On September 10, 2019, Litman Gregory’s Rajat Jain interviewed David Marcus, portfolio manager of Evermore Global Value (EVGIX), who has invested in Europe for over 30 years. Marcus covered recent conversations with European corporate management and provided examples of companies that can thrive despite the current malaise on the continent.
Rajat Jain: What do you mean when you say you invest in “Special Situations”?
David Marcus: That means we focus on cheap stocks with catalysts, which can be breakups, spinoffs, restructuring, management changes—all kinds of strategic change. We’re not looking for cheap stocks and hoping they go up. We want to know there is a path to get the value from the stock to the shareholder.
Can you walk us through examples of these special situations in your current portfolio?
One of our holdings is Vivendi [“Breakups/Spinoffs”]. Vivendi is one of the largest media companies in the world. They own 100% of Universal Music Group, which is the largest music company in the world. They’re in the process of selling between 10% and 20% to a group in China called Tencent. It’s finally showcasing the value here.
Every single person that goes from getting free music … to paying for music [through Spotify, Pandora, Tidal, etc.] is a customer of Vivendi through their Universal Music business.
The business has exploded. This is a conglomerate—exactly what we look for. It’s a conglomerate that’s breaking off non-core assets. They’re buying more focused areas that fit their core operations. They have the video game business. They have the music business. They make movies and TV shows in Europe through Canal+. This has been a fantastic investment for us that has quietly transformed itself from an ugly conglomerate-behemoth into a more focused conglomerate-behemoth, yet somewhat smaller.
We don’t think all conglomerates are horrible. We just think that when they get a little TLC and are focused and are managed properly, actually you can peel out lots of different kinds of value.
Fagron [“Restructurings”] is a pharmaceutical compoundings business. They work for pharmaceutical companies where they put together all kinds of products for health care.
They are the largest in Europe. They’re no. 1 in Brazil. But really, to make this a very tight point, we discovered this company just under three years ago. It really was a company that had good businesses but had overextended its balance sheet. When it was refinancing the balance sheet, in the meantime, the stock had gone from €40 per share to just under €6. It had collapsed.
We always look for these restructurings and changes and said, “Let’s get our arms around this.” We valued the U.S. business at zero, because they had a lot of problems here. We said if it’s still cheap without the U.S., there’s something interesting here.
We helped them refinance by participating in a capital restructuring. The stock has done very well because they brought back the original founders of the business, who brought back the old style of doing business. Today it has a clean balance sheet. The U.S. has now been approved by the FDA. Since we counted that as a zero, it’s added huge value to this story.
Restructuring is an area where a lot of people don’t like to look. We look at them. When others are dumping stocks, we can find areas where we find situations that are less competitive, and we really can get our arms around the businesses. Europe, again, is just chock-full of these that were forgotten stories over the years that are now being dusted off and refocused on.
“Other Special Situations” [are] ones that kind of just don’t fit into the other buckets. Here, I’ll talk about Frontline. If it’s not the no. 1, it’s the no. 2 largest oil tanker business in the world. As a firm, we own about 3% of this company.
Here, again, we started buying it when all kinds of shipping and transportation were considered completely the wrong place to invest. There were all kinds of concerns with shipping.
The good news is, that means that the industry went through a radical transformation where older ships were being scrapped. New regulations have come in for how fuel emissions are done. What that means is that if you have older ships, they’re not economical to keep going. So they’re scrapping the old ships.
So many companies got burnt over the years; they ordered fewer and fewer new builds. You have this interesting time where you have fewer new ships coming into the system, and more scrapping than ever before. We’re seeing the valuations and the pricing and the cash generation here growing exceptionally well. We’re really at the front-end of that. It’s been a good investment so far, but we see a lot more value here.
[Then we have] “Compounders,” which are generally family-controlled businesses. They’ve cranked out huge total return to shareholders over many years, yet trade at a discount. For compounders, we’re looking for leaders at the top that are exceptionally talented at creating value.
Let’s take Exor as a quick example. You probably know more of their products than you think. This is the holding company for the Agnelli family, one of the wealthiest families in Italy, through which they control Fiat-Chrysler Automobiles, Ferrari, [and] big insurance businesses.
During the U.S. financial crisis, when Chrysler was really in bad shape, they bought Chrysler from the U.S. government. They were able to really take advantage of a company—making a bid for almost nothing—to buy Chrysler. Today it’s the cornerstone of the cash-flow generation there.
It’s really smart guys that buy assets on the cheap, who can do it and grow it. This has compounded extremely well for us.
Can you talk about how you’re able to get access to management? Just based on your recent trips, what are you hearing? How are managements adjusting to this almost-zero-growth environment? What are their concerns and what are their hopes?
Sure. Yes. We spend a lot of time visiting these companies there. We go to Europe quite a bit. A lot of them are coming here as well. We get as many meetings as we can throughout the year.
Most companies, we’re trying to meet with them multiple times. To be clear, we’re never looking for secrets. We’re just trying to understand how they think about their business. How do they think about creating value for shareholders or if they’re even thinking about it at all? To really understand the nuance of it.
