Description

Situation Overview

Lundberg is an ~$11bn (USD) Swedish holding company (‘holdco’) trading at a 10% premium to its Net Asset Value (‘NAV’), near all-time highs.  80+% of Lundberg’s NAV comprises investments in liquid, publicly traded companies, with the remainder in private Swedish real-estate assets. The portfolio is largely static over time, with low turnover.

Lundberg’s own history—and those of similar European holdco’s—suggest a ‘normal’ holdco discount of ~20%, reflecting 30% downside from here.  On a blank sheet of paper, we see no reason to pay a premium to NAV for a portfolio of public securities and vanilla real estate, layered on top of which is $50m (0.5% of NAV) in annual G&A.

Chart of Lundberg’s historical premium/discount to NAV:

Business/Industry Overview

Founded in 1944 as a construction company, Lundberg has become one of the largest Swedish holding companies managing the wealth for the Lundberg family. It was started by Lars Lundberg and has been run by his son Frederik Lundberg since 1981 (took over when he was 29, now he’s 68). In 1983, Lundberg began diversifying into investments outside their core construction and real estate operations.

Lundberg’s entire NAV is comprised of investments in publicly traded companies and private real estate operations. The public portfolio is 83% of NAV across investments in 8 companies. There is minimal portfolio turnover, with the majority of public investments held for 10-15+ years.  The current public book comprises (in order of size with Bloomberg ticker(s)): Hufvudstaden (HUFVA/C SS Equity, ~19%), Industrivarden (INDUC/A SS Equity, ~18%), Holmen (HOLMA/B SS Equity, ~16%), Indutrade (INDT SS Equity, ~12%), Sandvik (SAND SS Equity, ~6%), Handelsbanken (SHBA/B SS Equity, ~5%), Skanska (SKAA/B SS Equity, ~5%), Husqvarna (HUSQA/B, ~3%).

The private real estate portfolio is 17% of NAV and split between ~40% residential, ~35% office, ~17% retail and 8% other. The real estate book is marked to market quarterly (~4.2% avg cap rate in 2018 using a combo of external valuation and internal calculations on an individual property level based on comparable location/price data and PV of future cash flows), typically does not significantly fluctuate in value, and leverage is low (~20-25% LTV). Including their investment in publicly traded Hufvudstaden, ~35% of the portfolio is invested in Swedish real estate.

Altogether, the Lundberg sphere (Frederik the CEO and his daughters) own ~70% of the company and hold ~93% of the vote (through a private share class with 10x voting rights)

What are European holdco’s and why do they exist?

Holdco’s are publicly traded investment vehicles with holdings across a variety of private/public assets. Many holding companies were established to manage the investments for wealthy families, who in most cases still have a significant/controlling ownership stake. The chief reason these holding companies exist is due to favorable tax treatment that allow them to pay virtually no tax in their home jurisdiction. These tax advantages are most prevalent in Europe.  Other large European holdco’s include EXO IM Equity, GBLB BB Equity (and their own parent co PARG SW Equity), INVEB SS Equity, INDUC SS Equity, and LATOB SS Equity.

With respect to taxation in Sweden…

Holdco’s are exempt from capital gains tax. Dividends received are taxable, however, these can be offset by paying out dividends which are tax deductible. There is an annual tax of 1.5% on the market value of shares owned at the beginning of each year at the 22% corporate tax rate (i.e effective 33bps rate), however, this excludes unlisted assets and listed assets where the HoldCo has held >10% of the votes for a year. Therefore, it is possible to pay no tax, and at worst the tax is de minimis.

Another common feature is dual class shares where one class has significantly higher voting rights. This allows HoldCo owners to minimize economic ownership but retain voting control.

Valuation

European holdco’s have typically traded at a discount to NAV.  Today, the average discount of the universe of holdco’s listed above is ~15%.  Historically, the average discount has been more like 20-25%. We’ve observed short instances of certain European holdco’s trading at premiums to NAV, which have typically reversed quickly.

