Wendel MF.PA
December 22, 2007 - 10:51pm EST by
2007 2008
Price: 99.01 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 4,986 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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An Atypical Player in the Private Equity World – E3bn of value for free if listed stakes are hedged - 100% Upside For Those Willing To Read Through This Lengthy Writeup In Its Entirety

Wendel’s investment case is predicated upon a simple thesis, which is unfortunately (or fortunately, for value investors like yourselves) disguised by a complicated corporate structure.  The inarguably brilliant management team at Wendel (for skeptics, read: http://www.bloomberg.com/news/marketsmag/wendel.pdf) has taken 2 actions over the past months that have somewhat inexplicably sent the share price from a high of E145 to its lows at E99.  

What has happened or what has management done to warrant this devaluation? (1) Wendel carved out and IPO’d 20% of world class asset Bureau Veritas (the global testing and inspection concern), to highlight material hidden value within Wendel, and, in my opinion, to establish a market value prior to the long-rumored consolidation involving Bureau Veritas and SGS within the testing and inspection industry.  All good so far; the IPO was a smashing success.  The shares were multiple times oversubscribed and have traded brilliantly in an otherwise dismal market.  Because testing and inspection businesses are few and far between, it is likely that institutional investors holding Wendel for exposure to Bureau Veritas exited Wendel and invested directly in BV post IPO, causing downward pressure on Wendel's shares.  It wouldn't surprise me at all if Wendel used some of these "high multiple" proceeds to buy back its own shares at 7x FCF, as it has an authorization for buying back up to 10% of its shares outstanding, and has used this policy aggressively in the past when Wendel's shares have traded at a 10% discount to intrinsic value.  (2) Wendel has amassed a 17.6% stake in legacy French conglomerate Saint-Gobain, for a multitude of INTELLIGENT reasons that will be discussed later in this write-up.  The result? Wendel has been de-rated to a staggering 60% discount to my 2007 fair intrinsic value calculation.  Put another way, the “Wendel Stub” is trading at roughly zero, ascribing no value to the roughly E3bn of value respresented by the 5 private companies owned by Wendel.  Why you might be wondering.  I have read a multitude of explanations, and will attempt to summarize them as follows: (1) In simultaneously IPO’ing Bureau Veritas and amassing a stake in Saint-Gobain, the majority of Wendel’s NAV is now LISTED as opposed to private.  In other words, the publicly traded PE sector in Europe, which trades at a premium of 15-20% to NAV, is no longer a relevant proxy for Wendel’s valuation.  Instead, the market has ascribed a discount more appropriate for a disorganized conglomerate of garbage with poor corporate governance and no ambition to create shareholder value.  As absurd as this sounds, I direct you to sell-side research, which has repeatedly made reference to this “status change”.  (2) The market doesn’t understand what Wendel is doing with Saint-Gobain.  Perhaps they are returning to their roots and recreating a holding company of disparate stakes? Lafonta keeps a relatively low-profile and is not  often heralded as a genius, a brilliant value creator, a “Warren Buffet of Europe”, a Sergio Marchionne.  But he is.  And his recent actions in amassing a 17.6%stake in Saint-Gobain are brilliant for a multitude of reasons that will be discussed in greater detail below.  (3) Wendel is a private equity firm, and private equity firms depend on cooperative debt markets to finance future deals. My take: who cares? My investment case is predicated solely on the assets that Wendel owns today, liquidation value “if you will”.  Wendel’s current portfolio is comprised of businesses that are leaders in their respective niches, with high barriers to entry, moderate-to-high organic growth, attractive bolt-on inorganic growth opportunities (capturing the significant arbitrage between low purchase prices of fragmented private businesses, and larger businesses of scale), very high free cash flow conversion, and restructuring potential/margin expansion opportunities that will create significant value for shareholders in each business.  Furthermore, Lafonta is choosing not to "pay up" for auctioned assets with higher cost debt - SMART.  Instead, he has engaged in a highly imaginative and intelligent approach to gain control over a legacy french empire with enormous upside in the hands of Lafonta's management team (the process of Wendel/Lafonta gaining effective control without any further capital outlay and directing Saint-Gobain's restructuring is detailed below).

