Description

Mittel Spa is an Italian holding company undergoing a transformation. We think there will be significant share price appreciation over a 3-5 year horizon coming from a combination of NAV per share growth and the discount to NAV closing. Overall we project potential for a 3x return over a 4 year horizon with low risk of capital impairment and optionality for higher returns.

The crux of the story from our standpoint is the recent involvement of Rosario Bifulco. Bifulco took over management of Mittel in 2016. Prior to this, Mittel was a non-bank financial institution that made loans and owned real estate, both of which did not serve Mittel shareholders well as management was below average. In 2016, Bifulco came on board buying a 7% stake in partnership with a passive financial investor who bought 25%. Bifulco was appointed CEO with the goal of turning around and transforming Mittel. He launched a 5 year strategic plan that will involve the disposal of all legacy assets and massive cuts to corporate overhead and corporate complexity (the legacy Mittel had well over 50 different subsidiaries). The proceeds from the disposals will be used for middle market private equity transactions under Bifulco’s direction primarily in the consumer and healthcare sectors. The transformation has already been underway with numerous disposals to date and several new investments. We think in a few years time, Mittel will look completely different and it is in that change combined with a proven value creator at the help that is the core of our thesis.

Introducing Rosario Bifulco:

Bifulco received his MBA from Harvard Business School in 1982 and returned to his native Italy to launch his business career. Over the last three decades, he has built a reputation as one of the top executives and entrepreneurs in the healthcare sector in Italy. Bifulco built Humanitas (one of Italy’s largest and most successful hospital chains) from 1993 to 2002. After Humanitas and prior to Mittel, Bifulco was Executive Chairman at Sorin which is a cardiac surgery company where he led a turn-around and a merger with the US-based company Livanova in 2015. The share price increased more than 5x during his tenure up to the date of the merger in 2015 (granted the start date is 2009 but still substantial value creation) and has doubled again since then in terms of the value increase at Livanova.

From our checks on him, we learned that not only does he have a strong track record in his professional career but that he has also been a shrewd investor on a personal basis having made successful investments in real estate and a variety of sectors. One individual who knows him well believes he has created a net worth in excess of $100M USD, of which his own personal investing was a major contributor. This individual also noted that he is one of the most connected businessmen in Italy, highly respected, and is one of the top two or three Italian executives that he would most like to invest behind if given the opportunity.

Below are two articles in the local Italian press about Bifulco (Google Translate can help with the translation):

·         http://www.ilovepalermocalcio.com/palermo-ecco-chi-e-rosario-bifulco-lex-presidente-e-amministratore-delegato-di-lottomatica-interessato-allacquisto-del-palermo/

·         http://www.aboutpharma.com/blog/2012/12/04/rosario-bifulco-dalla-parte-dell-eccellenza-italiana/

Finally, of the several people we spoke with who either had worked with Bifulco directly or have known him for many years, each one said his ethics and integrity is beyond reproach.

The heart of our thesis in Mittel is that the market is not appreciating a massive off-balance sheet asset the company has in Bifulco as CEO and that ‘varsity’ CEOs in small ‘JV’ type companies can be a good way of making money. We think if he achieves anything close to his past value creation track record at Mittel, shareholders will do very well even assuming there isn’t a gaping discount to NAV, which there is.

Bifulco’s cost basis in 2016 was 1.75 Euros a share, a bit higher than today, and he has been buying repeatedly in the market including most recently in December of last year

Mittel NAV:

The legacy Mittel is a complicated animal with many different parts, and one has to accept some uncertainty on valuation similar to investing in a bank where one cannot know each underlying loan. We believe the uncertainty can be handled via position sizing and via some high level diligence. In the case of Mittel, the steps we took were:

• Going over the key real estate holdings with Jones Lang Lasalle in Milan who felt the carrying values were reasonable

• Speaking with a former executive at Mittel, who knew each asset intimately and felt in aggregate the NAV was reasonable

• The insider buying from current management

The below table shows the rough split up of NAV as of 12/31/17 by principal category of asset. 12/31/17 is the last available public data on the NAV break-up but the company’s CFO has told us that little has changed as of 3/31/18.

