liquid) if not for really bad sentiment around the company in some way. You say they are not liked, might there also be some risk that they take advantage of the minority down the line? Another possibility is that there is some hidden undervaluation in the private portfolio.

[writser]

It's an intriguing idea going by just your post.

 

Did you adjust the cash on the books for the outlay in buybacks?

Yes I think I did. The company bought back 15.1m shares but also sold a stake of 8.1m shares in United Internet AG. Net cash outflow from that swap should be ~E80m.

 

What's to say they will favor making a takeover offer vs continuing the slower buyback route? There's only so much room for a premium when the bulk of the company is cash+stocks.

Well, in an ideal world: capital allocation. With the slower route they have a few billion in cash doing nothing on the balance sheet for a few years. Of course that has been the case for a while now .. And there is also the risk that they will plow back the cash in new ventures .. Which is why I'm not holding yet. I don't really want to own the underlying assets for 5 years at the current price and I especially don't want that cash to be invested in more ventures. I mean, that might be profitable, it's just something I'm not very comfortable with.

 

Why did they go public in the first place? Just a matter of price, or to grant liquidity to owners, etc? If those reasons have changed, then the takeover thesis is strengthened. I remember Kinnevik holding a stake in this company earlier (also co-investors in Jumia, Zalando).

I can't say for certain but I think it was mostly an opportunistic move. They sold ~33m new shares and ~5m Samwer shares at E42.50 in the IPO while the company was much, much smaller. I think the sentiment was right to dump some shares on the public. As far as I can see, ever since they have done nothing with the IPO proceeds - there has been a boatload of cash on the balance sheet since.

 

It's the type of situation which is not generally wildly mispriced (good transparency on assets and stock seems relatively liquid) if not for really bad sentiment around the company in some way. You say they are not liked, might there also be some risk that they take advantage of the minority down the line? Another possibility is that there is some hidden undervaluation in the private portfolio.

Yes, another reason why I have not quite convinced myself to buy a position.

 

Regarding the (under)valuation of the private portfolio: that could very well be the case. In any case, the market valuation of the private portfolio bounced from very optimistic in 2014 to 'you can get it for free' in 2020. Sentiment shifted a bit maybe, with Uber and WeWork and similar cases in 2019. If Samwer is still enthousiastic about the private portfolio this should be as good a time as any to buy out other holders.

[alwaysinvert]

https://ecommercenews.eu/rocket-internet-wants-to-exit-stock-market/

 

 

Google tells me the squeeze-out level is 95% (!) in Germany which bodes well for the minority. Also, if they want to keep having co-investors in the venture space, it would probably not be very wise to screw Baillie Gifford, so maybe you can piggyback on them and be safe. If this is the case, the downside is pretty much taken care of and the only question is of timing and what the maximum feasible upside is. Seems pretty enticing at prices just about unmoved from this tender level. Even if Baillie Gifford and Samwer were to team up, it strikes me as unlikely they could do a takeout without either offering a premium for all the shares or doing tenders at higher prices than the current one.

[alwaysinvert]

This may not be the case in the German market or in this specific case for reasons I am unaware of, but generally today I would not expect the stock to go down if they suddenly turned around and invested much of their cash in something new. So even if you wouldn't be personally keen on keeping the investment in such an event, it doesn't strike me as a very adverse scenario. It might even give the stock a pop because of the lessened cash drag?

[writser]

This may not be the case in the German market or in this specific case for reasons I am unaware of, but generally today I would not expect the stock to go down if they suddenly turned around and invested much of their cash in something new. So even if you wouldn't be personally keen on keeping the investment in such an event, it doesn't strike me as a very adverse scenario. It might even give the stock a pop because of the lessened cash drag?

 

Might very well be true. Though that's not something I'd want to rely on when I make my investment decision. Takeovers in Germany are quite complicated. An introduction, with the ominous title: "Germany’s takeover rules are more S&M than M&A":  https://www.reuters.com/article/us-germany-regulation-breakingviews/breakingviews-germanys-takeover-rules-are-more-sm-than-ma-idUSKBN1X7112 . Or, if you want the hardcore stuff: https://www.freshfields.de/globalassets/public-takeovers-in-germany.pdf .

 

I bought a few shares today. I mean, I can't pump this here if I don't even have a position.

 

Also, as I said in the initial post, I think that GSJ is potentially even more interesting. Situation is very comparable but company has explicitly said it wants to return cash to shareholders. I have a larger position in that one.

