Bollore: Complexity Creating Arbitrage with over 95% Upside via Muddy Waters

This is the first time in our investment careers that we have come across a situation in which a company’s opacity is a reason to buy the stock. Our investment approach is to tackle complex situations, and attempt to understand the economic reality underlying the information (often misinformation). So it is with Bollore SA, which has a horrifically complex corporate structure. However, through this structure, Bollore effectively owns a significant portion of itself. Most of the market seems to take at face value Bollore’s reported shares outstanding of 2.5 billion. We estimate that the effective shares outstanding are only 1.1 billion (57.2% lower than reported).

Muddy Waters, LLC is long Bollore SA (BOL FP) because its complex corporate structure, with numerous levels of circular ownership, effectively cancels over half of its outstanding shares. Thus, we estimate that the true number of shares outstanding is only 42.8% of what Bollore reports. Bollore’s shares present a unique corporate structure arbitrage.

  • Muddy Waters, LLC is long Bollore SA (BOL FP) because its complex corporate structure, with numerous levels of circular ownership, effectively cancels over half of its outstanding shares.
  • We estimate that the true number of shares outstanding is only 42.8% of what Bollore reports. Bollore’s shares present a unique corporate structure arbitrage.
  • Mr. Bollore is an outstanding capital allocator, and has grown the share price and book value of Bollore over the past 20 years, respectively, by 1,213% and 1,953%.
  • We value Bollore shares at €8.50, which is 94.6% higher than its current price.

Bollore: Complexity Creating Arbitrage with over 95% Upside – Introduction

This is the first time in our investment careers that we have come across a situation in which a company’s opacity is a reason to buy the stock. Our investment approach is to tackle complex situations, and attempt to understand the economic reality underlying the information (often misinformation). So it is with Bollore S.A (BOL FP), which has a horrifically complex corporate structure. However, through this structure, Bollore effectively owns a significant portion of itself. Most of the market seems to take at face value Bollore’s reported shares outstanding of 2.5 billion. We estimate that the effective shares outstanding are only 1.1 billion (57.2% lower than reported).

There is some irony that Muddy Waters’s first public long derives most of its value from frontier market operations – specifically its Africa ports and logistics business. However, this is a business that has been built slowly over three decades. It is somewhat of a boring, albeit lucrative, business. This is exactly the type of model we like to see in emerging and frontier markets.

For investors searching for more “sex appeal”, there is an electric car business – both producing electric cars, called the Blue Car, using proprietary battery technology from BOL’s majority owned Blue Solutions. Bollore’s Autolib service is a car sharing service that in the greater Paris region alone had 2,010 cars, 40,600 premium subscribers at December 31, 2013. Since inception in December 2011, Autolib has had 4.8 million users.

We had never heard of Bollore’s controlling shareholder, Vincent Bollore, until we came across BOL. We were therefore surprised to learn that he has been one of the sharpest-elbowed activist investors in Europe over the past three decades. During this time, he has compounded BOL shareholder wealth at an outstanding rate.

Summary

Muddy Waters, LLC is long Bollore S.A (BOL FP) because its complex corporate structure, with numerous levels of circular ownership, effectively cancels over half of its outstanding shares. Thus, we estimate that the true number of shares outstanding is only 42.8% of what BOL reports. Bollore’s shares present a unique corporate structure arbitrage.

BOL is an investment holding company controlled by French activist investor (and billionaire) Vincent Bollore. Based on our estimate of the effective shares outstanding, we estimate BOL’s present per share net asset value at €10.63, versus its current trading price of €4.37. Applying a 20% discount because Bollore is a closely controlled holding company, we value BOL shares at €8.50, which is 94.6% higher than its current price.

Mr. Bolloré is an outstanding capital allocator, and has frequently been called “the Carl Icahn of France”.1 He has grown the share price and book value of BOL over the past 20 years, respectively, by 1,213% and 1,953%. While we do not expect Bollore to distribute significant cash or assets in the near future, we do expect Mr. Bollore to generally continue to earn superior returns for Bollore shareholders.

Corporate Structure Arbitrage

Muddy Waters is long Bollore because its complex corporate structure creates a unique arbitrage. This complex corporate structure, a form of “Breton Pulleys” obscures that the public owns over twice as much of the company as the market believes.2 We therefore estimate that NAV per share is 2.2x what the market seems to believe. Moreover, we estimate that the per share claim on dividends and distributions is 2.2x what the market seems to believe it is. Based on our estimated NAV of €10.63 per share, and applying a holding company discount of 20%, we estimate that Bollore’s shares are presently worth €8.50.

The public owns more than twice as much of Bollore as it believes. In other words, Bollore’s shareholding structure is largely circular, and we estimate that Bollore owns 57.2% of its own shares through various intermediary entities.3 That means that the public effectively owns 42.8% of the company, versus the reported 24.3%.

Muddy Waters - Bollore

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