It’s an English company, it’s listed in Germany, and in a former life it went bankrupt. But get past the complications, and it looks like a buy
On a global basis, fewer than 10% of investors ever consider investing money outside the boundaries of their home country.
This tunnel vision is the main reason why you can currently pick up the shares of a former star performer for a bargain price.
DNick (Frankfurt:D2H) is an English company, but it’s listed in Germany rather than England and the majority of its business also resides in Germany. To complicate matters further, it has recently undergone an English bankruptcy proceeding, caused by a large pan-European project that went wrong. It now boasts major shareholders from all around the world.
German investors don’t follow the company because, legally speaking, it’s an English corporation. And British investors don’t have DNick on their radar screen either, because you can only buy the shares in Frankfurt and not in London. As far as investors’ attention is concerned, the company has literally fallen through the cracks as it doesn’t quite fit into existing categories.
Back in the mid-1990s, DNick’s legal predecessor was actually a widely known company with a huge investor following. The company specialised in metal alloys and at the time had won the contract to produce the new euro coins. With an entire continent of then 360 million people in need of billions and billions of new coins, everyone expected the firm to be in for a huge windfall profit.
The problem was that after the euro project was finished, too much of the company’s increased production capacity was left idle. The management had simply been carried away by the prospect of the high-profile euros order, and shareholders were left paying for machines gathering dust.
The ensuing bankruptcy of what at that time was still a German company was only bypassed when a couple of smart lawyers found a loophole not in German, but in English law. Those divisions of the operation that were still lucrative – such as the company’s long-standing interest in producing ammunition husks – were separated from the loss-making division.
Thus DNick was born. Its name is still a reminder of its days as a German company (when it was “Deutsche Nickel”), but DNick is an altogether different creature today. The loss-making divisions are now history and DNick can focus on those parts of the old business that had proved themselves to be reliable sources of income.
The bankruptcy proceedings and the restructuring of the operative business were used to carry out a proper house cleaning. Thanks to its operation being hugely cash-generative, DNick has just recently been able to pay back the last remaining loans stemming from the old days. Put simply, the company is now in better shape than at any time during the past ten years. That’s why, more likely than not, potential bidders will soon appear on its doorstep.
They’ll be attracted not just by DNick’s favourable numbers, but by its fragmented ownership structure. As part of the bankruptcy proceedings, the former creditors ended up owning 55% of the company. Among the large shareholders are investment banks Goldman Sachs, Bear Stearns and Morgan Stanley. While each of them represents a powerful financier in its own right, none of them has a large enough stake to have a serious and lasting interest in the company.
It seems likely that the consortium of current owners will jointly put the company up for sale. Currently, the shares are valued at about 3.25 times the present cash flow. As a rule of thumb, private-equity investors usually pay around eight times cash flow. If a company is offered to them at eight times cash flow, they can take on huge debt and finance the acquisition without putting up much of their own money.
So at the moment that suggests the shares are more than 100% undervalued. So even when factoring in a certain margin of error, the shares should appreciate considerably once a bid is launched.
In all likelihood, a bidder won’t stop at acquiring the 55% of the company that is currently owned by the banks. They are more likely to want complete control and hence to buy out the remaining free-float. In other words, shareholders could soon all receive a bid approach, and one that would value the company up to 100% higher than the current share price.
Now that is a language that everyone understands, no matter what country they reside in.
DNick can be bought in the UK through Barclays Stockbrokers – tel: 0845 601 7788
Sven Lorenz is a fund manager and investor. His blog is at Undervalued-shares.com.