Below I detail Wendel’s present discount to intrinsic value:













Listed Assets


# Shares Held mm

Share Price


Per Share




€ 24.28

€ 1,956.97

€ 38.90

Bureau Veritas



€ 38.65

€ 2,601.15

€ 51.70

Saint Gobain



€ 65.10

€ 4,382.41

€ 87.11




€ 53.00

€ 324.68

€ 6.45

Neuf Cegetel



€ 36.00

€ 10.08

€ 0.20




€ 100.25

€ 20.05

€ 0.40

Sub-total Listed Assets


€ 9,295.34

€ 184.76



















Unlisted assets Market Value (net of debt)





(debt assumed)

Oranje Nassau


€ 344.00

€ 344.00

€ 344.00




€ 644.16

€ 715.96

€ 796.46

€ 384.00



€ 859.41

€ 977.79

€ 1,105.52

€ 1,723.00



€ 784.68

€ 906.16

€ 1,039.60

€ 520.00



€ 67.62

€ 98.36

€ 124.67

€ 367.00



€ 2,699.86

€ 3,042.27

€ 3,410.25








Per Share






Oranje Nassau


€ 6.84

€ 6.84

€ 6.84




€ 12.80

€ 14.23

€ 15.83




€ 17.08

€ 19.44

€ 21.97




€ 15.60

€ 18.01

€ 20.66




€ 1.34

€ 1.96

€ 2.48




€ 53.66

€ 60.47

€ 67.78








Total Market Value All Assets

€ 11,995.2

€ 12,337.6

€ 12,705.6


Value per Share


€ 238.4

€ 245.2

€ 252.5


Wendel Share Price


€ 99.10

€ 99.1

€ 99.1





€ 50.3

€ 50.3


Market Cap


€ 4,985.72

€ 4,985.7

€ 4,985.7


Discount to Fair Value







Wendel is a young investment company but one that carries on an old industrial tradition. Wendel was formed in 2002, a result of the merger between CGIP and Marine-Wendel, the latter which was in financial crisis resulting from its nearly bankrupt steel mills.  The appointment of a CEO Jean-Bernard Lafonta systematically boosted the performance of the 300-member family’s holding. Since Lafonta’s arrival, the portfolio has been actively reshaped, cutting old stakes (Cap Gemini, Wheelabrator Allevard, Valeo) and acquiring fresh blood (Legrand, Bureau Veritas, Editis). More importantly, the real switch of strategy consisted in taking operating control of the companies in which it invested, a sharp break with the more passive approach taken previously.  The market rewarded Lafonta’s work by re-rating the shares at an average 10% premium to Wendel’s stated NAV (which, has been restated upwards >10-20% each quarter since Lafonta’s team took over, suggesting investors view NAV as a hyper-conservative measure of intrinsic value.



I will briefly attempt to summarize Wendel's investment philosophy, which is fairly Buffet-esque, with the caveat that they have unique access to companies in France with political sensitivity that other players would not be permitted to purchase.  Wendel seeks in its investments companies with: high barriers to entry, good pricing power, leader or leader-potential in a specific niche, capacity to consolidate their competitive position through acquisitions. In other words, they all have a significant growth profile, margin expansion potential and strong free cash flow conversion. For these companies, Wendel's management, together with these companies' managers, apply a solid, two-pronged strategy: 1) implementing a determined top line development policy, which consists in accelerating their organic growth pace and consolidating their market with acquisitions, and 2) optimizing their free cash flow generation through good cost and cash control (WCR, capex), as do most other investment funds. In other words, investing in Wendel gives access to a range of strong companies with excellent growth prospects and an optimized balance sheet structure. Interestingly, whereas typical private equity competitors were drooling over an asset like Pages Jaunes, Wendel would not contemplate investment in a company facing a potential threat or mutation of its end market due to cannibalisation risk from the internet.  Hedging out listed stakes gives access to a highly unusual inefficiency of 3bnE of value leakage that will not be tolerated by a proactive CEO like JB Lafonta.


