Special Situations/EVENT DRIVEN: Club Med
trade action flash – the deal is dead, long live Club Med
CU FP: Eur 18.20 – target > Eur 21
April 3, 2014
As we made it clear a year ago, the Fosun/Axa offer at Eur 17.50 greatly undervalued the company and its brand name. We thought fair value was in the low 20s and this is still our view. With the shares now trading consistently well over the offer price, and with a number of activist/aggressive shareholders each with significant stakes in the company, we think that the 17.50 offer has zero chance of succeeding regardless of the court’s decision on April 29. The consortium will need to either bump the price (we think no bump will be substantial enough to reflect fair value), lower the minimum tender threshold – in a new offer - or/and see its attempt to control the company failing. The reason why we are adamant on this and the value of Club Med is that at the time of the offer, and at the then offer price, Club Med was already greatly undervalued. Since the offer has been made, almost a year ago, the share prices of global hotel groups have significantly risen (next table). As a result, valuations in the hotel sector have exploded along.
The court is to rule whether to uphold the AMF approval of the offer. Hedge fund CIAM and shareholder association ADAM are questioning the calculation method of the CU offer price and the independence of the expert. Under the most likely scenario, the Court will uphold the AMF decision, but it could request a second independent expert opinion or annul the AMF decision, which would result in a cancellation of the offer.
Although Club Med has sub-average profitability in the sector in terms of operating margins or ebitda margins, a 40% rise in the share price would only need a 40bps increase in ebitda margins to 9.5% for the stock to be fair value. This shows the operating leverage available to a buyer of Club Med at the current price, ie. the slightest increase in margins increase tremendously the valuation of the company. Clearly AXA/Fosun had been attempting to steal the company away at Eur 17/share and made it a joke when the offer was “bumped” to 17.50. We would think that given what has happened to hotel valuations in the last year, a bump well over Eur 20 would be necessary to convince investors to tender above the 50% threshold (in fact they only need 16% tender to pass that mark). For this to happen, the current offer has to fail and expire which will almost certainly happen. What we think is more likely to happen next is a new offer with a modest bump in the Eur 18-20 area while possibly lowering the 50% threshold, with AXA/Fosun being happy to buy as many shares as being tendered. We expect the shares to remain listed and to eventually re-price north of Eur 25 once a turnaround becomes more obvious.
FULL REPORT ATTACHED