On the real estate assets first, it is important to note that the vast majority of the NAV is properties in Milan where valuations are appreciating strongly. Per our call with JLL, Mittel’s assets in Milan are neither trophy assets nor subpar but average in quality and should increase in value along with the market. The remaining non Milan portion is more at risk of impairment, although both JLL and the former executive felt these cuts if they happen would be minor.  

On the loans, this is difficult for us to assess from the outside as the loans are to private companies, but the former executive knew each well and felt again at most 10% type of reduction to the portfolio would be needed.

On the new investments, these are each transactions that Bifulcu has made since joining and consist of a nursing home company, a niche automotive components company, and a luxury ceramics tiles company. The nursing home operation was bought at 7.5x EV/EBITDA on an LTM basis, the automotive components at 3.4x, and the ceramics tiles at 3.2x. Given these valuations, strong operational EBITDA improvement in each since the time of acquisition, and the fact that each deal is in the low end of the middle market PE range in Italy where competition is much weaker, we think there is likely upside to this part of the NAV even today let alone over time as Bifulco seeks to grow each business meaningfully.

On the fund investments, the former executive felt these were all fine and could have appreciation potential.

All in all, we think current NAV is reasonable and we would make three additional valuation points. First, corporate overhead is being reduced to 5M Euros from the current higher levels as part of the strategic plan. We do not think this needs to be capitalized and deducted from NAV because we think shareholders are actually getting significant value from the management team and would view this as an asset vs. a liability. Secondly, careful analysts will see in the footnotes Mittel being named along with many other defendants in an environmental lawsuit where 3.5B Euro of damages is being sought from all defendants cumulatively. We can discuss this further in the Q&A for those who are interested, but we spoke with management about this as well as an environmental law firm in Italy to validate what management told us, and we believe there is no economic risk from this. Thirdly, there is a small tax loss carryforward which would add to NAV but it doesn’t change the valuation materially.

Valuation and Risk-Reward:

The market cap adjusted for treasury shares and pro-forma for a recent stock dividend is 137M, so Mittel is trading at a ~ 40% discount to NAV.

Our thesis is one would likely do very well investing in Bifulco even if he charged private equity fees. In our case, we are getting him without fees (although salary + stock options) and we only have to contribute 60 cents to get a $ of value in his ‘fund.’ If he can create multiples on money over time again, there will be substantial upside.   

And given an existing meaningful discount to hard asset value and a good jockey at the helm, we think the downside is reasonably well protected.

In terms of catalysts, as the transformation continues and Mittel becomes less like a complicated holding company and more a simple portfolio in much more attractive sectors, we think the current discount to NAV has room to shrink, especially as management has a plan to increase IR significantly once the transformation is complete (currently they are open to speaking to investors who call them but do not actively seek new investors, attend roadshows, etc.). Additionally, if and as the share price continues to increase, they would like to place the treasury shares which are ~7% of total S/O and would help to increase liquidity.

Risks:

Italian macro, obviously with assets like loans and real estate a cyclical downdraft would be a major risk.

Another more Mittel specific risk is Bifulco has assets outside of Mittel given his personal wealth. He has told us he spends 90%+ of his business time on Mittel, which has been corroborated by the people we spoke to who know him, but it’s important to note that Mittel isn’t his only focus.

Catalyst

In terms of catalysts, as the transformation continues and Mittel becomes less like a complicated holding company and more a simple portfolio in much more attractive sectors, we think the current discount to NAV has room to shrink, especially as management has a plan to increase IR significantly once the transformation is complete (currently they are open to speaking to investors who call them but do not actively seek new investors, attend roadshows, etc.). Additionally, if and as the share price continues to increase, they would like to place the treasury shares which are ~7% of total S/O and would help to increase liquidity.