What will Lafonta do to eliminate this value leakage? I believe he will prudently repurchase his own shares, up to 10% (for which he already has authorization), and cancel them immediately.  After all, Wendel's shares are trading at 6.8x consolidated 2008 FCF, while proceeds from Bureau Veritas were captured at 18X '08 FCF.  Lafonta is an intelligent arbitrageur, and has the cash available to do this twice over.  In this instance, FCF per share increases from E14.0 to E15.6.  Each business in Wendel's portfolio deserves a premium to the CAC, but to be ultra conservative, placing a 10X multiple on consolidated FCF figures yields a target price of E160, 60% higher than current levels.  I believe Lafonta should send a strong message on the repurchase of the first tranch of 10% of shares outstanding and tender for these shares immediately.  This would, of course, force repurchase at a premium, and Lafonta is a patient manager.  If he did this rapidly, and got board authorization for a second repurchase, he could be more patient the second time around.  Keep in mind, Lafonta repurchased and canceled 10% of his shares last year as well.  In the end, it is in long-term shareholders' interest to see Wendel repurchase the most possible shares at the lowest possible price, so if you are a shareholder, endure the pain and/or accumulate more shares.  If you are not, this is a very rare opportunity to accumulate shares, indeed.


Description of Unlisted Businesses

I am going to limit my business descriptions to the unlisted assets (with the exception of Saint-Gobain, which requires some probing) for the sake of brevity.  Listed assets are well-covered by the sell-side community.



Wendel  acquired Editis in September 2004, following its forced disposal by Lagardere (who purchased these politically sensitive assets from Vivendi during its liquidity crisis) to conform with European Commission rules on excessive market concentration (Lagardere owns Hachette, the leading publisher in France). This purchase is an excellent example of Wendel's competitive advantage in acquiring high quality assets within France, as many suitors were rejected from this bidding process, higher offers not withstanding. Editis is the number two book publisher on the French market (behind Hachette, Lagardere group), with an estimated market share of 18% (purely on the publishing part, i.e., excluding the distribution business). On a global basis, it is world number thirteen, with 2006 sales of EUR755m.
















% growth









€ 58.4

€ 72.5

€ 89.8

€ 93.2

€ 97.8









Editis is present in two core businesses in the book value chain: 1) publishing, which represents 64% of sales (literature, education and reference books) and 2) sales and distribution, for its own publications and also for third part publishers, representing 36%of sales. Editis captures 30-40% of the value chain contained in the pre-tax selling price of a book. Editis is present in publishing side (11-20% of the selling price) and in distribution, marketing and sales (all of which combined amount to around 20% of the selling price). The size effect and a vertical integration on the bookís value chain are essential competitive advantages, as, in publishing, size provides: 1) sufficient financial capacity to invest in authorsí rights, 2) risk dilution, when split between a large number of publications, 3) a clear capacity to attract writers, 4) better capacity to absorb the structureís costs, 5) greater marketing capabilities. This is even truer in reselling, given the fixed-cost nature of this business. Reselling is similar to a logistics business, in the sense that it deals with large volumes to ensure solid profitability.


Importantly, Wendel was forced to dispose of Larousse dictionaries, which temporarily lowered the group's profitability.  Wendel has quickly gone about restoring margins; this structural adjustment was mainly achieved through headquarter rationalisation and the centralisation of editorial staff (number of sites cut from 19 to 10), the outsourcing of IT costs and adjustments to Interforumís costs structure. The loss of the Larousse contract has consequently been more than offset by organic growth (+7.2% in 2005, +2.6% in 2006)and acquisitions.  In 2006, the Larousse had a negative impact of -11% in Editisís total sales (-EUR85m), and it probably represented around 30% of Interforumís sales. Given the fixed-cost nature of the distribution business, Interforum had no choice but to win new contracts in order to maintain its profitability. Indeed, Interforum signed close to 30 new distribution contracts in the same period (Michel Lafon, Panini, Readerís Digest, etc.), which represented roughly 20% of Interforum's 2006 turnover. With the recently signed Dargaud and Le Lombard distribution agreements, the Larousse loss will soon be offset by new wins. In 2007, Interforum will face the termination of contracts with Dalloz (negative impact of EUR30m est.), but fortunately signed other significant distribution contracts with Gallimard and Media Participations at the end of 2006, which should fuel growth in 2007. 


General literature  33% of group sales

In general literature (fiction and non-fiction), Editis is currently the French leader in hardback books and number two for paperback books. Paperbacks are structurally more profitable than hardback books given that their lower retail price (three times lower) is more than offset by their lower cost of production (the marginal cost is four times lower for a paperback book, at a constant number of pages). Editis has an estimated general literature market share of 22%.

