|Shares Out. (in M):||84||P/E||0.0x||0.0x|
|Market Cap (in $M):||300||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-311||EBIT||0||0|
RHJ International is not a continental European bank but last year it traded like one, currently selling for less than the cash equivalents at its holding company (pro-forma for the recent Asahi Tec sale) and possessing very compelling upside (134% to their adjusted September stated NAV).
RHJI was created in 2005 when Tim Collins, the founder of private equity firm Ripplewood, IPO’d a number of his funds Japanese private equity positions in a Brussels holding company. RHJI has subsequently transformed from a portfolio of Japanese LBOs into an investment vehicle for European financial businesses, thus far accumulating a private bank in England and a number of other small positions.
RHJI has been written about before on VIC which has good background detail. Investments have cycled in and out of RHJIs portfolio since then. I will focus briefly on the current major stores of value.
Holdco Assets (as of Sept 30 and Pro Forma for Asahi Tec Sale) - €311m
Cash at 9/30: €153m
Loans at 9/30: €19m
Proceeds from sale of Asahi Tec: €139m
Pro-forma financial assets at HoldCo: €311m
So that’s more than the market cap. Let’s talk about what else you get!
Kleinwort Benson Group
The KB Group began with the purchase of Kleinwort Benson in July 2010 for €256m, which subsequently acquired KBC Asset Management in October 2010 for €24m and Close Offshore Group for €29m in June 2011. These businesses combined are a very financially stable entity and should not face solvency/liquidity issues or extinction risk based on events in Europe. So what is this worth today?
Kleinwort Benson - €128m - €256m
From a high level standpoint the original KB purchase, while negotiated with a forced seller (divestment from Commerzbank announced in Oct. 2009 and closed in July 2010), appears to have been done a little too early. KB has most of its assets denominated in Sterling/USD and today has a core tier 1 capital ratio of 19%. This bank should not have the same risks associated with a continental European bank.
From their last update
Kleinwort Benson Group remains resilient with a robust balance sheet and a Core Tier 1 ratio of 19% at September 30, 2011, and strong level of liquidity. The Group has no exposure to Portuguese, Irish or Greek debt and only limited exposure to Spain and Italy, with the majority of assets maturing in less than one year and denominated in Sterling and US Dollars.
It is quite possible that this will turn out to have been a good investment although they will need to improve their profitability for this to be a large success. Where they are marking the value of the business is probably somewhat reasonable (~approx. their cost of €256). To be very conservative on valuation (remember this appears to be completely solvent with relatively liquid assets and very little European exposure) we can say that it is worth ½ of the value they paid and is now only worth €128. I would say that this is too pessimistic but useful to think about to form a downside perspective. Here is a quote from an article discussing valuation paid at the time.
Some bankers said Mr. Fischer paid too much for Kleinwort Benson, especially because he has yet to add other services like financial advisory. But Mr. Fischer said his offer was just 10 percent above Kleinwort Benson’s net asset value and his hiring plans in the short term were restricted to about 15 bankers.
Giving this bank credit for only its TBV would value it at near the €200m mark, which would give no value to the ~€3.8B of discretionary and advisory AuM. I think that marking this at ½ to 1x what they paid ranges from very conservative to reasonable with the midpoint offering a modest discount to TBV.
KBC Asset Management - €24m
I think that they likely negotiated a very good deal for KBC Asset Management (€23.7m in Oct, 2010) and that using their carrying value is already conservative. It currently has AuM of €2.8 billion and €16.1m of cash. So an EV of ~€7m (implied by their cost) likely does not need to be discounted (in fact should perhaps be marked up but I won’t do that here).
Close Offshore Group - €29m
On June 1, 2011, RHJI announced their acquisition of Close Offshore Group from Close Brothers, Plc. for €29.2m (and this likely was a very solid purchase). This added a further €0.5 billion in discretionary AuM, had a TBV of €38m and saved them a fair bit of capital by acquiring back end infrastructure which was a significant upgrade for Kleinwort. Given the recent purchase of this business, the negative goodwill, the AuM, and the buyers’ market for banking assets, this is probably marked appropriated.
So using the prices paid for these last two assets and the above range for KB results in a value range of ~€181-€309m for the group. I think that the low end of this range is highly conservative but useful to think about.
