Carson Block, founder of Muddy Waters Research, appeared on Bloomberg TV with Stephanie Ruhle and Erik Schatzker today, where he announced his first long position in Bollore. Block said, “The reason that we’re long Bollore…it’s actually really the mirror image of a lot of our shorts in that it has a very opaque corporate structure, but in this case the opacity actually has created a huge arbitrage opportunity.”
On how he found the deal, Block said, “We got contacted by an investor who said we know you like opaque things, complexity. This is one that’s really interesting. And to us it’s a no-brainer. I mean I love this as much as I love the short theses that we’ve published because it’s not where we are sitting here like most long investments or investors would do and saying, well what’s going to happen in the future? We are looking at right now.”
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- Block Says Long Bollore Because of Opaque Corporate Structure
- Block Says Bollore Has Fewer Shares Outstanding Than Realized
- Block Says Bollore’s ‘Opacity’ Is Reason To Buy Stock
- Block Calls Bollore ‘The Carl Icahn Of France’
- Block Says Bollore Is A No-Brainer; Per Share Value Higher
Muddy Waters’ Carson Block Takes Long Position in Bollore
ERIK SCHATZKER, BLOOMBERG: When Carson Block speaks, investors listen. From Sino Forest, to Olam International to American Tower, Carson has made headline after headline with his courageous and often controversial calls. He made his reputation as a short seller with a talent for forensic research. Now he’s right back here on Bloomberg Television to reveal his latest position. Carson, let’s get right down to it. What are we talking about?
CARSON BLOCK, FOUNDER, MUDDY WATERS: All right. Well the first thing to get out of the way is this is a long.
STEPHANIE RUHLE, BLOOMBERG NEWS: What?
Carson Block: Yes.
RUHLE: Wait. Carson Block likes something?
Carson Block: I know. Say it ain’t so, but….
RUHLE: You’re a new man. Fatherhood has changed him.
SCHATZKER: Well right. When you told us that you are not a ninja assassin, you are not a ninja assassin.
Carson Block: No. I love everything. It’s — and we are long a company traded in France called Bollore.
Carson Block: Bollore. It’s a holding company. And the reason that we’re long Bollore it’s actually really the mirror image of a lot of our shorts in that it has a very opaque corporate structure, but in this case the opacity actually has created a huge arbitrage opportunity. So people don’t — investors don’t understand really what this corporate structure does. And it looks like Bollore has about 2.5 billion shares outstanding.
Because of this corporate structure, there’s so much circular ownership that, effectively, you have all of this treasury stock that and that’s not being excluded under accounting rules excluded. So the true shares outstanding we estimate are really about 1.1 billion. So that means that the public, instead of owning about 25 percent of this company, actually owns about 52, 53 percent of it. So if you look at it on a net asset value per share basis, which you would do with a holding company that effectively more than doubles what the net asset value per share is. So this is something that we think is worth at least 850 euro.
RUHLE: Let’s just back it up. Let’s just slow this down.
Carson Block: Sure.
RUHLE: It’s a holding company.
Carson Block: Correct.
RUHLE: How exactly do you unlock the value here?
SCHATZKER: How about we spell it first for everybody?
Carson Block: Sure.
Carson Block: Yes.
SCHATZKER: And it’s run by a French billionaire.
Carson Block: Yes, Vincent Bollore, who actually has — he’s known as the Carl Icahn of France. And then Europe has a reputation for not having activist investors. I mean this has been throwing very sharp elbows for about three decades. I mean he has tussled with Lazard. He is on the board of Vivendi now. So he’s actually a very impressive investor. He’s grown….
RUHLE: How did you find him? How did you find this deal?
Carson Block: So we got contacted by an investor who said we know you like opaque things, complexity. This is one that’s really interesting. And to us it’s a no-brainer. I mean I love this as much as I love the short theses that we’ve published because it’s not where we are sitting here like most long investments or investors would do and saying, well what’s going to happen in the future? We are looking at right now. We’re saying this is something where the per-share value is substantially higher than it appears to be.