Education and reference books 31% of group sales

The Education market is mainly made up of school book publishing. This is a mature and cyclical market which is largely dependant on 1) changes to the state scholarship programme, as a new book is almost systematically released each time the program is changed, 2) the change in the number of pupils in full-time education (-0.3% in primary and secondary over the last 15 years, according to INSEE). The financing of these school books varies according to the scholarship grade: local authorities finance books for primary schools, the state for secondary school and there is no financing for sixth form. However, the Education market is much stronger in terms of profitability, as less discounts are granted in this segment (price is less of an issue than quality, and the people who order the books, i.e., the teachers, push for their favourite books) and return rates are likely to be lower (easier to forecast print quantities, as it mainly depends on the number of pupils). 


Market shares tend to remain stable, given the loyal behaviour of the people who order the books (school teachers), who always tend to recommend the books that they are used to teaching. Despite the necessary investments (significant authorsí teams, librarians, drawers, dedicated marketing teams), this niche segment is quite profitable given: 1) large volumes, with good visibility (quantities and titles known in advance, given that figures depend on the number of pupils for a given back-to-school period) and 2) a potentially very low return rate. (The attractive characteristics of this business is why we have recently seen such competitive auctions for similar businesses of Reed Elsevier and Wolters).

The Reference books market, on the other hand, is a small niche, mainly composed of dictionaries. As such, its size is limited to EUR55m, i.e., 2% of the French publishing market. Editis brand, Le Robert, is well positioned, in both French language dictionaries (29% of the market), and bilingual dictionaries (30%). 

Distribution: Like the majority of the large publishers, Editis is vertically integrated, from publishing to selling and distribution, via its branch Interforum. Interforumís activities regroup the reselling of books to all categories of retailers and are responsible for all logistical operations (order management, billing, inventories, deliveries and returns). Interforum currently has around 100 third-party publishers. Reselling is a logistics business, i.e., mainly a fixed costs activity, meaning that its profitability depends largely on the volume handled. Most large resellers distribute books from their own publishers and also offer this service to third-party publishers, which are too small to be able to afford the cost of reselling. Interforum is the second reselling platform in terms of size, behind Hachette.

Capex requirements should remain relatively limited (mainly maintenance capex), as significant investments were made before the acquisition by Wendel.  

What remains to be done in the mid term?  Many development opportunities in France and Editis should continue to slightly outperform the market, in spite of its already significant market shares, thanks to its niche positioning (best-sellers, manga, tourist guidebooks, etc.) External growth prospects could also support this strategy, as the publishing market is still quite fragmented, except for the two leaders (Hachette and Editis). There may still be several opportunities to be seized in the French market, and Editis has already bought three publishers since 2004.  As the distribution set-back of the loss of Larousse has been rectified, this analysis estimates that Editis is able to close the profitability gap with peer Hachette, at north of 11% in the long run.



A strong, niche asset in building materials

Materis was acquired in May 2006, at a price of EUR2,100m (for 100%). This included EUR420m in equity and EUR1,680m in debt. Wendel holds 76% of the capital, representing EUR319m invested in equity. The transaction ratios were 1.55x 2005 sales and 9.1x 2005 EBITDA. For 2006, the ratios appear quite attractive, at 1.3x sales and 8.2x EBITDA, in light of recent transactions in the sector (8-10x EV/EBITDA) and the valuations of listed peers. 

Materis is one of the leading global manufacturers of specialty building materials, mostly targeting the renovation and new construction end-markets. Materis has 73 production sites and employs approximately 8,000 people. Materis is a diversified company, as it is split into four autonomous divisions: Admixtures (Chryso): 9% of sales and 9% of EBITDA, i.e., a 17% margin; Paint (Materis Paints): 43% of sales and 32% of EBITDA, i.e., a 12.6% margin; Mortar (ParexGroup): 30% of sales and 30% of EBITDA, i.e., a 17% margin; and Aluminates (Kerneos): 18% of sales and 29% of EBITDA, i.e., a 27% margin.

As 50% of its sales come from renovation, Materis benefits from structural growth trends with a high level of recurring revenues. Residential market exposure (37% of turnover) is admittedly more cyclical. Materis is mainly active in Europe (78%, including 40% in France) while having little exposure to the Americas (14% of revenues). Moreover, Materis is active in markets where barriers to entry are high: this involves constant innovation in very specialized products (R&D, especially in mortar, admixtures and aluminates, less so in paint) and good knowledge of its clients. Moreover, there are still many family-owned companies in the markets in which Materisis active, and there may be opportunities for consolidation, as was the case ten years ago in the USA. 