Shaklee - €51m
It appears based on the operating metrics of the Shaklee company (which is publicly traded) that their $51m valuation is conservative and that, although their path to monetization is unclear, this is likely an appropriate number to use for its valuation. The business may be an interesting value investment itself at this price (extremely illiquid). Shaklee is a large multi-level-marketing business (24th largest in the world, directly behind the Pampered Chef) with approximately 2/3 of its business in the United States despite trading in Japan. It appears to be carried at an already conservative valuation (JASDAQ: 8205).
Other Financial Assets - €26m - €38m
There are multiple other investments at RHJI (mostly recent financial investments) but I will not go into detail about these since they are very small relative to the value of the enterprise (and there is no reason to think that management is materially misstating their values). I am using a value range for these other positions of between 2/3 and 1x what they carry them at which is probably a fair approximation but ultimately not material to valuation.
Sum of the Parts
|RHJI Rough Valuation Range|
|Discount to Cash Equivalents||25.0%||12.5%||0.0%|
|Cash and Loans at HoldCo Value||233.6||272.6||311.5|
|Shaklee (100% of carrying value)||51.4||51.4||51.4|
|Total Other Investments (66% to 100% of carrying value)||25.5||31.8||38.2|
|KB Group (using ranges described above)||181.0||245.0||307.3|
|Upside from todays price||62.6%||98.8%||134.4%|
It seems that RHJI is near the end of their merchant banking strategy and relatively close to folding the holding company operations into a larger financial services firm (Leonhard states that intention on the latest call if they find the appropriate acquisition). If this process takes a year that might involve an additional €20m of costs. Given that the above valuation takes a ~€80m haircut to cash in the conservative case I think that any further transitional corp. costs are largely controlled for (inappropriate to capitalize).
Given that the business has pro forma cash at the holding company of more than the current market cap, I think that this investment offers a margin of safety in addition to compelling upside in the broad range of likely outcomes. The investment analysts who cover this are generally responsible for European banking stocks and I believe that the market substantially mischaracterizes the risks and value of this business. Simply using managements carrying costs for the assets would imply 134% upside.
Other Capital Allocation
In the first six months of this year, the business repurchased 1.44m shares at an average cost of ~€5.98/share. They subsequently repurchased another €2.7m worth of their stock in Q3. They understand that their stock is quite discounted to an ultra-conservative valuation (trades less than cash…..).
Tim Collins is a private equity figure with a pretty good historical track record (although less good since RHJI came into existence) who has been discussed extensively on the VIC board so I won’t focus on him here but he has had both home runs and much less attractive outcomes. I still view his involvement and substantial insider ownership as a positive feature. Leonhard (the CEO) is the person running around Europe trying to buy distressed assets so I am more interested in his expertise.
Leonhard is a very legitimate figure in the European banking world and seems to be a perfectly reasonable candidate to execute their financial investment strategy. Before coming to RHJI Leonhard became CEO of the Winterthur Group (an insurance subsidiary of Credit Suisse) which he overhauled and sold to AXA for ~$10 billion. He then became the head of CS in Europe but left when he was passed over for the CEO slot there. He is under 50 and serves on the board of Glencore, Julius Bar, and AXA Germany. So the idea that he is buying distressed European financial assets seems pretty reasonable.
RHJI is involved in negotiations with Deutsche Bank to acquire BHF, a subsidiary focused on private/corporate banking and asset management. There are very wide ranges speculated in the press as to how much BHF might be sold for but it would probably consume the HoldCo assets and also likely require a minority partner. There are a couple relevant things to keep in mind when evaluating risk of overpayment and how this might affect valuation. We are well positioned to buy the bank with KB Group, it is a complete buyers’ market today and overpaying on an acquisition of this type when there is blood in the streets should be somewhat challenging. RHJI should also have the ability to negotiate specifically on the assets of BHF that they want. If you are going to carve out the attractive businesses from the big banks in Europe, now would be a pretty good time to do it.
As such, I don’t believe that a discount on the holding company cash is really warranted. However, based on the risk that they did a deal which didn’t work out it seems conservative to assume the cash has a valuation multiple of somewhere between ¾ and 1x its actual value.
The company trades for less than the HoldCo cash and even though this trades in Brussels, the Cash should be fine, the bank is in England, and the only remaining industrial asset assigned value trades in Japan and does most of its business in the US. This is too cheap.