Three months ago I bought a 3% position of Telefonica Deutschland (TEF) and published a detailed write up about the company. Since then the share price has increased by roughly 40% and is now exceeding my estimate of intrinsic value by 10%.
In my original analysis I incorporated substantial net savings from the merger with E-Plus mostly in line with management’s forecast and I expected 2017 to be an inflection point, when average revenue per user (ARPU) should increase for the first time after several years of decline. Major reasons should be the fast increase of data usage and a more supportive regulatory environment. From my perspective, the current share price is now fully reflecting this scenario.
I think that a further increase of the intrinsic value could be justified by large savings from lower prices realized at spectrum auctions, more deregulation and hence pricing power for operators or some kind of “resource conversion”.
For instance, Telefonica SA is currently in the process of selling its British subsidiary. So management might also be thinking about a sale/merger of Telefonica Deutschland to/with another entity which could unlock additional value for minority shareholders in the future.
However, at the moment I regard these potential catalysts as speculative having not enough substance to provide further upside for my estimate of intrinsic value.
Nevertheless, I am fully aware that the momentum coming from the decision made yesterday by the ECB might push TEF’s share price further upward over the next months. However, this is only due to a reduction in the discount rate applied but not due to any improvement in the company’s fundamentals. The same applies to TEF’s share high dividend yield which might attract more market participants given the ultra-low interest rate environment.
In conclusion, as the share price is now trading above my estimate of the company’s intrinsic value and I have not observed a change in the company’s fundamentals since my original write up, I will sell my position at today’s VWAP.
Edit 1/26/2015: Sold the position on 1/23/2015 at a VWAP of EUR 4.90 realizing a total return of 38.4%.
United Medical Systems
United Medical Systems (UMS) announced a tender offer, closing on 27th of January, for up to 10% of the company’s issued shares at EUR 10.5 per share. Though this offer price is 5.4% below the total estimated liquidation value, the offer is accretive to performance from an IRR perspective (assuming that the last payment to shareholders will be made in October 2016). I will therefore tender 100% of my holding anticipating that some shareholders make no use of the offer.
Edit 2/6/2015: I was able to tender 32% of my shares at a price of EUR 10.5 each realizing a total return of 10.2% over a four month holding period.
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