Materis has also enjoyed a nice top-line growth rate of 6.8%



























€ 1,165.0


€ 1,159.0

€ 1,191.0

€ 1,308.0

€ 1,359.0

€ 1,622.0

€ 1,703.1

€ 1,788.3

€ 1,877.7

€ 1,971.6


























€ 168.9


€ 175.0

€ 187.0

€ 218.4

€ 229.7

€ 259.5

€ 272.5

€ 286.1

€ 300.4

€ 315.4


























€ 40.8


€ 40.6

€ 41.7

€ 45.8

€ 47.6

€ 56.8

€ 59.6

€ 62.6

€ 65.7

€ 69.0

% of Sales

























€ 128.2


€ 134.4

€ 145.3

€ 172.7

€ 182.1

€ 202.8

€ 212.9

€ 223.5

€ 234.7

€ 246.4

Interest @ 6.5%








(€ 97.5)

(€ 92.2)

(€ 86.3)

€ 0.0









€ 115.4

€ 131.3

€ 148.4

€ 246.4

Taxes 30%








€ 34.62

€ 39.38

€ 44.53

€ 73.93









€ 80.77

€ 91.90

€ 103.90

€ 172.51









€ 1,050.03

€ 1,194.67

€ 1,350.73

€ 2,242.64









€ 1,130.80

€ 1,286.56

€ 1,454.63

€ 2,415.15









€ 1,211.57

€ 1,378.46

€ 1,558.54

€ 2,587.66

Ownership @ 76%








€ 859.41

€ 977.79

€ 1,105.52

€ 1,835.51





























































Enterprise Value









€ 2,288.97

€ 2,403.41

€ 2,523.59

Net Debt










(€ 1,419.23)

(€ 1,327.33)










€ 788.97

€ 984.19

€ 1,196.25



Further Detail On End Markets Materis enjoys strong positions on each of its markets. 1) Paint (decorative mainly, 44% of Materisís turnover). Materis is the fourth-largest European player. It is present in France (no. 2 player), Italy (no. 1), Spain (no. 3) and Portugal (no. 2). Sales represented around EUR670m in 2006. The global decorative paint market represents around USD38.6bn (EUR30bn, source: Euromonitor), i.e., 45% of the global coating market (worth USD86bn). This market is set to grow by 5.5% p.a. by 2010, accelerating from 3.8% on average between 2001 and 2005 (source: Euromonitor). The European market accounts for 28% of the global market, i.e., around EUR8.4bn. With EUR670m in sales in 2006, Materis has an estimated global market share of roughly 2%, and around 8.4% in Europe. Growth in decorative paint more or less follows GDP trends, i.e., it is more structural than cyclical. Although the environment is quite competitive in western Europe (more mature markets), growth is still sustained by the development of Do It Yourself (DIY) and home decoration networks. This business is regional and success is based largely on brand recognition. In that respect, Materis has a competitive advantage relative to good brands such as Tollens and Zolpan in France, Robialac in Portugal, Alp in Spain and Max Meyer in Italy.

Organic growth will focus on emerging markets (aluminates and mortar in China, admixtures in India), which should help Materis outperform its market. On the external growth front, it should look at targeted acquisitions. Materis will benefit from the distribution synergies with the recently acquired Zoltan network. Note that the leverage on Materis is high (80%), meaning that there is significant value-creation potential, given that: 1) Materisís management already knows how to manage the company quite well (EBITDA margin has improved by 240bp in the last four years), 2) Materis generates high free cash flow (high margin, capex limited to 3.5% of sales)on a regular basis, as it is supported by stable markets, with structural growth in the majority of its sales.  Wendel will try to optimize the revenue synergies in paint distribution, and could use its position of future control in Saint-Gobain to do so.  This potential upside has not been modeled, but a large call option exists.



Above we have used a peer group to determine a value for Wendelís stake. As Materis' exposure is twofold (building materials + coatings), the closest peers are Sika (Switzerland) and Imerys, present in building materials, and ICI and Akzo Nobel, both coating specialists. Above we have used a blended multiple of 14x FCF to value Materis.



Wendel acquired 90% of the capital by investing EUR378m in equity, with the remaining 10% invested by Deutsch's management.  Deutsch was acquired on the basis of 9.8x 2005 EV/EBITDA, or around 8.8x 2006 EV/EBITDA. Wendel had the best opportunity to buy Deutsch, as Carl Deutsch, the son of the company's founder, wanted it to be run as a family business, rather than being over-levered and stripped ruthlessly of its cost-base.