SCHATZKER: So hang on one second. It’s — I wouldn’t say it’s easy to call out a fraud, but once you’ve identified a fraud, once you believe a company is a zero, or a doughnut or however you prefer to term it, you should feel conviction, right?
Carson Block: Yes.
SCHATZKER: There’s no business there, so I’m happy calling it a short, saying sell this stock. Does it feel harder in any way to call out a long? Do you feel as convinced about Bollore as a long as you did about say Sino-Forest as a short?
BLOCK: Yes, and here’s why. Because generally speaking our research approach we’re looking backwards. So we’re looking at information that companies have disclosed. And when you….
RUHLE: They’re bigger.
Carson Block: Right. And we’re asking is this information reflective of economic reality. Now we’re usually doing from the short side because we are trying to find areas in which the company is misleading investors or lying. In this case we are looking at the historical numbers here, shares outstanding, and we’re saying there’s a problem here. This is not reflective of economic reality. The share count is much too high when you take into account how Bollore owns subs that own holding companies that own Bollore.
RUHLE: All right, but hold on. You want to talk economic reality? This company is smack dab in the center of Europe, which is an absolute garbage storm.
Carson Block: Well maybe even worse, but I have a rebuttal for this. Most of the value, so about eight point, according to our valuation, about EUR8.3 billion is related to its transportation and logistics business. The vast majority of that is owning and operating ports, yes or sorry, operating ports in Africa. Now, yes, I do not like emerging market investments in most cases. I’m very critical of them.
This is a business in Africa that he’s been building for 30 years. It’s kind of a boring business. The economics are great. The EBITDA margins look to be about 40 percent. And there are very, very high barriers to entry and competition. So it’s not — there isn’t this massive blue sky story associated with their logistics business in Africa, which is something we like. It’s just it’s a very steady, good business.
SCHATZKER: What’s the motive? Here’s one thing I always want to know. What’s the motivation?
RUHLE: Hold on, a steady and good business in West Africa, sounds like an oxymoron.
SCHATZKER: There are — well maybe, but there are lots — there have to be lots of good businesses. It’s still a growing economy.
Carson Block: I mean it’s moving (inaudible) around the world.
RUHLE: All right. Well we’ve got to know what the stock is.
SCHATZKER: Hang on one second. You say it is worth eight euros a share?
BLOCK: Yes, 8.50.
SCHATZKER: Okay. So right now it’s at EUR4.53, roughly, and but it was worth less than that before we started talking.
RUHLE: Hold on, right here. Look at this. Look at the spike. Since we started this interview, the stock is up over three percent. When Carson Block speaks, people listen.
SCHATZKER: Can we — I want to go back to this point about motivation. In whose interest is it to make — in whose interest is obfuscation? How does Vincent Bollore, for example, benefit from this convoluted corporate structure which, as you explain, obscures really the true number of shares outstanding, or at least the economic value to the common shareholder?
Carson Block: Okay. You are asking a very interesting question, and because I’ve never met Mr. Bollore I can’t — I can’t really answer it. I can only speculate that perhaps, and again I don’t know, this might have to do with allowing him to over time increase his share of ownership while not triggering tax liability, perhaps.
RUHLE: Why haven’t you met him, when you did all of your work and decided to get involved, why wouldn’t you request a meeting with him?
Carson Block: Well it’s actually very rare that we openly speak to managements of companies that we are working on.
RUHLE: Yes, but that’s because you are usually going after them.
Carson Block: Right.
RUHLE: And the last thing they would want to do is meet with a guy who thinks they’re a complete fraud. In this case, why wouldn’t you want to meet him?
Carson Block: Well because I don’t want to approach a company, and by the same token, and say, hey, I think that we’re — I’m interested in going long on you, now show me all the really nice stuff about your company that you can. I think that’s the problem that a lot of investors have when they do look at companies from the long side is they’re really they’re seeing what the company wants them to see.
