|Shares Out. (in M):||91||P/E||0.0x||0.0x|
|Market Cap (in $M):||330||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||0||EBIT||0||0|
Background / History
RHJ International (trades on Euronext in Belgium, RHJI BB on Bloomberg) is a holding company trading at a steep discount to NAV, with several pending developments that should close the gap. Longer term, there is the potential for this to trade at a material premium to TBV, as do most European private wealth banks / asset management groups, but we’re not there yet.
RHJ has been a value trap for years (it has been written up several times on VIC), but they recently finished shedding their legacy Japanese investments and closed a long-delayed acquisition (German private bank and asset manager BHF), which I believe was bought at an advantaged price from a somewhat price-insensitive seller (Deutsche Bank). Tim Collins (Ripplewood founder) is a meaningful shareholder, and he has been pulling the strings (and fending off activists who called for a liquidation instead of the acquisition of BHF). A liquidation last summer could have been attractive, with the stock around 4 and NAV around 7, but that ship has sailed. Collins historically used RHJ as a holding company for his Japanese deals, and there were some questionable related-party deals over the years, but we seem to be to the point where there is not much more they can do to destroy value on that front. The Japanese assets have all been liquidated, and most of the cash has been spent on BHF. Collins recently stepped down from the board, while also increasing his economic exposure to the company.
RHJ has owned UK-based Kleinwort Benson for several years, and they just consummated the acquisition of Frankfurt-based BHF following several years of stop-and-go regulatory review by the German regulators (Bafin). So, RHJ is now basically a play on private wealth management and asset management in the UK and Germany, with some other pieces less meaningful. The combined entity is very well capitalized, and the merger makes strategic sense, however the road to profitability is uncertain given uninspiring standalone performance at each unit.
Please see the following link for the most recent details surrounding the merger:
To complete the deal, RHJ needed to bring in outside co-investors, as well as issue 5.5m shares to the seller, Deutsche Bank. For what it’s worth, these shares were valued at 5.56 apiece for purposes of the deal, or par value… a nice premium to market. The shares recently became unlocked (60 days post-closing, which occurred in late March). RHJI contributed its KB asset, 137m in cash, and 31m in shares, while the outside investors contributed 172m in cash, for a total purchase price of 340m. BHF has BV of 494m and TBV of 459m, so maybe the purchase price equates to 0.74x TBV.
The current structure leaves RHJ owning about two thirds of the combined KB/BHF, with the co-investors splitting the other third of the combined group. It’s more complicated than that, but not much more. The upshot is that ownership of each of KB and BHF falls out like this:
RHJ shareholders continue to own outright about 65m Euros in cash, 8m loans receivable, and relatively small stakes in German financial group Quirin (publicly quoted, QB7 GY on Bloomberg) and US-based in-flight connectivity provider GoGo, Inc. (publicly quoted, GOGO).
Following is a chart which shows NAV for RHJ in absolute and per share terms, using TBV and BV for KB/BHF.
|Pro Forma Valuation - 12/31/2013|
|Tangible||per shr||per shr|
|Book Value||91.0||Book Value||91.0|
|New Combined PW/AM Unit||700.0||774.0|
|Stake in KBG||65.8%||158.5||1.74||184.2||2.02|
|Stake in BHF||68.9%||316.1||3.47||340.2||3.74|
|Net Stake in Combined PW/AM Unit||474.6||5.22||524.4||5.76|
|Less: Integration Costs/Burn (Pessimistic)||(50.0)||(0.55)||(50.0)||(0.55)|
Most importantly, KB/BHF are currently not profitable. BHF may be close to breakeven, and KB loses money. According to RHJ, BHF lost -2.5m pre-tax in 2013, and KB lost -13.8m. They anticipate 20m+ in synergies from combining the private wealth units’ back offices, so perhaps combined this is breakeven today on a pro forma basis, but there is a lot of wood to chop. They anticipate 60m+ in combined pre-tax profit two years “post transformation” (whenever that is). On 700m combined TBV, this doesn’t seem very impressive compared to peers earning RoE’s in the low teens to >20%, but it’s better than nothing, and hopefully only the first stop.
As I will discuss below, the company intends to clean up the corporate structure and eliminate duplicative layers of costs, but to be conservative, I assume that they will burn through most of their cash in the process. This would be highly disappointing, but given this group’s history, why not. Assuming they blow 50m of their 65m cash position, we are still looking at NAV in the high 5’s per share, using TBV for each of KBG and BHF.
Pending Structural Improvements
There are several improvements management has committed to making in the relatively near term.
First, they intend to move the listing from Belgium to somewhere more convenient and visible (maybe London?) This should be a mild positive for liquidity and also visibility – there is no longer any reason for this to be stranded in Brussels (previously done for tax reasons, as I understand it).
Second, they plan to clean up the currently convoluted ownership and corporate structure. At some point relatively soon, they say they will collapse the ownership structure, such that the direct interests in KB/BHF recently obtained by Fosun Bank, Stefan Quandt and Collins are converted into RHJ shares. While they cite the potential for negotiations to make this less than automatic, they seem committed to getting it done. The co-investors should be inclined to achieve a more liquid investment once a major exchange listing is secured for RHJI, and I expect a reasonably fair conversion price, given Collins has more value currently in RHJI stock than in his recent co-investment in KB/BHF; Collins already owns 8.8m+ shares of RHJI, currently valued at 32m, vs. his recent < 14m co-investment in the new KB/BHF deal.
Peer Returns and Valuations
I looked at Julius Baer (RHJI’s CEO Len Fischer, whose background is described well in a prior VIC writeup, recently stepped down from the Julius Baer board due to pending competitive conflicts as a result of the closing of the BHF merger), Close Brothers (UK) and Beringer Bank (Hamburg). Some of these may currently seem aspirational, but they are mostly in the same business lines... just much more profitable. It is interesting to note that when we look at revenues as a % of AUM, Beringer is at 78 bps, KBG is at 65 bps, and BHF is only 32 bps. I hope there is opportunity to do better at BHF, but this discrepancy may simply highlight an inferior mix of assets. However, it also tells me there is something wrong with KBG’s cost structure, as it is the least profitable (most unprofitable) of the bunch, despite managing productive assets. Management maintains they have been in growth mode, investing in private wealth managers to build a pipeline of new mandates, and they are seeing early signs of success.
Julius Baer earns a 14% RoE, and Close Brothers is near 20%, low credit spread environment notwithstanding. They trade at significant premiums to TBV, with Julius Bear around 1.6x book and over 2.5x TBV, and Close Bros at 2-3x.
In the relatively nearer term, I am betting that as RHJ upgrades the Belgian listing to a major listing, simplifies the corporate structure and shows progress integrating KB and BHF, we should see the stock trade closer to TBV, which I hope will remain above 6, representing 65% potential upside from today’s price.
While a longer shot, if the integration is successful and KB/BHF can ultimately match its peers’ return profiles, there is a chance we could be looking at returning several times our money (over a period at least several years).