[writser]

Also, as I said in the initial post, I think that GSJ is potentially even more interesting. Situation is very comparable but company has explicitly said it wants to return cash to shareholders. I have a larger position in that one.

 

http://www.german-startups.com/index.php/press-release-as-of-10-march-2020/

 

This equals an equity per share as per 31 December 2019 of roughly 2.70 to 2.80 euros per share (IFRS). The balance sheet items cash and current financial assets alone may make up more than 1.00 euro per share already as per 31 December 2019 and should increase noticeably through planned divestments of stakes.

 

Management does not plan re-investments of capital gains in shareholdings within the Venture Capital stage after it has taken note of the share price being penalized by the capital markets within the last years due to the limited transparency of the financial data of its portfolio companies, leading to a significant discount on the Net Asset Value (NAV) per share. As long as the share price is significantly lower than the NAV per share in the eyes of the management, it wants to use sale proceeds for further share buybacks of its own shares, subject to approval of the supervisory board, and fully exercise the legally permitted volume for the use of own shares under exclusion of subscription right. Share buybacks have become even more attractive due to the share price drop for the corona virus.

 

German Startups Group’s management looks very confidently to the further year 2020.

[writser]

Rocket released annual results. 2019 presentation: link. As of March, 31 they sold their Jumia stake. Rocket has a net cash position of 2.1b or ~E15 / share. On top of that ~1b in listed stock and loans and private companies valued at ~1.1b. Another ~E15 / share. Current price: E18.70. Bunch of options outstanding but they are far out of the money.

 

Yes, I know, Covid-19, the world is collapsing, etc. Still, Germany seems to have a pretty good handle on the pandemic, as far as that is possible. And a portfolio of internet startups should be _somewhat_ resilient. I think Rocket is too cheap right now - only question being if other investments offer a better risk/reward.

 

GSJ1, German Startup Group, similar story. E1 in cash and financial assets per share. Estimated book value of E2.70 at year end. Committed to liquidating the portfolio buying back shares. Traded as low as 1.10 a few weeks ago. Same scenario. I'm not sure how much the unlisted portfolio is worth but almost assuredly more than 10 cts / share.

 

I have a decent position in the latter one.

[Kaegi2011]

Rocket released annual results. 2019 presentation: link. As of March, 31 they sold their Jumia stake. Rocket has a net cash position of 2.1b or ~E15 / share. On top of that ~1b in listed stock and loans and private companies valued at ~1.1b. Another ~E15 / share. Current price: E18.70. Bunch of options outstanding but they are far out of the money.

 

Yes, I know, Covid-19, the world is collapsing, etc. Still, Germany seems to have a pretty good handle on the pandemic, as far as that is possible. And a portfolio of internet startups should be _somewhat_ resilient. I think Rocket is too cheap right now - only question being if other investments offer a better risk/reward.

 

GSJ1, German Startup Group, similar story. E1 in cash and financial assets per share. Estimated book value of E2.70 at year end. Committed to liquidating the portfolio buying back shares. Traded as low as 1.10 a few weeks ago. Same scenario. I'm not sure how much the unlisted portfolio is worth but almost assuredly more than 10 cts / share.

 

I have a decent position in the latter one.

 

This seems really interesting... Not sure I've seen a lot of companies trading for effectively their cash position (my first stock in Gateway Computers way back was when they were trading at 70% cash value, but haven't been looking out for them).  Seems like low downside. 

[DW1234]

This might deserve it's own thread, but I've been trying to figure out what shareholders of GSJ.de are paying to the General Partner.

 

- 2.5% of book value if BV is <€50M. 2% if it's >€50M. They waived their fee several times since 2017, taking 1.5% instead of 2.5%. Current BV is ~€30M, for a total fee of ~€750K assuming they stop waiving their fee.

 

- Fixed remuneration of €200K per year for current management. This increases with €8K each year.

 

- GP is allowed to expense all costs incurred for doing business, but also is allowed to hire 3rd parties (lawyers, tax advisors etc) in his own name on costs of GSJ.

--> This one sounds a bit shady (?)

 

- Shareholders are also paying for GSG (German Startups Group Management, which is authorized and obligated to manage the company) personnel expenses of €80K.

 

I'm not German and details could easily have been lost in translation/understanding, so I'd love to be corrected if I'm wrong. All of this summed up would be €1M+ of fees a year if they take advantage of all of it.

