Description

I recommend either of two actions depending on your time horizon and equity market outlook. 1) To buy GBL outright to benefit from the 30% discount to NAV and the growth in underlying assets or 2) to buy GBL and short proportional amounts of its 3 largest holdings to bet on a closing of the discount to NAV without taking market risk.

GBL was recommended by Vanbr707 in December 2008 and that write-up outlines the long-term track record of GBL and has useful links to GBL's website.

GBL (Groupe Bruxelles Lambert, GBLB BB) is the holding company of long-term partners Albert Frere of Belgium and Paul Demeriss of Canada. This partnership has a very long history of value creation. There is nothing to suggest that minority shareholders might be disadvantaged and the tax benefits of a Belgian holding company (no capital gains tax to the holding company) would argue for a low discount to NAV.

The following table breaks down the NAV

Pros

1. Albert Frère et al have a long history of value creation. See this story on Bloomberg. www.bloomberg.com/apps/news?pid=newsarchive&sid=arceEUVquXlw
2. It is a straight forward holding company; all investments are listed companies, with the top three accounting for 75% of NAV. All underlying companies are leaders in their respective fields
3. There is little slippage from the holding company structure. As a Belgian holding company, there are no capital gains taxes due, there are no withholding taxes on dividends from their French portfolio companies ( 98% of NAV). The cost of running the holding company is less than 10bps of the NAV.
4. The discount to NAV is approximately 30%, this is on the high-side post the Bertelsmann disposal...which was hard to value as a private company. The discount has been sub 10%.
5. Given the liquidity of the major portfolio companies, a return of capital to arb strategies should lead to the discount narrowing.
6. No net leverage at the holding company level.

Cons

1. The underlying companies are well followed and it is difficult to have a contrary opinion. Three of the companies have had rights issues this year which has derisked their balance sheets.
2. A lot of the historical value creation was achieved by controlling smaller companies that were subsequently sold on, at a control premium, in return for cheap equity in a larger more dominant company. It is hard to see this strategy continuing given the current portfolio structure.
3. The Buffett issue - given the advanced age of Frere and Demeriss the question remains if the next generation can be as successful.
4. The holding company structure above GBL is convoluted; a possible unwinding has long been speculated. It is unclear if this would have any effect on the discount. (Pargesa, the publically traded structure above GBL, on a look-thru basis is at a lower discount than GBL)

Catalyst

No immediate catalyst