One of the most important things for us is that we actually are investing in people—not just businesses. We like to say we’re betting on jockeys—not just horses. We need the right jockeys. That’s why it is so critical to get out and talk to them.
When we are getting out there and talking to management teams and individuals, and the families that control these businesses, we see really it’s subtle, but it’s accelerating. It’s been so tough in Europe for so many years that you’re seeing companies that have really learned to adapt.
It’s the old line, “Adapt or die.” Well, these guys have “adapted or fired.” They fired a lot of managers. We’ve seen families kick out their own family members and put professionals in to help run these businesses more competitively. They’re not competing with the guy down the street anymore only. They’re competing with everybody in their industry.
What we’re specifically hearing is, they have the capital to take advantage of adding more products and services. They’re finding new ways to cut costs. Stories like the company that’s a conglomerate that has 15 different IT departments and realizes it should only have one, because 15 of them don’t talk to each other. So they start cutting costs and start refocusing.
You can’t cut your way to success completely. But the focus on the streamlining of operations and cost-cutting is critical.
Additionally, supply chains are evolving around the world because of the trade war. In some cases, even for us, we start to think about, “Do our companies sell to China or do they sell indirectly to China?” Meaning, if we have a French company that sells to a German company—they sell to somebody. It really pushes us to rethink how stocks in our portfolio work and how they make money.
These managers are really positive about the opportunities for their businesses. They see the chance, again, to make acquisitions. They have already cut costs. They’re seeing a pick-up in order flow. Funny enough, in some cases, because of the trade war—as I say—supply chains change. In some cases, Chinese companies were buying from the U.S.; now they’ll buy from Europe. Sometimes it’s dramatically different.
We can’t count on those changes forever, but the point is, they’re taking advantage of it. Even the shipping companies that we tend to own and like—for them, it’s all about what you would call ton miles. How many miles are they selling—much more than where the customer is. “Is it a Chinese customer or a U.S. customer?”
Trade wars are actually creating longer trade routes, as Chinese companies are buying more from Latin America. It’s just all these things. That’s why I say bad headlines are not always bad for the companies.
I have to say, some of our companies—they’re not even feeling it at all. They’re saying we don’t have any impact at all from trade war. Aurelius Equity Opportunities … is a publicly traded private-equity business, headquartered in Germany.
Actually, just this morning, we spoke with management. They were talking about the two most recent acquisitions they made—both U.K.-based. They said if it weren’t for Brexit, they never would have bought those businesses. They buy cast-offs from larger companies that are getting rid of non-core businesses. The fear has taken some companies to say, “We want to get out of our businesses in the U.K.”
The CEO was saying that the deals they struck in the U.K. were two of the best deals they’ve seen in quite some time. The sellers were extremely motivated. They as the buyer took their time and did their homework. They were able to buy things really cheap.
That is what has really happened in Europe. I think most American investors really just think it’s the same-old-same-old. It’s not.
Vincent Bolloré has been a controversial figure. What are the risks that you see in investing in his holding company? And how have you gained comfort with it?
Vincent Bolloré controls Bolloré, which is in our “Compounder” section of the portfolio. Bolloré, in turn, controls Vivendi, which I discussed earlier.
I started meeting Vincent Bolloré over 20 years ago, in the 1990s, before he was a billionaire. He was just a well-known guy in France … He transformed [Bolloré] from a sleepy backwater bankrupt situation to really a global business.
How did I get comfortable with him? He has been so aggressive in what he does. Hostile corporate raider. Aggressive manager of the businesses. Yes, he’s had some issues. They have more ports in Africa than any other public company, yet they also own media and telecom businesses.
Recently he announced he was retiring as the chairman of this group. He’s promoted his two sons—Yannick Bolloré and Cyrille Bolloré—to take over.
I’ve met the sons over the years, but I went to France right after this announcement. Actually earlier this year, I spent some time with both of the sons, to talk to them. What are they going to do differently? How much influence does the father have?
Frankly, you want the father involved. He is an unbelievable value-creator. He’s created an enormous level of return here.
We tracked the issues that they had in Africa. Questions on how they got some of the port contracts. They’re not being investigated by either of the African countries; it’s the French regulators that are looking at them; their view is that the way they conducted business may not have been perfectly above-board.
We read all the documents and we talked to them and specifically asked Bolloré directly about this. Their view is, we could probably pay a fair chunk of money and this all goes away; you just pay a settlement. But their view is, “For us to admit guilt when we’re not guilty? We’re not going to do it.” So, they’re fighting it. In the meantime, the transition is accelerating to the sons.
I have to tell you, it was such a good meeting. I met the two of them separately. They each gave me more than two hours. One is now the chairman of Vivendi. The other one’s the chairman of Bolloré itself.
They talk differently than the father. They basically articulate that he’s very good at buying things cheap, but when it came to management, they haven’t always rationalized and restructured.
They were talking about all the low-hanging fruit they had throughout their empire—of places to streamline, cross-promoting products and services.
I love it from an investment standpoint. I think there are many years of potential value to be created here. It’s already done very well overall. But we’re always going to track and watch it.
