Elevator Pitch
Rocket Internet (“RKET”, “Rocket” or the “Company”) is an interesting “free-roll” or “bump-itrage” situation, where investors today can buy the stock with a capped downside of EUR ~3c per share and the potential to make a few Euro’s if the offer price is bumped, setting up an incredibly asymmetric trade.
Overview
On the 1st September, Rocket’s management board announced plans to delist from the stock exchange1. Under the current German laws, the Company must offer shareholders the opportunity to cash out their shares at a minimum price of the trailing 6 month volume-weighted average price (EUR 18.57). Unlike Germany’s favourable takeover and squeeze out laws, under the current structure2, minority shareholders are not entitled to a “fair value” determination unless:
- The issuer… does not publish inside information that directly affects him as soon as possible, or
- the issuer or the bidder violate the prohibition of market manipulation under Article 15 of Regulation (EU) No. 596/2014 with regard to the securities that are the subject of the application
The Act also states a “fair value” determination may be requested if the securities are listed for less than 1/3 of the trading days during the 6 month period, or if several successively determined stock exchange prices differ by more than 5 percent.
The founders and majority shareholders of Rocket are obviously using this delisting mechanism to their advantage, given the trailing 6 months coincides perfectly with the onset of the Coronavirus and the subsequent share price fall.
The move is quite shrewd from the Samwer brothers as not only does it allow them to tender for shares at a 33%+ discount to NAV (and less than cash + public securities), it allows them to:
- Do so without worrying about minority shareholders requesting compensation for fair value
- Use the Company’s own cash
- Force the hand of many institutional investors who are unable to hold private investments
While it may be shrewd from their perspective, it highlights the failures (yet again) of Germany’s laws to protect minority investors.
Why might they bump the price?
The reasons why I think they may bump the price fall into two broad categories:
- One-time opportunity
- The delisting mechanism provides a very favourable opportunity to acquire the Company at a cheap price, without having the risk that minorities dispute the price and take legal action in order to receive “fair value”
- It would be very easy for a 3rd party to argue that Fair Value is much closer to the EUR 28 per share in tangible book value given the majority of assets are cash and liquid public market stocks
- Therefore, they do not want to waste this opportunity, as their ability to use the Company’s own cash, to buyout minorities at a later date will be much more difficult and opens up the possibility that minorities will seek fair value
- For this reason, if enough shareholders indicate that they won’t tender or push back, they may consider offering a bump
- In the recent on-market buyback at EUR 18.57 they acquired no shares
- The delisting mechanism provides a very favourable opportunity to acquire the Company at a cheap price, without having the risk that minorities dispute the price and take legal action in order to receive “fair value”
- Shareholder pushback
- There has been substantial public backlash in the German and foreign press and DSW (the leading shareholder association in Germany) had some pretty scathing comments about it recently3
- There are some potential loopholes in the Act that could open the company to lawsuits
- Shareholders that don’t tender can be quite a nuisance at each years AGM through Section 142 of the Stock Corporation Act which allows for the appointment of
It’s also worth pointing out that:
- The tender is paid for out of company cash
- Even a 10% bump in price to EUR 20.50 would still be a >25% discount to tangible book value
So to avoid any current or future hassles, it’s not a bad deal for them to bump the price if enough shareholders pressure them – which I would encourage everyone to at next weeks EGM!
Valuation
| Private company investments: | EUR 0.8bn |
| Net cash: | EUR 1.2bn |
| Liquid public stocks: | EUR 1.3bn |
| Low liquidity public stocks: | EUR 0.3bn |
| Loans granted: | EUR 0.8bn |
| Total value: | EUR 4.4bn |
| Shares outstanding: | 135.7m |
| Value per share: | EUR 32 |
Is it a good bet?
Given the cost of the bet is so low (~3c) the probability of a bump does not have to be high, for it to have positive expectation:
| Potential bump price: | EUR 19.00 | EUR 20.00 | EUR 21.00 |
| Upside: | EUR 0.40 | EUR 1.40 | EUR 2.40 |
| Required probability for positive EV: | 7% | 2% | 1% |
The bump prices were plucked out of thin air, but all would still be at substantial discounts to the NAV and very accretive for the major shareholders if offered. It’s also worth noting that they offered EUR 21.50 in a December 2019 tender offer, when the tangible book value was around similar levels to today – that alone would be 16% upside!
Daniel- thanks for this interesting idea. But do you realize that you’ve never once mentioned what the current offer price is? That info should be at the beginning of the writeup.
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I don’t want to make I too easy for you now do I?
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Haha.
Very interesting that the group bought close to 800m “easily convertible into cash listed shares as a part of the Group’s treasury strategy”. As far as I can see they have not disclosed what it is. As part of your treasury strategy I’d say you could buy some fixed income ETF’s, but the phrasing specifically suggests ‘shares’. Any ideas? Did I miss some disclosure?
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