Author Topic: DDM - DDM Group  (Read 7701 times)

compounding

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Re: DDM - DDM Group
« Reply #20 on: March 05, 2019, 05:41:47 AM »
Before events today I had a high conviction that the bid would close. This recommendation makes me a bit less certain that they will reach 90%. Also what has not been mentioned here is they announced an agreement with a majority of bondholders (not 2/3, but close) which should make the risk of refinancing the bond a small risk. This new ERC announcement and statement of increasing earnings should make the financing even less of an issue.

I have been accumulating at levels 34-37,5, and have about 15% in this stock. I feel like the downside should be limited even if the offer falls through with a decent upside. Given I'm not overly optimistic on the indexes now this type of investment seems okay. Was planning on accepting the offer, now not entirely sure..

Personally, I don't really understand why the bondholders would agree to change the terms like that without anything obvious in return. But I guess 56% liked it enough to do it. You have any ideas?

The cash flow from the existing portfolios are potentially in the range of SEK 2.5 bn the coming three years (according to the Q4 presentation they have 66% of the ERC in 2019-21, and today's announcement "accelerated the collection curve"), and the net debt is SEK 900 m, so that should provide some comfort for credit owners.

The stock is super cheap, but there are some risks. The general sentiment regarding the industry seems pretty lousy, Intrum has a very high short interest and the financing costs for the industry have gone up the last six months. I'm guessing it's related to fears about IRR's going down due to competition, credit losses on existing portfolios, and the leverage/reliance on capital markets. So you could have a scenario where it stays listed, and you have a majority owner that's hostile towards the minority, and all of the above headwinds, which in a levered equity play will have a big effect on the stock. This obviously goes both ways, as I indicated in my earlier post...

Not sure about the offer either. Still haven't done anything with my position. Would be nice to hear something from some of the large stockholders, or some activist getting involved.

« Last Edit: March 05, 2019, 05:49:37 AM by compounding »
@JohanHjortsson


compounding

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Re: DDM - DDM Group
« Reply #21 on: March 05, 2019, 06:48:09 AM »
Another way to look at it, which makes it look less cheap, is to remove the cash from the net debt calculation. The press release regarding the updated ERC today mentioned they will be "fully invested", whatever that means, so I think the correct calculation is with the cash removed. That would mean net debt is SEK 1557 m instead of 900 m, as I wrote in my previous post.

In that case we are at 0.58x EV/ERC, slightly under the multiple implied by the bid in December. Still cheap, but not as insanely cheap as I first thought.
@JohanHjortsson

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Re: DDM - DDM Group
« Reply #22 on: March 06, 2019, 12:42:54 AM »
Yeah I guess we'll see exactly in the next Q, I would guess somewhere in between those two numbers (0.55?) since fully invested should mean you have some little cash on hand for short term needs. Like 3 months wages.

Regarding the bondholders they did get a bait in a 3% of nominal fee. Apart from that I guess part of the bondholders might also be shareholders? Is there a registry for checking who holds the bonds?

Also if I understand what's below correctly they made sure they can take on 100-150 MSEK more of low interest debt:

"(iii) the reduction of certain senior debt qualifying as Permitted Debt, pursuant to sub-clauses (g) – (i) of the definition of “Permitted Debt” included in Clause 1.1 of the terms and conditions of the Bonds, from 20% to 10% of the outstanding total aggregate financial indebtedness of the DDM Debt group. "

compounding

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Re: DDM - DDM Group
« Reply #23 on: March 06, 2019, 04:43:55 AM »
That's true, on the other hand, if the cash is needed for operations it's not exactly excess cash, and probably shouldn't offset the gross debt.

Yeah, I saw that. Guess maybe that was enough. Good questions, will have to look into that.

I'm thinking that the refinancing ahead and general reliance on capital markets for funding might keep Demeter a bit in check with regards to their behavior. Being delisted will raise the cost of capital, and considering DDM's size, they might even lose access to debt markets without being listed. The company is already subscale, and it doesn't make much sense financially to restrict access to debt and equity funding in that way. I'm tempted to say that the mentioning of delisting in the bid prospectus was an empty threat designed to scare shareholders into giving up their shares, but that might be taking it too far. At least it reduces som negative tail risk.

I think it's quite possible that Demeter waives the 90% condition if they don't get that much, and that they just hold on to the shares they get for 40. I think the bid committee decision confirmed the fundamental case enough to say it's a bargain at 40, so why would they not take the shares they can get at that price? Especially considering they have funding benefits from being listed.

In summary, I think the merger arb is a decent punt from here, and my current plan is to sell my shares to the bid and see what happens from there. Any criticism welcome.





@JohanHjortsson

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Re: DDM - DDM Group
« Reply #24 on: March 08, 2019, 04:04:55 AM »
After thinking about this it's clear that I also need to accept the offer. I just don't want to align long-term with these owners. However, if the bid fails I will be semi-comfortable with having to stay. And I agree with your assessment that they will likely follow through and increase their ownership even if they don't reach 90%. Holding cos have done similarly recently in e.g. Stendörren, Karo Bio.

Btw, if you are interested in this type of merger-arb play it'd be fun to hear your thoughts on Latvian Forests current situation.

compounding

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Re: DDM - DDM Group
« Reply #25 on: March 29, 2019, 09:14:45 AM »
More positive developments lately:

1. Entered into a revolving facility worth €27 m for Euribor + 350 bps, seems low in relation to their other debt
2. Sold a portfolio in Russia which resulted in a realized gain of €2m
3. Got their ERC confirmed in a third party review by on of the "big four"

All these factors would point to a value higher than SEK 40 in my view. I'm almost tempted to hold onto my shares, but there is still the risk that you are not aligned with Demeter and they try something to force you out. Whether or not the funding is sensitive to issues like that, and if that provides enough margin of safety, I'm not sure.

I took a look at Latvian Forest, it looks interesting. Seems likely that they will liquidate the company and pay out around 12.50 per share. I've noticed there has been a lot of insider purchases which sort of confirms that view. You have any additional thoughts?
@JohanHjortsson