 

This is quite a lot for a 17M marketcap, 30M BV company and would definitely warrant a discount. I do still think this is undervalued with €2.77/share in equity and €1+ in cash for a current price of €1.53.

 

They mention they'll be switching to an 'asset manager' model to close the gap between shareprice and IV. Does anyone have an opinion about this? Fact is they'll still be investing in illiquid, hard to value start-ups, but getting rid of taking €1M+ a year in fees could help...

 

 

[writser]

-

[writser]

Oops. I accidentally deleted my previous post while trying to reply ..

 

Anyway, this seems like an interesting development: http://www.german-startups.com/index.php/ad-hoc-announcement-as-of-15-july-2020/ .

 

Hard to judge if the 'exchange ratio' is fair because the press release is a bit light on details. But seems like a positive development.

 

Also, if my understanding of German law is correct, with the number of shares increasing 6x to 15x and the new owners in a lock-up agreement, future tender offers could be much larger without crossing the 10% treasury share threshold. I.e. they can effectively buy out all minority holders in a single year, while right now they are limited to buying back 1.5m shares / year.

[writser]

CEO doing some decent buying:

 

https://www.dgap.de/dgap/News/directors_dealings/kauf-gerlinger-partner-gmbh/?newsID=1370759

https://www.dgap.de/dgap/News/directors_dealings/kauf-gerlinger-partner-gmbh/?newsID=1370763

[DW1234]

I've read their PR, I've read this: https://www.wallstreet-online.de/diskussion/1230976-2751-2760/german-startups-group and I still don't really know what's going on. Is there somebody who can explain this to me like I'm 5?

 

Btw, the CEO occasionally responds in that thread. Currently I'm just waiting to see what happens. The CEO is buying more shares and there's still some discount to NAV, so even if this deal collapses it shouldn't matter too much.

[writser]

If you want the bearish take: https://valueandopportunity.com/2020/07/16/transaction-updates-german-startups-group-sell-miko-sell/ . The no-carry part is bad. But the fact that it if you vote for the deal you will be diluted by a factor 6 without knowing whether the PE fund has actually raised money and that the auditor was not allowed to see the commitments is really terrible. I have to read the small print myself yet but if that is true I will not be voting for this deal.

[Hielko]

Sounds pretty sketchy.

[writser]

Back to Rocket Internet:

 

https://www.rocket-internet.com/news/rocket-internet-se-rocket-internet-se-decides-on-launch-of-public-delisting-self-tender-offer-and-convenes-extraordinary-general-meeting-parallel-share-buyback-program

 

Proposed delisting at rock-bottom valuation.

[writser]

I think you can make a point for buying some shares here. Shares are trading around E18.61, or only a few cents above the E18.57 Rocket is planning to go private at. Perhaps a bit pointless to do this exercise a few days before the Q3 results, but using the latest presentation:

 

1.9b cash

0.5b liquid stocks

0.1b illiquid stocks

1.0b private companies

0.7b loans granted

 

A total of 4.2b with ~136m shares outstanding makes for a NAV of about E30 / share. As far as I understand this is not a mandatory going-private transaction (though that might be a next step) but a voluntary tender offer. Insiders owning ~50% of shares outstanding will not tender. It remains to be seen what other large holders will do, but looking at the shareholder composition it seems very possible that they will manage to buy 25%+ of shares outstanding, the delisting being the stick. That would cost ~650m and increase NAV / share to ~E35, with still a lot of cash in the bank.

 

So, if you buy now, what are some possible outcomes?

 

1. The company buys back a ton of shares at E18.57 and subsequently squeezes out other holders at the same price. Result: break-even.

2. The company buys back a ton of shares and you are stuck with an untradable (but very cheap!) position. Result: unknown, probably not too bad.

3. There will be a small price bump. Result: decent short-term profit.

 

I don't think option 3 is unlikely at all. The company is now literally offering one cent more than the lowest allowed price. It seems very likely activists will emerge. Or perhaps BaFin feels the need to stir up the pot, god knows they could use some good PR after the Wirecard disaster. Also I think it's not impossible that Rocket itself will bump the price a bit, maybe a E20 bid or whatever was the plan all along and a small price bump might placate shareholders more than an initial bid of E20.

 

Regarding option 2, if you are fine with the illiquidity this might be preferable to tendering. A secondary market might pop up somewhere, or in a few years Rocket might try to buy you out at a better price or there will be another liquidity event. The risk is of course that you don't know what the end-game plans of Oliver Samwer are. The current plans make clear he's not exactly Warren Buffett ..

