DEAL REPORTER
• Long investor placing cheap bets on rival bid
• Tyre division spin-off could entail extra value - minorities
Pirelli’s [BIT:PC] minorities are holding on to their positions with a view that China Chemical Corporation’s (ChemChina) EUR 15 bid leaves room for a higher price, according to a fund manager at a top ten shareholder and two minority investors.
There is trapped value in Pirelli that could be released by spinning-off its industrial tyre division, the shareholders said. Rival bidders could be enticed by this opportunity, they added.
A long-term shareholder said he was still buying shares slightly above the offer price to take advantage of any rival bid boost, knowing that he would suffer only a modest loss if one does not emerge. “It is like holding a very cheap call option”, he added.
Pirelli shares are trading at EUR 15.35 in Thursday’s morning session but were hovering around EUR 15.39 yesterday. The EUR 15 offer does not include a 0.367 dividend set to be paid on 20 May.
Another shareholder said he had reduced his holding after the offer was announced but was still maintaining some exposure as he thought a higher price was still possible.
Pirelli’s largest competitors Bridgestone [TYO:5108], Michelin [SCA:EPA] and Continental [FRA:CON] have all been rumoured as potential rival bidders for the Italian tyre manufacturer.
Meanwhile, the top ten shareholder noted there was some frustration among minorities because they believe Pirelli is worth more if the benefits of a reorganisational plan are taken into account.
Pirelli had acknowledged to its shareholders that it was evaluating strategic options for its industrial unit before ChemChina’s offer emerged, but minorities will not be able to share its benefits if the takeover is successful, he noted.
Pirelli could unlock EUR 3 to EUR 5 worth of value if it turns into a pure-play premium tyre manufacturer by spinning off its industrial business, the top ten shareholder believed. The first shareholder reckoned ChemChina was not paying a full price for Pirelli considering the upside potential coming from the spin-off.
But, ChemChina’s bid looks fair after considering the execution risk and time required to put in place the company’s reorganisation, the second shareholder argued.
The Chinese company has indicated it will take a few years to spin off the division and merge it with its existing industrial tyre unit Aeolus Tyre [SHA:600469]. In this timeframe the positive outlook on the European automotive sector could change, as the favourable EUR/USD exchange rate that supports the bullish sentiment will not last indefinitely, the third shareholder added. This means that giving Pirelli a fair value of EUR 20 could be an overstatement, he also noted.
The offer values the company at a premium to the sector average despite the stock posting double-digit gains since the start of the year, and the company tripling its value from 2011, this shareholder pointed out. The offer values Pirelli at 6.94x EV/EBITDA while its peers trade at an EV/EBITDA average of 6.8x, according to Dealreporter analytics.
Pirelli’s industrial business posted revenues of EUR 1.55bn in 2014, down 1.5% on the previous year excluding the impact of forex fluctuations.
Meanwhile, Pirelli’s controlling shareholder Camfin will take part in the reorganisational plan by reinvesting part of the proceeds coming from the sale of its 26.2% stake in the company.
Hopes for a ChemChina’s bump are frustrated by the bidder’s offer not being conditional to a Pirelli delisting, as the reorganisational plan can be executed also with the company still on the market, although at a slower pace, a source close to the controlling shareholder Camfin noted.
If ChemChina realises that placing a bump significantly outstrips the costs of slowing down Pirelli’s reorganisation and having lower access to its cash, the prospect of an increased offer becomes more concrete, he noted.
Potentially minorities could get a bump if the offer completes without ChemChina being able to reach a delisting threshold but chances that the bidder would improve its offer at this stage are low, the first shareholder believed.
ChemChina needs 66.7% of Pirelli’s share capital to be in the position of merging the company with one of its holding vehicles and delist it. The bidder has already secured around 30% of votes, after Edizione signed a binding agreement to tender its stake in the mandatory offer. Edizione can terminate the agreement in the event of a rival bid.
The offer values Pirelli at around EUR 7.3bn based on the outstanding number of ordinary and saving shares, and will be financed by a jumbo loan guaranteed by JPMorgan.