I believe that even if there were an issue for those two specific ports in question, and they somehow lost those contracts, it’s a blip for the company. It’s less than 6% of their business. Where this case has not moved forward, it’s been two years into this already. Nothing’s happened.
We’ve seen companies from GE to Siemens to all kinds of big conglomerates get into similar kinds of issues for how they got into contracts in certain markets. Normally what ends up happening is there usually are cash settlements to the governments that are investigating them. Then they change their business practice.
If you want to be a little more cynical, like myself, I actually think it’s a good thing. Why? This cleans up the old way of doing business. They bring in more regulation and more structure. More focus.
The seventh generation of the family just operates differently. These are guys that went to business school and have a different focus on how to do business. I just see it as an evolution of this multigenerational conglomerate to be more streamlined and more corporate governance. More focus on doing things the right way.
We see that not just at this company. We see that at other companies, as well. It’s a big theme in Europe.
A lot of these families didn’t think about corporate governance or anything of that nature. It’s a huge focus now. There are so many rules and regulations that have come into play in the different markets.
If you want to say the U.S. has really brought something that people haven’t focused on, it’s this. It’s harmonizing corporate governance levels and goals and structures. It’s having real ramifications for a lot of these companies.
Interesting, David. In how many instances of these family-controlled businesses do you find you’re not enthralled with the next generation and pass? How many of these holding-based companies do you find are bringing in outsiders to be CEO and have real independence?
People assume the old view that by the third generation, it’s over with. Remember, Bolloré is the sixth generation of this family. His sons will be the seventh generation. I will tell you, the fifth generation of Bollorés basically put the thing into bankruptcy.
I’ve been meeting family-controlled businesses as really a cornerstone of what I’ve been doing for pushing 30 years now, starting when I went to Sweden. The first country I ever went to in the early ’90s.
What I’ve found is that you have all kinds. You have the head of the group that does not groom the next generation. They treat them very poorly, in fact. Sometimes they ship them out to the furthest reaches of their empire and say, “See if you can learn your way back.” Other times, they kick them out completely. We’ve seen fights where the next generation has to fight its way back in. We’ve seen it all.
In the case of Bolloré, his son Yannick is in his late 30s. His son Cyrille is in his early 30s. Cyrille, when he was in his early 20s, his father shipped him to Africa. He said, “You’re going to go work in the logistics business. If you can figure out how that works, I’ll give you another one.” And he did!
Then, the dad eventually said, “You know what? My younger son is the one that’s going to take over this whole empire; not my oldest.” The older son runs Vivendi. He’s very good at those things. But he started him off within Havas—one of the largest advertising agencies in the world.
I would tell you right out of the gate, he did a horrible job. Horrible. Well, he learned at the shareholders’ expense in those days.
He eventually bought 100% of Havas, and it’s part of Vivendi. Today he’s chairman. He’s a completely different person. He was groomed as a young guy in his early to mid-20s to late-20s to 30s. Now he’s pushing almost 40. It’s just a remarkable transformation.
I’ve asked people at competing companies: You met Yannick Bolloré in the past. Now you see him running what he’s running. You get the same feedback, which is the father put these guys through the wringer to learn.
We have companies we don’t own, where the next generation is not creating value. But you know what I find is that talking to those families—it’s critically important. It’s really like getting the map to the minefield—they’re learning what to avoid.
They don’t realize that they’re value destroyers. They think they’re value creators. So you want to meet them.
It goes back to that concept of, “Who are the jockeys on the horses?”
In the case of Exor, John Elkin—who’s the patriarch of the family—is in his 40s. When this guy was 22, his grandfather said, “I pick you. You will one day take over the empire.” He started grooming him in his early 20s. When he was 28, the grandfather died. Everybody thought, “My God. This guy’s going to destroy this thing.”
Back then, Fiat was not doing well. Unlike his grandfather, who was a power guy controlling these businesses, Elkin’s attitude was, “I need to bring in smart guys who are smarter than I and unleash them.” That’s what he did. That’s professional management. He brought in one of the great auto industry executives, whom I’m told at the time was not an auto industry executive, Sergio Marchionni. He was running a different business for the Agnellis.
He said, “You’re going to help me turn the auto business around.” He had to go to his family and beg them to give him money to reinvest in the auto sector because it was dying. He unleashed Marchionni, who has become one of the legends now. Unfortunately, he died last year.
Elkin got very good at finding talented people, bringing them in and unleashing them. That’s a hybrid. You have the family in control but bringing in professionals alongside them. They don’t mastermind it. They let these guys do their thing.
The guy after Marchionni was a guy named Mike Manley. He was groomed by Marchionni. So it’s a chain, now.
They’re trying to merge with somebody else. Maybe Renault, maybe somebody else, because the scale in the auto industry is changing.
I can tell you, this guy Elkin is ruthless. I see him at the Berkshire Hathaway meetings. I’ve gone for 20 years. He goes there. He’s a huge believer in value investing. But when I say he’s ruthless, he’s brutal when it’s time to buy assets cheap. When they sell assets, they really are aggressive in how they conduct business. He holds the bar high for everybody, including himself. There are wonderful interviews with him out there. I’d say it’s worth looking that up.