This is going to be a brief post summarising my recent decision to purchase Radission Hospitality (RADH). Full disclosure, I own a material stake in RADH purchased ~2-3 months ago, however, I will base all number on today’s price of ~SEK 36.00
- In August of this year, HNA Group (a Chinese consortium) agreed to sell its stake in the Radission Hotel Group to another Chinese buyer, Jin Jiang (one of the largest hotel operators in the world). HNA owned 100% of the privately held US operations, as well as ~70% of the European arm, which is publicly listed in Sweden
- On November 16th, the transaction for the first parcel of shares (~51%) cleared and Jin Jiang became the beneficial owner
Why is this interesting?
Under Swedish takeover law, when someone acquires 30% or more of a company, they become legally obligated to tender for the remaining shares at a price of no less than what they transacted at, within 4 weeks of becoming the beneficial owner. Given Jin Jiang acquired its shares at a price of SEK 35.00, they have until 14th December 2018 (i.e. Friday next week) to offer remaining shareholders the option to sell their shares for at least SEK 35.00
Given the shares are currently trading at SEK 36.00 (i.e. a premium to the minimum offer requirement) why do I think this is still an interesting opportunity? Because I believe there is a non-zero probability that Jin Jiang will want to secure 100% ownership of RADH, and to do so, they will be required to pay a premium. Therefore, we have a classic “heads I win, tails I don’t lose much” situation, where our maximum downside is SEK 1 and our upside is X
Why would Jin Jiang want 100% ownership?
For starters, Sweden has some of the strongest minority shareholder rights in the world and a 10% group can be a real pain for the majority owner: power to elect board members, call for EGM’s, prevent share issuance etc.
But more importantly, I think Jin Jiang brings substantial value to the table through their 100 million member loyalty club. I would imagine they will plug Radisson into this database and drive material, incremental volume to the hotel portfolio – why would they want any other shareholders to benefit from this?
Finally, the turnaround plan the management team put in place which should lead to the company doubling profits over the next few years, seems to be going smoothly. At current prices, not much is being “priced in” and as such, provides further upside that Jin Jiang may want to have all to themselves.
What price would get the deal done?
Well that is the million dollar question. To be frank, I’m not sure, however, I think I can take a stab at what the minimum value required to get the deal done might be. Back in 2016, RADH’s former owner, HNA, attempted to acquire the remaining 30% for SEK 35.00 – which at the time represented 7.2X EBITDA. The board rejected this bid as they deemed it too low. Following this logic, it seems likely that the board would still deem a bid of 7.2X EBITDA “too low” which sets a floor price for our upside scenario at around SEK 45 (FY18 EBITDA estimate of SEK 1,102m multiplied by 7.2X)
Putting it all together
So we have three possible scenario’s:
- Jin Jiang offers the minimum value of SEK 35.00 and we lose SEK 1.00 per share
- Jin Jiang decides they want to acquire the remaining 30% and offer some value > SEK 45.00
- The deal falls through due to some black swan event (stock probably falls to SEK 25.00)*
The way I frame the situation is similar to how I think about betting pre-flop in a game of poker. In this case the pot would contain SEK 10.00 and represents our potential profit, while SEK 1.00 would be the cost to call, or our potential loss. Therefore, based on the pot odds of 10:1 (potential profit divided by potential loss) we would need our probability of winning to be greater than 10% in order for the bet to maintain a positive expected value.
This is where investing moves from science to art, because unlike in poker, where we know the probability of hitting a pair etc. we do not know what the chances are that Jin Jiang will indeed offer a premium to try and secure the deal. However, based on my earlier comments around why Jin Jiang would want to acquire 100%, I believe the probability is greater than 10%. Also, as I pointed out, SEK 10.00 should represent the minimum upside to secure the deal, in reality, the size of the pot is greater than or equal to 10.00 which reduces our required probability of success to less than 10%. For these reasons, I am making the call. However, you should do your own research and not rely on any facts, figures or logic presented in these notes.
*I include this possibility just to cover all bases. I would assigned a probability of <5%