Wilhelmsen: On Today’s Merger

A quick update on my opinion on today’s proposed merger. You can read the press release from the company here: http://www.newsweb.no/newsweb/search.do?messageId=408785

Expected gain for the holding company (WWIB): 30 MUSD per year (250 MNOK)

First the hard numbers. The synergies – a larger and more robust company will be able to achieve better financing terms, will need to employ fewer people as well as being able to direct their combined vessels more efficiently – are expected to result in a gain on the bottom line of between 50-100 MUSD for the new merged company, Wallenius Wilhelmsen Logistics.

Wilhelm Wilhelmsen Holding (WWIB) will own 40% of this company, which means the bottom line will improve by 75 MUSD (average estimate) * 40% = 30 MUSD per year = 250 MNOK per year. There are 46,5 million outstanding shares which means earnings will improve by 5 NOK per share. If we assign a conservative PE of 5-6 that would mean 25-30 NOK/per share. The market’s verdict today: 7 NOK.

Now that I got my scorn for the market’s ability to do simple math out of the way let’s focus on the broader picture because there is more to this merger than the gain from synergies.

The name itself indicates a gradual move which has been underway for the last couple of years away from shipping and towards inland logistics, where margins are better – and where stock valuations are much higher. WWASA is valued at a gigantic discount to book value, while inland players such as Hyundai Glovis (p/b 2) and Qube Holding (p/b 1,5) – both of which Wilhelmsen Holding hold a minority share in – are valued much higher.

There is also the fact that the Wilhelmsen’s have once again demonstrated a willingness to let go of majority control and instead focus more on releasing shareholder value. I think this trend is very clearly going to continue. Once a tightly controlled company starts to open up like this the odds of it reversing course are low. The selling off of the Hyundai Glovis shares may now have come closer and perhaps there is more streamlining to come from the Wilhelmsen Maritime Systems division in the near future as well.

Just my two cents on the meaning of today’s development. I’m curious about your view…

11 thoughts on “Wilhelmsen: On Today’s Merger

  1. Thanks for the uppdate, it looks promising/interesting. However, 46,5 million shares can be missleading to count with since Wilhelmsen ASA will issue new shares
    to Wallenius Lines AB. Hence, after the merger there should be more shares such that both owners own 40%. This could also explain why the market might not be completly terrible at math.

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    1. I accounted for that, Ruter. The company said between 50-100 MUSD in synergy gains per year for WWL. So 75 MUSD would be an in between estimate. 40% of that belongs to WWIB (the holding company), so 30 MUSD seems to me to be the right number to use.
      Wallenius gets 30 MUSD through their 40% ownership and remaining minorities owners (the market) gets the last 15 MUSD.

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  2. What’s your take on Treasure ASA? You buy a big inland player at a 40%+ discount, overhead seems minimal and I expect TRE to pass through the received dividends as either dividend or buybacks. Seems like a decent idea. Not exceptional, but simple thesis & will probably outperform a little bit.

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    1. I own it for the reasons that you list here. I see the downside as relatively well protected because of the large discount and with all the restructuring activity going on (merger, spin-off, asset sales etc) a Glovis sale may come sooner than I had originally expected. I believed they wouldn’t sell before the current EUKOR contract expires in late 2019, now I am less sure.

      The discount is now at an all time high at 42% by the way (NAV currently 29,5). It was down to 35% recently.

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  3. I’m not sure I agree with your assertion that the muted market response of WWIB shares represents the failure of the market to do math. I think it is more likely due to the transaction currently being at the LOI stage (non-binding) combined with collective market disbelief in synergy numbers for transactions as many deals get completed only to never realize the full amount of synergies that management expected. WWIB looks attractive at current prices, with or without the transaction.

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    1. Hi RS, very fair points you are making, and I have to say that the reason I write blog posts is for the opportunity to receive replies like yours, so thank you!

      I agree completely with your point that some discount needs to be applied. The only question is how much. When I wrote my post I considered making this exact point but instead opted for using an extremely low PE of 5-6 instead (would have disturbed the story telling flow to explain every decision!). The following day Nordea came out with a PE multiple of 8 arriving at around 38 NOK.

      The market’s 7 NOK increase is like saying: Take the company’s assertion and apply a 75%+ disbelief factor and I just see no reason for that given their conservative history. Added to that: This is no aquisition where the aquirer paid a premium. This is a merger and I think it is perfectly reasonable to believe there are savings both on the cost of capital as well as on staff. Even the fact that they are giving off control to do a merger ought to be worth NOKs in my opinion. So I really think the market is wrong here.

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      1. I forgot to address your other point about the agreement not being binding yet. Absolutely you have a point. But how much would you discount this by? I think 75%+ is yet another case of the market discounting _uncertainty_ too heavily rather than realistically. Would the company go ahead and put a merger in motion if the probabilities were in the 75% range of them not going through? I doubt that. If I had to assign a number I think 25% combined is more reasonable.

        I’m curious what you think is a fair percentage and your thinking when arriving at that number?

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      2. I think there is a more simple explanation to discounting the synergy value 75%:
        – the NAV discount is around 60-65% right now for WWI
        – add to that another 10% for the non-binding / unsure nature of the synergies

        In other words: Why would you expect the market applies 100% synergy AV if all other NAV is discounted 65%?

        But I agree that the merger signals probably more good things to come. I added to my position on day 2.

        I also think TRE is a superior way to play a cash offer for the 12% stake, as compared with buying Glovis outright. In a cash offer scenario this adds 66% return to your investment because the discount would disappear. Think how big 66% incr return is for this event…

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      3. Good point, Belgian Guy. Yes, that would pretty much explain the market reaction. Those discounted NOKs will represent an added upside once the discount narrows, which will have to happen at some point and I wonder whether the proposed merger will increase the likelyhood of that happening sooner rather than later.

        Yes, I agree about TRE. I see no rational reason for buying Glovis in South Korea when you can get the 35-40% discount in Norway. It seems there are players out there who are starting to see this as well as both price and volume has increased this past week. On Friday there was a 20 million NOK transaction. Maybe South Koreans noticing the arbitrage opportunity?

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