Uncle Sam Wants You! (to Buy His Stuff)
So you think you've found a cheap, safe investment. You think it will weather downturns and offer good upside if things go well. You know that external risks exist, but are navigable. Yet, if it is really so great, why would someone ever sell it to you so cheaply? What do they know that you don't? The seller of an investment should know more about its value than the buyer. The seller has had more time to follow the company, talk with management, analyze competitors, etc. How can you know the seller isn't selling you a lemon?
Most of the time, we can't answer this question. Some of the time, there are poor reasons that sellers cheaply part with shares; changes in the business such as restructurings, spin-offs, and mergers are among reasons that shareholders might make the mistake of selling. The best answer, however, is that they are selling because they don't have a choice.
Use the Force
Finding forced sellers in investing is like playing basketball against middle school kids; you don't have to be great to win. If you're bigger and stronger than the competition, you could be out of shape and you'll still win more often than not. If your rivals have to sell their investments, they can't be too picky about price, making it easier for you to "win" the transaction. Where can you find these forced sellers? Glad you asked.
Tough times have compelled governments worldwide to collect companies and assets that they don't necessarily want or need, like the US Treasury's bailout of AIG from 2008 through 2013. Pressure from external sources like the EU, IMF and Joe and Jane voter have forced those governments to sell these and other assets that have little to do with government. As a result, governments around the world have recently been busy selling off assets for reasons that have nothing to do with their price or value. This is great news for investors.
Der Verkauf (the Sale)
In 2007, the German government reached an agreement with mining unions and other stakeholders to wind down subsidized coal mining in Germany by 2018. As part of the agreement, the specialty chemicals business and real estate assets of miner RAG Corporation were put into a new company, owned by a trust to fund pension liabilities after mining ceased. They called the new company Evonik (EVK).
Shortly after the trust formed, it sought to sell EVK shares. Confronted with gloomy European financial markets, it was only able to sell a minority stake to buyout firm CVC. In the ensuing years, EVK tried and failed three times to complete an IPO of its remaining shares.
It finally succeeded on April 25th. And by succeeding, it sold only 2.5% of shares to the public. This time, CVC sold shares too. After five years of holding its investment, it needed to show returns to its investors. The trust privately sold additional shares to other investors prior to the IPO to bring the total stake sold to 14.5%. While not a complete belly flop, it wasn't an IPO that excited many investors.
Value Still Matters
So once we've found a party that must sell and is attempting to do so, then what? Is it a good investment? Because the parties have indicated that they will continue to sell shares, this has scared potential investors. The trust and CVC will likely use any future price increases as an opportunity to sell more shares. While this selling could keep a lid on near-term price appreciation, the good news is that these guys won't sell shares forever. The share price will eventually reflect the value of the business.
The majority of EVK's value comes from its specialty chemicals business. EVK's products go into a broad range of end-uses, like diapers, insulation, and snow ski coatings. Some of the businesses have done well and others less well. They all generate a significant amount of cash and should continue to do so if the world economies grow at a snail's pace or even if they deteriorate again. The bottom line is that, under most scenarios, EVK offers a very attractive return to shareholders.
The Wide World of Castoffs
It's not just the Germans. The Dutch recently announced they'll be selling an energy supply company, Urenco. The Irish are ridding themselves of a stake in Aer Lingus. Greece embarked on a sweeping privatization program with its first asset sale of a gaming company earlier this year. Even the US has sold out of many of the assets it scooped up during the financial crisis.
Not all of these will turn out to be good investments, but by starting with the knowledge that sellers are selling because of political pressure to do so, rather than a desire to get the best price, we can tip the scales in our favor and find a more abundant crop of good investments.