RHJ International (RHJI) is a holding company currently in the final stages of a transformation to a financial services company. Originally, the company used to mainly invest in undermanaged Japanese businesses. However, the performance of these investments did not meet expectations. As a consequence, in 2007 with Leonard Fischer a new CEO was appointed and the company decided to dispose its portfolio and start the transformation into the financial services industry. Since then, their largest acquisition so far was made in 2010 by buying Kleinwort Benson, a British private bank, from former Dresdner Bank for EUR 243 m. In addition, it is currently planned to rename the entire company Kleinwort Benson, and possibly demand a listing in London.
With the sale of Shaklee in H1 2013 almost all of the former Japanese investments have been sold. However, for many of the disposed assets the achieved sales price was below cost. This caused book value per share to drop from EUR 10.7 at the end of 2009 to EUR 7.3 at the end of 2012.
The current investment portfolio as of June 30th, 2013 consists of the following assets:
The company’s current NAV estimation is EUR 6.9 per share offering a 43% discount to the current share price.
Kleinwort Benson Group consists of two segments. First, Kleinwort Benson Wealth Management is active in the UK with balance sheet assets of EUR 2.6 bn and EUR 6.3 bn assets under management. The segment has been generating losses since its acquisition. The bank is solidly financed with a Tier 1 ratio of 19% and a loan to deposit ratio of 20% leaves ample leverage potential. Current book value stands at EUR 199 m. Based on the company’s information management is driving cost efficiencies and reinvesting these into revenue opportunities and systems improvements. However, it seems that sustainable profitability is still a mid to long term goal. The management is currently not making any statements what the targeted returns on capital are as long as the transformation of the business has not been finished (see BHF-Bank deal below).
Second, Kleinwort Benson Investor is managing assets for institutional investors. They are focusing on specialist equity strategies for public and corporate pension schemes, sub-advisory investors and foundations/endowments. Assets under management (AUM) are EUR 4.0 bn. AUM has been increased by 43% since the end of 2011. The segment has generated an operating profit of EUR 1.1 m in H1 2013.
quirin bank is the first fee-only private bank in Germany which offers clients wealth advice without conflict of interest and it is listed in Frankfurt. There is an interesting interview with the bank’s CEO about its business profile. So far results have been weak and the bank was only able to barely break even. Management is holding approx. 12.3% of the company.
After the disposition of Shaklee for EUR 39.8 m the legacy portfolio is now representing only 3% of the portfolio. Based on the company’s information the Shaklee sales process took 18 months. Due to no interest of potential buyers, RHJI had to sell its share in the company to Shaklee itself at a 40% discount to market value. In addition, part of the sales price (EUR 8.8 m) will be financed by a loan to Shaklee for a maximum period of 3 years.
RHJI is holding a 13% stake in the general partner in the Ripplewood private equity fund. Performance so far has been sluggish as well and the management decided to write off approx. 75% of book value as of June 30th 2013. In the lates conference call management explained that the fund’s impairment is due to the negative share price performance of its major investment after its IPO in 2013.
In addition, the company announced in its H1 2013 report that it is going to spin off its merchant banking business previously conducted through Ripplewood into a separate legal entity in which RHJI will hold a 19% stake. The goal of this transaction is to limit RHJI’s financial exposure to its merchant banking activities. There will be a capped maximum cash contribution to this entity of EUR 5.3 m. In addition, as part of this arrangement, RHJI will transfer to this new entity the licence to the name “Kleinwort Benson Advisors” for seven years. Interestingly, Tim Collins one of the major shareholders of RHJI will hold an 81% stake in this new entity investing EUR 15.0 m. So RHJI is providing 26% of the capital plus the name but is only getting 19% of the shares in the new entity. Management is of the opinion that winding down this underperforming business would be more expensive and that the new entity might be providing products for Kleinwort Benson Wealth Management in the future. However, as this is clearly a related party transaction, there might be a conflict of interest. So for me it is not clear whether this transaction is value enhancing for the shareholders.
The company is also holding a 70% stake in Arecon AG, which was fully written off at the beginning of 2013 and the management then decided to wind down Arecon’s activity.
Pending acquisition of BHF-Bank
To complete the transformation RHJI together with a number of co-investors is currently in the process of acquiring BHF-Bank, a subsidiary of Deutsche Bank. BHF-bank has EUR 37 bn under management. The acquisition process initially started in July 2011 in the form of exclusive negotiations. Based on the company’s information the co-investors include Blackrock, Chinese investor Fosun, and Acton SE (the wholly owned strategic investment company of German entrepreneur Stefan Quandt). Kleinwort Benson Group will acquire 100% of BHF-Bank for an agreed consideration of € 384m (0.77x book value), which will be paid in cash and is subject to closing purchase price adjustments. The associated capital increase in Kleinwort Benson Group will be supported by the co-investors. The execution of this acquisition would give Kleinwort Benson the opportunity to expand into the German private wealth market. However, the deal takes longer than originally anticipated as approval by the German financial regulator BaFin is still pending. Based on the management’s information there are no costs related to a potential non-transaction in case BAFIN does not approve the deal.
The large discount to book value attracted an activist investor, Equilibria capital, in 2012. Equilibria together with other investors forms an “investor goup” which is holding 4% of RHJI’s share capital.
