In my recent post, I had made a very quick analysis how I looked at the news that Rhoen now sells 2/3 of their business to Fresenius in order to sidestep the blocking shareholders.

That was my conclusion:

So for the time being I will not sell the shares and watch what is going to happen. At some point in time, the stub itself coul dbe an interesting situation in itself, as it will most likely drop out of the index etc. Sow I guess I will sell before the extra dividend is actually paid.

Let’s move a step back before that:

Before we knew that Rhoen wanted to sell and Fresenius wanted to buy at around 22,50 EUR (old offer). Initially, before the Fresenius offer, the shares traded at ~15 EUR, which I would define the “undisturbed price” without any control premium. Until last week, the market seems to have valued a rather low probability for the deal going through.

Very simply, the implied probability was around (17,50-15)/(22,50-15) = 1/3 or 33%.

Now a deal seems to be much more likely, but it is unfortunately not as “clean” as the old deal. Instead of getting only cash, one now expects a certain amount of cash plus a remaining “stub”. On the other hand,”all in” the price seems to be even slightly better as the old 22,50 EUR.

So why is the share now trading only at ~19 EUR ?

There are three explanations for this in my opinion:

A) uncertainty the deal is NOT going to happen

B) what will the remaining company (“stub”) be worth ?

C) the effect of the withholding tax on the special dividend

In my opinion, the withholding tax is not very relevant. If I buy now at 19,15 and I pay the withholding tax next year, I can make a “wash sale” (sell at a loss and buy again) to set off the tax. For institutional investors this is no issue anyway.

I am also pretty sure that the likelihood of the deal happening is very high. After the fiasco two years ago, Fresenius and RHoen will have put a lot of effort into this deal. So I would think that there is at least a 90% probability that the deal is happening.

This leaves us with c): People don’t seem to like being stuck with the “stub”. If we look into the Rhoen 6 month report, we can see that on an annual basis, Rhoen earns around 300-310 mn EUR EBITDA. The part which was sold to Fresenius is clearly the currently more profitable part with EBITDA of 250 mn EUR according to the filing.

This leaves the stub with EBITDA of around 50 mn EUR. The “implied” valuation of the stub is around 340 mn EUR EV at the moment, so we are talking about an implied valuation of 6-7x EV/EBITDA which is not much. Rhoen announced that they intend to earn 150 mn EUR EBITDA in 2015 in the remaining company. Even if this is too optimistic, I still think the “stub” is implicitly very attractive as RHoen has a very long history in turning around hospitals.

So all in all, at the current price, the stub looks like a very interesting investment.. The only problem is that I need to invest the full 19 EUR now in order to get expsure to the 5,20 EUR implied valuation of the stub.

In theory, as a professional investor, I could borrow up to 13,80 EUR against the Rhoen shares to lower the amuont of capital I need to commit and increase my Return on Investment. At the moment, as I have a lot of cash anyway, I do not need to borrow.

Expectation management:

Just to make sure, I do not expect that the shares will jump 5 or 6 Euros until the dividend will be paid. One has to think about the stock rather as a 13,80 cash deposit plus a 5,30 EUR stock. There will be very poor “visibility” about the stub in the next few months until the deal is finally settled. So I do expect some price appreciation on the “deposit part” but not that much, rather like an implicit attractive deposit rate as off set for the execution risk or so. My return expectation until mid next year is rather something like +1 EUR with a very limited downside.

Qualitative aspect

What I do like is the fact, that funder, Mastermind and 12% shareholder Eugen Münch has to a large extent the same interests as the “Normal” shareholders. This is different from similar situations where the CEO just wants to get a big golden handshake. I think the adversaries (Braun and especially Asklepios) might even be tempted to take over the “stub” at some point in time before someone else thinks about buying this (then unlevered) turn around case.

Summary:

So instead of waiting and selling, which was my first reaction, I will actually increase my RHoen position to a full position (5%) as I think that the current risk/return relation is not spectacular but still very good and not correlated much to the overall market.

This translates into around 3.6% exposure on a portfolio basis to the cash payament (Risky deposit) and only 1.4% “true” equity exposure to the stub. I will watch this carefully and potentially increase the position up to 2.5% “stub exposure” if prices gow below 19 EUR. For me the “stub” is one of the most interesting special situations at the moment.