Deutsch was founded in 1938 in California, by Alex Deutsch. It is active in designing and manufacturing connectors for the Aerospace, Automotive (especially heavy vehicles) and Transport end-markets. Headquartered in the USA, Deutsch had around 3,500 employees at end-2005, mainly located in the USA, France and the UK. Deutsch posted 2005 sales of USD502m, with a 22.1% EBITDA margin. Remarkably, margins reflect three times the amount of corporate overhead necessary, due to triplication of cost structures in Asia, Europe and the US and other minor offices (discussed below).  We expect a dramatic rationalization of costs over the coming years, in addition to a segmentation approach to pricing, to extract maximum value for the mission-critical products Deutsche provides to its customers.



Connectors are an approximately USD35bn market, of which aerospace represents around USD2.5bn and grew by an average of 7% p.a. over the past five years. The market is still highly fragmented, offering Deutsch acquisition opportunities. Deutsch is exposed to three main markets, Aerospace (42% of sales), Automotive (47%) and Offshore (11%). Moreover, Deutschís turnover is relatively well balanced between the USA (46% of sales), Europe (48%, of which France accounts for around 20%) and Rest of World (6%).

Visibility in the Aerospace segment is high, as 2006 was the second year in a row in terms of peak orders. Moreover, the next cycle peak in deliveries is not expected to take place until 2010, providing suppliers with several years of growth and visibility. Moreover, the automotive segment, which was sustained in 2006 by the US truck market, should be boosted in the future by the Chinese truck market, as more and more regulations (ex: European Union) push for increased security equipment, which should boost demand for connectors. 

The strategy for Deutsch is three-pronged: 

1) Organizational streamlining: thus far, Deutsch has not been structured as a single group, but as five companies acting separately. They are likely to be regrouped to benefit from a group structure, in terms of best practices, and also in order to achieveeconomies of scale. This is the case in particular in terms of purchasing power. In the longer term, Deutsch could also reorganize its production tool business, which currently has nine factories throughout the world. 2) Revenues: the goal is to strengthen relationships with the most important customers, and to implement synergies in marketing and sales. Deutsch actually has a large presence in aerospace in Europe (Airbus, Dassault, etc.) but lacks a presence with Boeing in the USA. It is seeking to develop relationships with this strategic client.  Moreover, Deutsch will try to grow in Asia, particularly in China, in order to address the heavy vehicle segment, which is poised to be a medium-term growth driver, backed by regulatory constraints (new equipment required by the European Union).  3) External growth: opportunities will be examined in a still fragmented market. Deutsch could acquire companies with less than USD50m in revenues, and could spend around USD100m. Of course, should an interesting opportunity arise, Wendel could contribute, providing additional financial power. 


Closest peers are Molex and Amphenol, both US players, trading at >10X EBITDA.  We have simply chosen to value it at acquisition multiple, 9.8X EBITDA.













€ 326.0


€ 369.0

€ 460.0

€ 497.0

€ 545.0

€ 588.6

€ 635.7

€ 686.5

% growth































€ 58.0


€ 66.8

€ 100.7

€ 109.8

€ 119.9

€ 132.4

€ 146.2

€ 161.3

% Margin

















€ 83.4

€ 97.2

€ 112.3







€ 48.9











€ 1,297.86

€ 1,432.84

€ 1,581.11

Net Debt










Net Equity







€ 871.86

€ 1,006.84

€ 1,155.11

% Ownership







€ 784.68

€ 906.16

€ 1,039.60



A stable asset with high FCF generation; Stahl is a Dutch company that specialises in providing high-quality coatings for leather, flexible and non-flexible substrates, textiles and related products. Stahl also produces chemicals and dyes for leather processing. Stahl consists of five divisions (leather finish, colours and tanning products, shoe finish, permuthane and picassian polymers), each offering a broad range of high value-added formulated products and services oriented towards specific customersí requirements in leather processing and in selected niche markets for performance coatings. Stahl operates nine manufacturing sites and 26 strategically located technical service laboratory facilities worldwide and employs some 1,400 people in more than 28 countries, many of whom are engaged in basic research and development of new products and processes. 