In 2012, Equilibria Capital tried to add an item to the agenda of the general assembly, where they suggested to pay a special dividend of €2.4 per share instead of trying to take over BHF-Bank. They didn’t succeed because RHJI told them that due to Belgian company law, they couldn’t pay out a dividend that year.
In 2013, they were successful in adding items to the agenda of the general assembly. However, none of the other major shareholders supported the activist investor, so that the resolutions were rejected. In their resolutions they requested the following:
– Pay out of special dividend (EUR 1.75 per share)
– Change in the Board of directors
– Limits on management compensation if the company is not profitable
Equilibria is criticizing the weak performance in the disposition of the legacy portfolio assets and the high costs (e.g.management compensation) at the holding level. From their point of view the structuring of the BHF deal is detrimental to RHJI’s shareholders interests. They point out that the management should be focused on improving Kleinwort Benson’s operating performance and not on further acquisitions. In addition, a break-up of the company is also outlined as an option to enhance value for shareholders.
Answer from RHJI
In RHJI’s answer to the investor group’s letter the management indicates that the payment of a special dividend will be examined, if the acquisition of BHF-Bank is not completed until the end of the summer 2013:
“Should the acquisition of BHF-Bank not be completed by the end of the summer the Board reiterates, what it has already publicly stated before, that it will give full consideration to a capital decrease and discuss with shareholders as appropriate. The Board is therefore fully supportive of a return of capital to shareholders in principle and under the right circumstances. Those circumstances do not currently exist, however, and the company has existing contractual commitments in respect of the BHF transaction to both Deutsche Bank, as the seller, and to our co-investors, the violation of which might expose RHJI to claims for damages by Deutsche Bank and our co-investors. The Board recommends that shareholders reject the small group of five shareholders request for a capital return whilst a major strategic business opportunity remains in progress, the outcome of which will be determined at the latest by the end of this summer. “
As we have already October, I am expecting an announcement in this regard coming soon.
Concerning holding level costs RHJI points out that the board has already committed to reducing these costs. Based on the latest company presentation total holding costs have been reduced by 45% in H1 2013 compared to H1 2013. Their goal is to reduce fixed holding costs (excl. lease costs and variable compensation which accounted for EUR 5.3 m in H1 2013) to below EUR 10 m in 2014. This would be a 50% reduction compared to their projection for the full year 2013.
In the table below you can find a sum of the parts valuation, which follows a more conservative approach than RHJI’s NAV computation.
|Asset||Ownership %||Valuation method||% of NAV||Stake value (EUR m)|
|Kleinwort Benson Wealth||100%||0.8x book value||35.5%||159.2|
|Kleinwort Benson Investors||100%||Investment value||5.3%||23.7|
|Quirin Bank||27.80%||market price||3.7%||16.7|
|Ripplewood Funds (GP)||13%||Investment value||0.8%||3.8|
|Legacy Portfolio||Investment value||1.9%||8.6|
|Loan (Shaklee disposition)||2.0%||8.8|
|Adjusted equity value||448.9|
|Shares outstanding in million||86|
|NAV per share in EUR||5.25|
I am using 0.8x book value for Kleinwort Benson Wealth Management in line with the BHF-bank’s acquisition multiple. For Kleinwort Benson Investors, I take the original acquisition price paid. The same applies to the Legacy portfolio and the Ripplewood Funds (incl impairment charge as of June 30th 2013). For Quirin Bank I use the current market price.
Based on this intrinsic value calculation, RHJI’s share price is offering a current discount of 25%.
Most holding companies are traded at a discount to intrinsic value/NAV. However, after the transformation will be completed, it is planned that RHJI will be renamed Kleinwort Benson Group resulting in a pure play private bank with a minority share in quirin bank. Hence, from my perspective there will not be a justification anymore to apply a holding company discount to the share price.
Apart from that, I believe that the adjusted equity value provides for significant upside potential once the current ongoing transformation has been finished. For a well-funded bank like Kleinwort Benson (comparable to Close Brothers, Julius Baer, Vontobel, Bank Sarasin) the multiple I am using seems to be at the low end and is only justified due to the weak operating performance so far.
So from my perspective EUR 5.25 comes close to the liquidation value of the company today ignoring any potential improvements in operating activity.
As I have pointed out there are a number of issues with this company:
First, the results of the disposition of the legacy portfolio were disappointing. Second, the transformation takes longer than expected. In addition, the performance of the banking activities has been weak so far and the management is not providing clear projections regarding expected returns on capital for the banking business. Apart from that, the spin-off of the merchant banking business raises a number of question marks.
Nevertheless, I believe that management is going into the right direction by focusing their investments on one industry. They are making progress in reducing costs and legal restructuring. In addition, the company is now at a stage where the transformation has almost been completed and a potential rerating of the stock price after its completion could be possible in the long run.
Shareholders are now in a situation where they could either have the acquisition of BHF-Bank (which is becoming more and more unlikely), or if the acquisition is not successful, shareholders will receive a significant cash return. Hence, there is also a short term catalyst for the share price.
As the current share price of EUR 3.9 offers an attractive discount to a conservative intrinsic value estimation, WertArt will invest into a 3% position with a limit of EUR 4.05. Please click here for more information on WertArt Capital and the virtual portfolio.
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 do your own research!