In September 2014, I started to accumulate a 3.5% position (2.5% in September and 1% in October at an average volume weighted share price of EUR 9.53) in the special situation investment UMS United Medical Services AG.
At that point in time, the company was in the process of selling its operating business in the US. In addition, management announced that the company will be liquidated after a successful disposition of the US affiliate. Both the disposition and the liquidation were subject to shareholders approval. When I initiated the investment there were a number of uncertainties regarding the amount and timing of future cash flow proceeds which I outlined in my original investment case.
At the time of my original investment, I projected the expected return as follows:
“I assume that the next general meeting after completion of the transaction will take place in June 2015 combined with a distribution of EUR 7.20 per share. An additional distribution of EUR 3.72 could then be made 13 months later in July 2016. Based on these assumptions an investment offers a total return of 12.0% and an IRR of 10.7% for a holding period of 22 months.”
In hindsight, the disposition worked out smoothly and the liquidation is well on track:
1) Already in January 2015, I was able to sell 32% of my holding via a tender offer from the company at EUR 10.5 per share realizing a 10.2% profit;
2) At the end of April 2015 after the general assembly had taken place (which decided about the liquidation), the company paid out a dividend of EUR 7.53 per share;
3) In the first quarter 2015 report, management forecasts a final liquidation payment of EUR 3.60 per share to be made at least twelve months after the last general assembly in April 2015.
Hence, assuming that the last payment of EUR 3.60 will be made to shareholders at the end of May 2016, this translates into a projected IRR of 19.9% and a total return of 14.7% for this investment.
Currently, shares are trading for EUR 3.35. Under the assumptions made above, market participants can expect an IRR of 8.0% and a total return of 7.5%, if they invest today.
It is important to note that most of the uncertainties that existed at the time of my original investment are gone. Currently, the company has roughly EUR 16.1 m or EUR 3.77 per share in cash. Other current assets sum up to EUR 0.5 m or EUR 0.11 per share. At the same time there are EUR 0.2 m or EUR 0.04 per share of outstanding liabilities.
Annual corporate operating expenses should sum up to no more than EUR 0.5 m or EUR 0.12 per share.
Consequently, management’s projection of the final pay out of EUR 3.60 seems to be a conservative estimate.
On top of that, there is potential further upside stemming from the following situation outlined in my original thesis:
“In addition, there is a brief story to be mentioned. Recently, the company sued its tax advisor as management is of the opinion that it was wrongly advised. The background is the following: concerning the dividend distribution for the fiscal years 2009 and 2010, on the advice of its tax advisors, the company withheld taxes for their shareholder (which is the common way) and remitted them to the tax office. As it turned out, however, the company determined that the distributions would have been tax-exempt because these distributions could have been made from the contribution account for tax purposes. Based on my understanding, the company had to bear accumulated costs related to this issue of roughly EUR 0.8 m until the end of 2013. Legal proceedings against the tax advisor started in 2014. Management expects the chance to succeed as “very good”. Let’s keep it simple and assume that they will reach a settlement and that any inflow from the tax advisers will be offset by outflows to the company’s lawyers.”
According to management, the company won the case against the tax adviser. Thereafter, the tax adviser appealed against the judgement. The court of higher instance will decide in July 2015 whether the appeal will be allowed.
On a positive note, it is now likely that the company will receive an indemnity from the tax adviser. I do not know what the amount could be which depends on the final outcome of the trial. However, given that the company has already paid at least EUR 0.8 m or EUR 0.19 per share for legal advice, I believe that any agreement or final ruling could result in a markup to the final liquidation payout to shareholders.
On a negative note, additional costs for legal advice might occur, if the appeal against the judgement will be allowed. More importantly, the final payment cannot be made before all issues regarding the company have been resolved. For instance, when the legal procedure will be prolonged the final payment has to be postponed until a final solution has been found. Another issue is an Italian affiliate which is still in the liquidation mode. Apart from that, there is a very small probability that the company will be subject to liabilities of which management is currently not aware of.
The following table provides an overview of the projected IRRs for this investment depending on (1) the timing of the final pay out and (2) the amount of the final dividend:
Given the relatively low risk profile of this investment, I believe that the potential return offered by the market is highly attractive at the current low interest rate environment. Therefore, I increase my current position in this investment as follows:
Between the day after the issuance of the first quarter report until today there has been no release of public information. At the same time, the share price traded in a small range between EUR 3.30 and EUR 3.36. Therefore, I think it is fair to assume that I increased my position during this period of time. From May 13, 2015 until yesterday 356,537 shares were traded in Frankfurt at a volume weighted average price (VWAP) of EUR 3.34 per share. According to the portfolio rules, I was therefore able to buy one third of the trading volume increasing my position to 4.1% of the portfolio (before: 0.7%).
A comment on taxes: As readers of this blog know, I ignore taxes (1) as it can be very complex to include taxes in the return calculation and (2) as tax treatment can vary between different types of investors.
The content contained on this site represents only the opinions of its author(s). I may hold a position in securities mentioned on this site. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. As always please do your own research!