Ben Strubel: Update on Compuware and Vivendi by Ben Strubel, Strubel Investment Management
Ben’s Notes
Dear Investors,
September 2014
Dear Investors,
I’m pleased to announce that Strubel Investment Management will be taking on a new intern this month. Nick Weber is a Government and Business, Organizations, & Society major at Franklin & Marshall College in Lancaster. Nick has had previous internships with Portfolio Advisors in Darien, CT and Imagine Software in Manhattan. Nick will be with us a day or two per week until the end of the semester in December. We look forward to teaching Nick about our investment process and research methods.
This month’s newsletter contains updates for two of our existing holdings, Compuware Corporation (NASDAQ:CPWR) and Vivendi SA (EPA:VIV) (OTCMKTS:VIVHY).
Compuware and Vivendi
Update on Compuware (CPWR)
Compuware Corporation (NASDAQ:CPWR) agreed to be bought out by PE firm Thoma Bravo for $10.92 per share (a combination of cash and proceeds from the sale of a subsidiary). Unlike the sale of Dell we are happy with this transaction. We first purchased Compuware at around $10.39 per share on May 20.
Including a dividend payment of $.125 we will receive $11.045 per share. This works out to a 6.3% return for just a few months of “work.” This compares favorably to the 5.86% return of the S&P500 during this time period.
We also continued buying Compuware Corporation (NASDAQ:CPWR) shares, both for new clients and for rebalancing existing portfolios, as the price went down. Some purchases were made at $9.98; so most, although not all, clients likely experienced a higher return than what I’ve computed here.
We are happy with the buyout. When we bought Compuware, we looked at it as a low-risk investment and were not expecting spectacular returns.
Here is what we said about Compuware in an earlier quarterly newsletter distributed only to clients:
The next company we are looking at is Compuware Corporation (NASDAQ:CPWR). Compuware is a software company focused on software testing, development, professional services, automation project and portfolio management, cloud computing, and mainframe and client-server system software. So pretty much the exact same thing every other large software company does.
Elliott Management, a hedge fund run by Paul Singer, owns 9.6% of the company. Previously, Elliott offered to buy Compuware at $11 per share but then signed an agreement with the company to place two of Elliott’s nominees on the board of directors in exchange for Elliott holding off on launching another buyout offer. We believe that Elliott’s involvement offers substantial downside protection. Elliott already made an offer to buy the company at $11 and Elliott is not a firm that gives up easily (or perhaps ever). The fund has owned defaulted Argentinean bonds and recently seized an Argentina navy ship as collateral. Yes, you read that correctly.
Already Elliott has spurred some improvements with the company focusing on cutting costs (the company had a bloated cost structure from its earlier halcyon days) and the company recently instituted a large dividend. The stock now yields 4.8%.
We believe situations like this perfectly match what our clients are looking for in dividend-paying stocks. The dividend is well covered by company cash flow, and Elliott Management’s ownership and possible buyout provide some downside protection.
Compuware Corporation (NASDAQ:CPWR) may not be a name brand “blue chip” stock like Wal-Mart Stores, Inc. (NYSE:WMT) or The Procter & Gamble Company (NYSE:PG), but it has the same important characteristics that those companies have with the exception that Compuware is available at a far, far cheaper price. And that should equal better returns.
We got pretty much what we thought—a modest, yet very safe return.
Update on Vivendi (VIVHY)*
When we originally purchased Vivendi SA (EPA:VIV) (OTCMKTS:VIVHY), an entertainment and telecommunications conglomerate, we believed that the market was not valuing Vivendi’s group of disparate businesses accurately. We first began purchasing Vivendi stock in early March of last year at around $20.42 per share. Shortly after, Vivendi announced its decision to focus on its media and entertainment assets.
In the interim, Vivendi has sold off, or reached an agreement to sell off, several businesses. It has sold a majority of its shares Activision Blizzard, Inc. (NASDAQ:ATVI), a video game publisher, and Maroc Telecom. These businesses were easy to value as both were publicly traded companies.
The remaining transactions have come in above our original estimates.
Vivendi will likely be selling GVT to Telefonica for EUR 7.45B, which was EUR 450M more than our original assumed value of EUR 7B. There is a competing offer from Telecom Italia for EUR 7B, but Vivendi has now entered into exclusive negotiations with Telefonica S.A. (ADR) (NYSE:TEF) (BME:TEF).
Vivendi SA (EPA:VIV) (OTCMKTS:VIVHY) also agreed to sell SFR to Altice/Numericable for a combination of cash and stock that should result in a value at or exceeding EUR 17B. This was EUR 2B higher than our assumed value of EUR 15B.
With the sale of its less attractive telecom businesses, Vivendi is now more of a pure play global media company. Generally speaking, outside of the US, media content creation and publishing is a far more attractive business than content delivery. In the US content delivery is attractive due to the anti competitive behavior of firms like Comcast and Verizon and poorly enforced regulations.
So far our investment in Vivendi has been very successful. We purchased shares starting at EUR 15.6. Shares now trade for EUR 19.63. We also received two 1 Euro dividends per share for a total return of EUR 21.63 or 38.65%. This compares favorably to the 16.73% return of the Euronext 100 Index (think a French-oriented version of the Dow Jones Index or S&P 500) and even the 32.02% return of the S&P 500.
We will continue holding Vivendi SA (EPA:VIV) (OTCMKTS:VIVHY) as we think its improved debt position (a sizable amount of the cash from the asset sales is going to pay down debt) and renewed focus on its media properties should leave the company well positioned for the future. In addition, the company pays an attractive dividend.
*Unfortunately, due to restrictions by one of the custodians, FOLIO Institutional, we use for client accounts we were not able to purchase Vivendi shares for those clients. FOLIO does not support stocks traded on foreign exchanges and some OTC stocks. (Vivendi is traded in the US on the OTC market.)
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