On March 31, 2010, RMB Holdings Limited (“RMB Holdings”), a South African investment holding company, announced its intention to consider a restructuring of its existing investment portfolio. On Wednesday, December 15, 2010, the company decided to proceed with the restructuring of its banking and insurance portfolio through the unbundling of its publicly-traded and privately-held insurance interests.
Currently, the company’s portfolio of strategic investments in South African financial services groups comprises both insurance interests and an interest in the shares of FirstRand Limited (“FirstRand”), one of South Africa’s largest diversified financial services companies. The company will separate the insurance and banking interests through the unbundling of the insurance interests as Rand Merchant Insurance Holdings Limited (“RMI Holdings”). As a result of the restructuring, the insurance interests of RMI Holdings will include the following:

On November 11, 2010, Straits Resources Limited (“Straits Resources”) (Ticker: SRL AU) announced that the company had entered into a proposed scheme of arrangement with PTT Mining Limited (“PTTML”)-a subsidiary of PTT Plc (Ticker: PTT TB)-under which PTTML would acquire 100 percent of the issued shares of Straits Resources at a price of AUD 1.72 per share.
According to the proposed structure-as set forth in the Demerger Scheme Booklet and Acquisition Scheme Booklet released on Monday, December 20, 2010-the acquisition of Straits Resources will occur subsequent to the demerger of the Straits Resources metals business. Following the demerger, newly named Straits Metals Limited (“Straits Metals”) will hold the following assets:

On July 28, 2010, the Board of Directors of ArcelorMittal announced its intention to conduct an assessment of the potential spin-off of the company’s stainless steel and specialty steels businesses from its global steel and steel related products businesses. The stainless steel division has plants operating in Brazil, Belgium, France, and China. In the first nine months of 2010, it produced 1.59 million metric tons of steel and USD 4.18 billion in sales, equivalent to approximately 6.8 percent of ArcelorMittal’s total revenue for the period.
The spin-off comes as producers are struggling with lower stainless steel prices and higher raw material costs, namely that of iron ore. On December 7, 2010, the ArcelorMittal Board of Directors approved the proposed spin-off. The company will convene an extraordinary general meeting of the ArcelorMittal shareholders on January 25, 20111 to approve the proposed separation.
Following the spin-off, the stainless steel division will be known as APERAM. Upon approval, ArcelorMittal shareholders will receive one APERAM share for every twenty ArcelorMittal shares held on the record date. Shares in APERAM will be listed on Euronext Paris, Euronext Amsterdam, and in Luxembourg. In the United States, they will trade on the over-the-counter market in the form of NY Registry Shares. Notably, following completion of the spin-off, Chairman and CEO Mr. Lakshmi Mittal is expected to own 31,866,913 ordinary shares in the APERAM, representing approximately 40.83 percent of its outstanding voting shares.

Upon further reflection, it seems quite possible that the importance of the concluding sentence in the excerpt above is prone to betrayal by the subtlety and brevity with which it has been presented to the readers of this report. That being the case, further clarification is in order.  As discussed in the original report, the valuation of Fiat Industrial proceeded on the basis of automobile manufacturer multiples, rather than industrial equipment manufacturer multiples. The lack of a suitably large set of comparable companies required such an approach. The result was a conservative valuation with only brief mention of the potential for additional price appreciation should the industrial business trade at a premium multiple. Notably, however, no analytical framework was presented for properly understanding why such an outcome might transpire and the potential prices that would result in the event of such an outcome. Such a framework is included herein.

On April 21, 2010, Fiat S.p.A. (F IM) announced its intention to demerge its non-automotive businesses into a newly formed company to be named Fiat Industrial S.p.A. (FI IM), which will begin trading on the Milan Stock Exchange on January 3, 2011. Though Fiat will remain listed on the Milan, Paris, and Frankfurt stock exchanges, the shares of Fiat Industrial are not expected to be listed in either Paris or Frankfurt. The transaction is expected to be effected on a tax-free basis, with Fiat shareholders receiving one share of Fiat Industrial for every share held.

Notably, Fiat’s equity capital structure is comprised of three classes of equity: ordinary, preference, and savings shares. Each share class differs in the priority of dividend distributions and the allocation of earnings. Post-demerger, Fiat and Fiat Industrial will continue to have the same three equity share classes.