Stahl achieved 2006 sales of EUR316m, up 4%, of which 1% organically and 3% linked to exchange rates. Note that over the last 20 years, Stahl has experienced average sales growth of 4-5%, with limited cyclicality. This can be explained by the diversity of the end-markets, in leather as well as in permuthanes: leather goods, automotive, furniture, garments, flooring, shoes, etc. Due to small impact on gross NAV, we've opted to curtail description of Stahl.  Additionally, the strong long-term track-record of organic growth speaks for itself. We have employed a conservative multiple, looking at peers HB Fuller, Rohm&Haas, although no companies track record of consistent growth across cycles matches that of Stahl.













€ 316.0


€ 328.6

€ 341.8

€ 355.5

€ 369.7

€ 384.5

€ 399.8

€ 415.8

% growth























€ 57.0

€ 60.8

€ 65.1

€ 69.5

€ 73.0

€ 76.0

€ 79.0

% Margin





















€ 44.0


€ 47.0

€ 50.6

€ 54.4

€ 58.4

€ 61.5

€ 64.0

€ 66.5












































€ 456.0

€ 486.7

€ 520.4





Less Net Debt













€ 138.0

€ 200.7

€ 254.4





49% stake



€ 67.62

€ 98.36

€ 124.67







AND FINALLY....SAINT-GOBAIN: WHAT ARE THEY DOING? Creating tremendous value for Wendel Minority Shareholders

Wendel has now amassed in total 17.6% of Saint-Gobain's share capital. In 2 years, Wendel's voting rights will be 2x its shareholdings, an obscure rule present in some french companies.  It didn't require clairvoyance to see that Saint-Gobain was a sitting duck with no major shareholder for an activist investment. The Belgium billionaire Albert Frere now holds c15% of Lafarge and 2005 witnessed the German billionaire Adolf Merckle take control of HeidelbergerCement. Wendel's potential to crystallize value through asset disposals is assessed in detail below.








Standalone, Saint-Gobain was in the midst of management transition and an independent (albeit painfully unambitious) restructuring program.  Incoming CEO, the former COO, has indicated that shareholders should expect 300mmE of cost savings accomplished by 2010.  This uninspiring figure didn't do much to rally existing shareholders, as the average annual cost cutting over the last 5 years amounting to greater than 200mmE per annum, or north of 1bnE over the past 5 years.  Reading between the lines, incoming CEO is suggest cost-cutting potential is tapped out, and is guiding to a major deceleration in cost-cutting.  


Wendel has made no secret of its view that management's cost-cutting ambitions are wholly insufficient. We believe Wendel's entry into the shareholder base of Saint-Gobain represents a golden opportunity to improve returns. Growth and returns have lagged the sector since 1993 primarily due to the business mix. The Building Distribution, Interior Solutions and Building Materials divisions have attractive prospects but the rest of the portfolio is non core, in our view. We think, for instance, the group could engineer a re-rating in stages: 1) dispose of Pipe, Packaging, Flat Glass and High Performance Materials for €20bn in total; 2) return €4bn to shareholders and repay €4bn debt; and 3) invest the remaining €12bn in Interior Solutions/Distribution markets accretively, where barriers to entry and leadership positions are strong. We estimate this would increase organic growth from 4.8% to 6.9% and improve returns. The conglomerate discount should disappear. The revised group would have the following profile:


SGO analysis

2007 Standalone



Share Buy-Back (@68E)




2007 Pro-Forma









€ 19,755.0


€ 3,955.0









% use of Proceeds














Assumed Buy-Back Price




























Marginal Interest Rate





























Income Statement
















€ 5,586.0


-€ 2,715.0




€ 1,582.0


€ 4,453.0







-€ 1,671.0


€ 1,053.0




-€ 475.0


-€ 1,093.0







€ 3,915.0


-€ 1,662.0




€ 1,107.0


€ 3,360.0







-€ 775.0


€ 1,186.0


-€ 474.1


-€ 712.0


-€ 775.1







-€ 230.0


-€ 230.0






-€ 230.0







€ 2,910.0








€ 2,354.9







-€ 1,015.6








-€ 821.9





Tax Rate


€ 0.3








€ 0.3







€ 86.0








€ 86.0







-€ 45.0








-€ 45.0





Net Profit


€ 1,935.4








€ 1,574.0





# Shares


€ 357.0




-€ 58.2




€ 298.8







€ 5.4








€ 5.3





Resultant Multiple Expansion








Share Price Upside

Current Px

Upside to Shares

Wendel's Leveraged Upside











€ 5.3















€ 10.5















€ 15.8















€ 21.1















€ 26.3








The group could engineer a rerating in three stages: 

- Dispose of Flat Glass, Packaging, Pipe, Reinforcements and Ceramics, Plastics & Abrasives. We estimate proceeds of €20bn assuming 7.2x 2007F EV/EBITDA. 