 

I'm not sure how much I like this idea (no position currently). It still needs a bit more work. What are the chances you can still trade shares somehow after the tender offer? I don't know. If insiders end up owning 75% / 80% / 90% / 95%, what options are available to them to squeeze out other owners? I don't know yet.

 

But all in all this looks like an intriguing idea. In short, it seems like it is hard to lose money here and there could be some upside. And forced selling / panic due to the upcoming delisting could lead to some opportunities, might not be the worst idea to put in some effort beforehand.

[DW1234]

Nice idea.

 

The big risk is RKET going private and then tendering for the rest of the shares for the same price a few years down the road.

 

https://www.lexology.com/library/detail.aspx?g=4228d3d6-17a5-4bb0-a55e-d0a264af3542:

"The shareholders may apply for judicial review of the offered purchase price and claim the difference between such purchase price and the company's actual value (either by way of an individual action at court or, as the case may be, a class action)."

 

So that's hopeful but overall it doesn't look like shareholders have a lot of power in these type of situations from the looks of it. BaFin approved their offer on the 9th of September. So odds of them intervening are probably low. These shares have traded on a relatively liquid market for 6 months, so their decision to approve this offer is understandable.

 

It also looks like shares will be delisted from every regulated market. Making a delisting offer like RKET did (cash offer for all shares outstanding) only happens when there is a full delisting on the regulated market, they do not apply to partial delistings with some shares remaining listed on other German or EU regulated markets. But it will probably still trade OTC, liquidity will probably be very low though.

 

I am very interested to know of comparable examples. Have there been price bumps, have there been attempts to make a squeeze-out (95% share ownership required), what was the timeline? If there are any German investors with experience I would greatly appreciate some extra input.

 

 

[writser]

Samwer started a Blitzkrieg .. The tender offer has launched, is open for one month (1 - 30 October) and the company will already submit a delisting application while the tender offer is running. Samwer is obviously trying to scare minority investors into selling. I think you can make an argument that buying and NOT tendering is the play here. A couple of ways to win here:

 

- Small chance that share will still be tradable on Tradegate or the FWB specialist market. Pro forma the company would be worth even more.

- BaFin could step in. The Frankfurt Stock Exchange still has to approve the delisting application.

- Another tender offer within a year or two is another possibility.

 

And minority holders in Germany have some firm rights: https://corpgov.law.harvard.edu/2014/06/07/shareholder-activism-in-germany/ . In particular, they can request an appraisal in certain circumstances and there's a history of this working out nicely for shareholders ( https://www.value-trust.com/wp-content/uploads/2019/11/German-Takeover-Endgame-Report-2019.pdf ). In this case I think it is pretty clear that there is way more value than the E18.57 offered. Just check all the company presentations touting E28 / share in assets (and that number would be even higher after the tender offer).

 

All in all, I am considering buying a small stake and holding on to the bitter end. The risk is of course that you end up owning something you can't sell and that Samwer is going to play hardball (and that risk is real) but given the rights of minority owners it wouldn't surprise me if Samwer is going to be a bit more accommodating to the last few shareholders.

 

I need to do more work on this idea. Obviously a key issue is whether you can tag-along with a lawsuit and what will happen if you are lazy and do nothing.

 

Some background reading:

https://www.economist.com/business/2020/09/24/why-rocket-internet-has-come-down-to-earth

https://www.sueddeutsche.de/wirtschaft/kommentar-ohrfeige-fuer-die-anleger-1.5042772

 

[Guest cherzeca]

I have been in David fights against a hardass Goliath and I can tell you it is no fun.  when I have won (not often), I have had a very strong edge (legal edge together with someone who could provide very good access to pissed off minority holders...in my case, limited partners).  and the upside was worth it, discounted for risk.  and you have to be proactive (inaction is not your friend).  looking back I smile and think I must have been crazy

[Spekulatius]

Writser, thanks for keeping this active. It is indeed an interesting situation. One problem with the German takeover law is that the Gewinnabführungsvertrag  typically stipulates just a fixed payment, so what you own after that is essentially a preferred share.

 

The pundits in wall street online.de seem to think that the shares will continue to trade in the dark market in Hamburg, but I don’t think Interactive Broker can trade on this exchange. Also it appears like the owners want to pivot this business to real estate and I am not sure this is a good idea. They seam hell bent not to distribute anything to owners though.

 

This is in the too hard pile for me.