Thesis

Lundberg is currently trading at an ~all-time high 10% premium to NAV, which is comprised 83% of investments in publicly traded companies that can be marked-to-market daily and 17% in private real estate which the company marks-to-market quarterly with minimal fluctuations.  We do not believe an investor should be paying a premium to NAV for a portfolio of liquid public securities and real estate held at fair value.

Throughout its own history Lundberg has traded around a 20% discount to NAV.  This is consistent with the histories (and current trading levels) of similar European holdco’s.  Lundberg has briefly traded above NAV several times historically, all of which eventually reverted to a discount.

Why might the premium exist?

Some have speculated the driver of the premium to NAV has been its recent inclusion in the OMXS Benchmark Index and scuttlebutt of a merger with another publicly traded holdco Industrivarden. We’re happy to take the other side of the former, while we discuss the latter below.

Merger with Industrivarden

Industrivarden is also a holdco but is unique in that there is no controlling family ownership (it was established in 1944 by Handeslbanken as a vehicle to gather and distribute shareholdings accumulated in the 1930s in the wake of the global market crash. Over time it evolved into an asset management business). There are two publicly traded classes of shares. The A shares carry 10x the votes of the C shares.

Lundberg initially invested in 2002 and has gradually increased their influence over time (including share purchases in the last few months). Frederik Lundberg has been on the board since 2004, was named Chair of the Board in 2015 and is a significant influence over the investment decisions. This can be seen by the fact Lundberg and Industrivarden have several overlapping holdings. Currently, the Lundberg sphere owns ~21% of the shares and just over ~29% of the votes (through A share ownership). At 30% of the votes, a mandatory takeover bid is triggered under Swedish corporate law. Since its initial investment, there has been consistent speculation of a merger (see DNB market’s analyst report from March 2019 for details).

M&A has been rare among holding companies, however, the few deals that have been done were typically when the investment portfolio’s overlapped and there was some cross-ownership that could be dissolved. Cost synergies were typically not a consideration. Lundberg/Industrivarden tick all these boxes, and a potential deal would be made easier by the fact that there is no controlling shareholder at Industrivarden. Looking at historical holdco mergers, we find that deals were typically done somewhere between the prevailing discount and NAV (i.e the acquirer didn’t have to pay above NAV, shareholders were still willing to accept a deal at a discount).

We suspect a potential acquisition of Industrivarden could be done somewhere between NAV and the current discount (10%).  In the worst-case (for the short) outcome of a deal done at the current 10% discount, we calculate ~10% accretion to Lundberg NAV.  This would leave Lundberg trading at parity to NAV, still ~20% expensive vs history and norms.

Trade structure

Short Lundberg and hedge by buying the underlying public holdings. This leaves you exposed to mark-to-market of the private real estate portfolio.  You could short additional Hufvudstaden as a proxy for the private real estate book.

If you are worried about a potential merger, you could own some Industrivarden as a hedge.

Other considerations

Holdco’s report quarterly and update all of the various components of their NAV. There is typically very little portfolio turnover, so it is easy to set up a spreadsheet to track the premium/discount on an ongoing basis with accuracy. Lundberg does not hold earnings calls.

We think Lundberg’s portfolio of underlying holdings is mediocre, primarily comprised of companies with defensive characteristics (e.g banks, forestry, construction, manufacturers, real estate). They’ve said they want to avoid sectors characterized by technology changes.

Catalyst

Reversion back to standard 20% discount

Disclaimer

This presentation is intended for informational purposes only and you, the reader, should not make any financial, investment, or trading decisions based upon the author's commentary. Although the information set forth above has been obtained or derived from sources believed to be reliable, the author does not make any representation or warranty, express or implied, as to the information's accuracy or completeness, nor does the author recommend that the above information serve as the basis of any investment decision. Before investing in a security, readers should carefully consider their financial positions and risk tolerances to determine if such a stock selection is appropriate. At any time, the author of this report may trade in or out of any securities that are mentioned in the report as long or short positions in his own personal portfolio or in client portfolios that he manages without disclosing this information.

This report’s estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor. This is not an offer to sell or a solicitation of an offer to buy any security.