- Return €4bn to shareholders via a buyback and use €4bn to repay debt. 

- Invest the remaining €12bn in Distribution and Interior Solutions markets. We believe that this transformation is achievable because: 

- There are buyers for the non-core assets. Private equity is likely to be interested in Flat Glass, Packaging and Pipe. The High Performance Materials assets could be attractive to industrial competitors.  

- There are ample acquisition opportunities. We believe there is €35bn of bolt-on opportunities in European Distribution and €90bn in the US. SIG, Eagle Materials, Rockwool and Wolseley US could be appealing. 





We believe the most likely acquirers for the High Performance Materials assets would be trade competitors. Most of these markets are fragmented and there are a number of major industrial groups that could be interested. These could include 3M, 

Imerys, Owens Corning or emerging market players such as Nippon Electric Glass, CPIC, Noritake or Kyocera. It is unlikely that a competitor would acquire the entire division, in our view, but specific brand or asset sales are possible. The strong cash generation of Flat Glass and Packaging could be attractive to private equity. These are businesses with strong brand names and good market shares. Falling energy costs should boost margins over the next 18-24 months.  A trade buyer could also look at parts of Packaging (eg Owens Illinois, Rexam in Europe) but the consolidated nature of Flat Glass following NSG’s acquisition of Pilkington probably rules this out in the float market.  Flat Glass could be attractive from an IPO perspective, given improving profitability and the market’s appetite for such assets.  A new entrant is possible for either business if customers start to vertically integrate (eg consumer groups or brewers looking at Packaging, automotive manufacturers 

buying Flat Glass). The Pipe business is unique. Saint Gobain is the world’s leader in cast-iron piping. The dominant market position could be of interest to private equity. An IPO is also possible, in our view. A new entrant would most likely be a vertically integrating utilities group focused on water assets. 


Acquisition Targets 

In most countries the Distribution industry is dominated by five or six major brands then a very long tail of small or medium-sized independent outlets. The major distribution markets in Europe are still fragmented. We believe this market structure provides ample opportunities for bolt-on acquisitions in this industry. To put the scale of opportunities into perspective, we estimate that independent outlets in France and Germany alone have annual sales of over €30bn. Assuming an EV/sales multiple of 0.65x (above the long-term average acquisition multiple of 0.52x) implies potential acquisitions of nearly €20bn. If Nordic and other European markets are included this figure rises to over €35bn, in our view. There is also a possibility that Saint Gobain could look to enter the US market, where more positive long-term demographic trends support better growth across the cycle. Wolseley estimates the North America distribution market is worth £460m a year, of which £187m is attributable to building materials. Assuming 50% of this work is done by small-medium firms and assuming an acquisition multiple of 0.65x sales, this implies acquisition opportunities of over £60bn (€90bn). 


We don't pretend to know what Wendel has in mind, but the aforementioned actions would certainly create material value for Saint-Gobain shareholders, and roughly 2.25x that for Wendel Shareholders, based on the estimated leverage structure employed in the acquisition of Saint-Gobain shares.


If the rather superficial case built above for a restructuring of Saint-Gobain is appealing, one could hedge all listed stakes in Wendel except Saint-Gobain.  If concerns about SGO's end-markets dilute the restructuring case and potential multiple expansion opportunities post divestiture program and cash return plan outlined above, one should simply neglect our attempt to estimate Wendel's strategy, and hedge the Saint-Gobain shares aswell.


-Wendel repurchases 10% of its own shares at a 60% discount to intrinsic value
-Market begins to understand Wendel's plans for a radical restructuring of Saint-Gobain
-Continued cash flow strength and NAV growth underpin share price movement upward
-Abolishment of moronic de-rating associated with % NAV attributed to listed vs. unlisted stakes (hopefully this posting is a start)
-Lafonta is brilliant and incentivized. He loves his own shares. If the market doesn't recognize fair value, I believe he could consider taking Wendel private, likely in iterative stages of share repurchases
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