On a post-demerger basis, the prospective annualized rates of return of Fiat and Fiat Industrial through potential multiple expansion alone are estimated to be in the high single digit to low double digit range. The superior long-term growth prospects of Fiat Industrial, however, appear to provide the investor with more attractively skewed source of optionality—that is, a similar base level of return in the short-term through multiple expansion (i.e., nine to ten percent if annualized over 1.5 years), with a significantly more attractive growth profile in the long-term (i.e., an annualized EBITDA growth rate projection of 31 percent, compared to 24 percent for Fiat).

Moreover, an additional source of optionality is present thorough the use of arguably conservative valuation multiples for Fiat Industrial. In the five year period ending in 2009, the average trading profit margin of the combined businesses of CNH and Iveco was 6.18 percent, compared to an average trading profit margin of 2.29 percent for the remaining automotive businesses. Not only was the margin higher, but performance was consistently positive, a characteristic which may very well be deserving of a premium multiple.

Ergo, while not extraordinarily attractive on the basis of current operations, the shares of pre-demerger Fiat, post-demerger Fiat, and Fiat Industrial are recommended as potentially attractive sources of growth optionality with a strong bias towards Fiat Industrial. Such optionality may very well become more attractive in the event of a diminution in market value resulting from the demerger.

Considering CDON’s near-term growth, the shares do not appear to be egregiously priced. It is not unusual for technology companies to attract high valuation multiples. These reflect the anticipated growth expected of these types of businesses. While it may be tempting to treat CDON similarly, we make two general observations. First, although CDON is characterized as an Internet or ecommerce company, we believe that the description “retailer” is more apt. Fundamentally, CDON is no different than Wal-Mart’s online business, other than that the latter company has a much better distribution network
and economy of scale. Second, CDON’s business is presently highly dependent upon the success of the Entertainment division. As the transition from physical medium to downloadable media progresses, CDON should feel the impact, even though the company does participate in the download market. It is due to the competitiveness of the market that
the Entertainment division generates operating margins of only 6%-7%, versus 12% for Sports & Health (but still exceeding the 5% operating margin of Fashion).

Aside from the sale of its own branded sports products and clothing items, the company does not appear to have any clear-cut advantages vis-à-vis its competitors. Should CDON flourish, it is likely to attract more competition. Additionally, the extent of CDON Group’s organic growth is still somewhat unclear, given that its historical sales growth was aided by multiple acquisitions. Since the purchases were completed when CDON was still part of a larger organization, it might not have the same advantages or bargaining power as a freestanding company. In the event that CDON pursues additional acquisitions in the future, they might be made at a greater cost. For these reasons, we would caution against being overly generous in terms of valuation.

To observe the extremes at which valuations may occur, one only need to look to Amazon.com. Although the company has indeed established itself as the de facto ecommerce juggernaut, it is well reflected in its share price. Amazon.com trades at 73x earnings, 12x book value, 39x cash flow and 31x EBITDA. One can infer that the multiples accorded to Amazon.com reflect the geographic growth that is still available to the company – that is, international expansion. CDON Group, on the other hand, appears to be strictly focused on dominating a local region. Clearly, it would be improper to apply Amazon.com’s metrics to CDON.

Nevertheless, a multiple of perhaps 20x earnings would still be within reason for a value oriented investor. As such, fair value would be established at SEK 33.00 – 34.00 per share. As a result, we would conclude that at present the shares are not substantially undervalued to recommend purchase.

On a pre-distribution basis, if Grupo Carso’s trailing twelve month majority net income were conservatively capitalized at 15 times, the fair value estimate would be MXN 48.23 per share, significantly lower than the current price of MXN 80.01.

On a post-distribution basis and at median competitor multiples of run-rate pro forma majority net income, the fair value estimates for Grupo Caro, Inmuebles Carso, and Minera Frisco are MXN 25.39, MXN 3.60, and MXN 14.41, respectively, or MXN 43.39 on a sum-of-the-parts basis. Solely on the basis of the run-rate pro forma financials of post-distribution Grupo Carso, Inmuebles Carso, and Minera Frisco, a sum-of-the-parts analysis is also suggestive of significant overvaluation.

Importantly, other than six months of pro forma financials, the company has provided investors with relatively little fundamental information about the real estate and mining assets themselves (e.g., real estate square footage, mining production potential, etc.).

In consideration of the current valuation of the company’s shares, the lack of a demonstrated record of long-term shareholder value creation (i.e., last ten years under the direction of Mr. Slim Domit), and the absence of detailed information about the spin-off assets themselves, the shares of Grupo Carso are not recommended for purchase at this time.

Should post-distribution Grupo Carso, Inmuebles Carso, and/or Minera Frisco trade below the fair value estimates provided herein, future purchase may be warranted.