So I like this approach of doing the research from a distance. Maybe someday I will meet him. Maybe someday I’ll ask him the question you just asked. I don’t know whether I’ll get the true answer, but yes, but we find it is most effective to research companies from a distance. That way they cannot attempt to affect your perspective.
RUHLE: All right. So you compare him to the Carl Icahn of Europe. I’m looking through my notes and I’m reading that Bollore plans to retire in 2022. That’s not that far off. What happens when he leaves? It’s like when Carl goes away, when Bill Ackman goes away, what’s left?
Carson Block: Yes. Well there’s a lot of value in that structure with this — so recently Bollore tendered for media company, Havas. And it’s been exchanging shares of Bollore for Havas. And this has actually had the effect of simplifying a little bit this corporate structure, and doing it in a way where there are really minimal adverse tax consequences.
So if you look at it from that perspective it’s a very smart move, and it might be first step along the road to simplifying the structure. So what does it ultimately become? He has a son who is running Havas right now. Maybe — maybe the children run the business, and it’s a media business, maybe it distributes assets. That remains to be seen.
SCHATZKER: So Vincent Bollore himself has been something of an activist.
Carson Block: (Inaudible).
SCHATZKER: How he earned that sobriquet, right, the Carl Icahn of Europe. Does Bollore need an activist? You’re calling out the fact that there’s hidden economic value here. You’re effectively being a value investor, right?
Carson Block: Yes.
SCHATZKER: But does so many value opportunities require, it seems these days, or at least attract activists to help unlock that value faster? Would you welcome activist investors to feast on Bollore as a same kind of opportunity?
Carson Block: Well the difference here is that with the capital that Bollore, that Vincent Bollore retains in the structure, he actually allocates it very well. Over the long term, over the past 20 years he’s compounded the price of the stock by 16 percent on an annual basis. Book value has grown by about 13 percent on an annual basis. These are very good numbers, so actually I’m happy to be along for the ride with Bollore for some time.
RUHLE: All right. We’ve covered Bollore. We’ve got to ask before you leave, NQ. Give us an update
Carson Block: Okay. Well that company —
RUHLE: Hate them, still hate them, yes?
Carson Block: — still exists anymore?
SCHATZKER: It does still exist. It’s only down 85 percent since you called it out.
RUHLE: Only, only.
Carson Block: Okay. So let’s see. We’ve had PWC wouldn’t sign off on the account, so they replaced it with a boiler room auditor. Chairwoman of the audit committee resigned. Two other board members resigned. Yes, I mean just about everything that could go wrong — CFO resigned. (Inaudible) has.
SCHATZKER: Here’s another question that you have to ask yourself. Why would anyone at this point be in NQ Mobile’s camp?
Carson Block: I mean if you — pure speculation. I….
SCHATZKER: But don’t you wonder, I mean if you truly believe that the stock is a zero and it’s still trading as if there is some economic value left, don’t you ask yourself that question?
RUHLE: Yes. Doesn’t Bill Ackman ask himself the question? He’s laid out every single point of why it Herbalife should be worth zero and there are still guys in that trade.
Carson Block: Yes, look, there will always be investors who want to believe the blue sky story. And if you believe the company’s numbers, NQ looks incredibly cheap, but look — it’s — you’ve got — there will always be people holding the bag. So those who are long in NQ right now, have been long, are holding a bag and the contents are not very desirable.
RUHLE: You almost have a sinister smile on like, he’s like somebody is always holding the bag.
Carson Block: No way.
RUHLE: I’m glad it’s not me.
SCHATZKER: Hang on. He went from I love everything to somebody is always holding the bag.
RUHLE: Yes, maybe not.
SCHATZKER: You know what? Before we leave let’s just have a look at the stock price, Bollore. It is the company that Carson Block for the first time, at least ever publicly, is going long on and an immediate market reaction, we are going to be following this one closely. You see….
RUHLE: Moving markets on “Market Makers.” Thanks to you, Carson, we are living up to our name today.
Carson Block: Well thank you.