Privatization of TLG IMMOBILIEN GmbH 2012 - 2015 Lone Star

Facts & Circumstances:

TLG IMMOBILIEN GmbH (TLG) is a German commercial real estate company which was founded in 1991 after the unification of Germany took over formerly GDR state owned real estate assets. Effective as of December 31, 2012 TLG was taken private in a tender won by Lone Star (LS) for a purchase price of EUR 1.1bln. 

German Ministry of Finance Source 

Fact Sheet TLG IMMOBILIEN as of before privatization 

 In a difficult environment LS managed to get TLG IPOed in October 2014 at a price of €10.75, all shareholding was sold off until July 2015.

Since then TLG developed quite well, did grow organically and via M&A and was control over TLG was acquired by competitor Aroundtown in late 2019. The COVID-19 restrictions are hitting commercial (break and mortar) businessses really hard, yet the recovery since the initial shock has been very step. This phenomenon can be overserved throughout the industry and is not TLG specific.

Question:

As a citizen I am always quite sceptical about the benefits of privatizations. So I wanted to find out: How much return did Lone Star make with this transaction.

Analyis:

I analysed the annual report 2013 - 2015 for transactions of/with shareholders and stock prices for share prices. All following values are in kEUR, except stated otherwise

The transaction between TLG and LS amount to the following:

The sale of share by LS in the open market I calculated as follows:

This makes a total calculated gain of EUR 1,216,072k vs. intital investment of EUR 1,100,000k, not taking into account discounting.

The return of EUR 116,072k sounds impressive at first, but if you consider it is equivalent to 10.6% based on capital invested for a holding period of 2.5 yrs and the risks involved is worse than I would have expected. I expect they have loaded up on debt to leverage but at 4.2% ROI p.a. I am not sure if they could debt finance at a much lower rate (back in 2012).

Concusion:

The € 1.1bln sales prices of the Ministry of Finance seems to have been quite a fair price at the point in time and certainly no steal/bargain for LS.

Who profits from the European integration: My point of view

In my opinion the advantages of the increased European integration experienced in the last couple of years are distributed in a unfair way.
Big (core-) European corporates enter new markets with weak local competition due to lower efficiency. They destroy the local competition, causing increased unemployment given that its holds true that lower efficiency equals more workforce employed.
People there can now maybe shop at lower prices, too bad if they don't have the money because they have no job anymore.
Corporates further profit by reduced expenses (cheaper labor, less regulation and taxes) even if they do not shift f.e. production sides (reduce tax by profit shifting via licenses to European tax havens, race to the bottom in corporate taxes, etc.).
I made a little drawing on a p/l of one of those corporates:

So now that its seems clear (at least in my view) who wins, who is the one that looses?
The average worker that has nothing more than work to sell, no land, no capital, no nothing.
Mainly unskilled workers, yet also highly skilled white collar workers suffer. The payment they can demand from companies as compensation for their work will reduced due to increased supply.

Asian Bamboo [AB5]: Fair Value Valuation of biological assets

Asian Bamboo AG (AB) is a holding company listed in Germany. Its assets are located in China, operations consist of bamboo farms. The farms produce:

• Bamboo Trees
• Spring shoots (sold fresh or canned)
• Winter shoots 

As AB is a company listed on a European Stock market it has to report for its group accounts according to IFRS. For biological assets, being the main purpose of the group, IAS 41 is applicable.
IAS 41 is a full fair value standard, it requires assets being valued at Fair Value less cost to sell (FVLTCS).

I compiled all the information given about the valuation process in their annual reports from 2007-2012 in the following table:

As it can be seen (yellow) an important changed happened in 2010. AB5 restated a lot of figures, most importantly the way they account for biol. assets:

• Now they included more comprehensive costs (land lease, recultivation)
• For the first time the fair value of biol. assets decreases (by around 30 Mil. Due to IAS 8 this doesn't show up in the p/l, only mentioned in notes)
• At the same time they increase the count of trees/ha by around 4 times. Potentially decreasing the loss connected with increased costs.
• Furthermore in the corresponding section of the notes there is no mention of their "independent" valuer anymore. Also later the display of the auditor is only a side notice outside the core report.

As we saw the effect of the restatement was balanced by an increase in (assumed) output of trees per ha. However if we take a look on the historical output on the following table 2 this assumption seems questionable:

Bamboo trees per ha sold in 2012 was 115 compared to 2.369 according to the FVLCTS calculation.
That is about 25 times actual//planned.
Apart from bamboo trees however the estimations of 2012 for spring/winter shoots seem more realistic.
This leads to the following conclusion:

1. Inputs (allmost all lvl 3 FVs, btw.) used seem overly (grotesque?) optimistic.
2. Inputs are realistic, however demand for trees is so low that the produced amount of trees cannot be sold.
3. inputs are realistic, demand is out there however AB has troubles with harvesting all the mature bamboo trees.
4. Mix of 1., 2. and/or 3.

The Management Report 2012 (p. 46) states negative impact on housing and construction. Also p. 63 stats AB think they can sell all shoots they harvest, that also means they can not do the with the trees.
However it seems mainly the reduced sells to Zhongzhu, a bamboo fiber manufacturer, a responsible for the shortfall. AB sees demand for fiber as key driver for tree sells (p. 63.
The business relations are like this:

•  Zhongzhu as OEM manufacturer buys bamboo trees from AB
• AB then purchases processed bamboo fibers back from  Zhongzhu . 
•  Zhongzhu is "strategic partner" since 2009 (loan from AB, non-interest bearing: 2,1 Mil. EUR)
•  Zhongzhu only need younger, low quality trees (=lower price?) 
•  Zhongzhu seems extremly sensitive to changes in business  environment ("minimal production volumes" in 2012)  

A similar investment (40% stake) in Xinlifeng (plywood) already failed, stake sold in 2013 at "about book value".
To me the theme seems recurring. Invest in "strategic partner" via equity/non interest bearing debt injection. First 1/2 years high tree sale volume, then decrease and exit.

It appears there is barely demand for bamboo tree based products. Initiatives to increase demand from AB are short-lived and initialized by capital injections.
Massive decrease of biological assets due to revaluation can be expected.
On the positive side estimations and sales for shoots seem fair (in 2012). However as of Q3.13 sales of shoots also fell drastically (more than - 60%).

Might make a follow-up on this with my own DCF valuation of biological assets, so i can compare it when the annual report 2013 gets released (no date of release yet).

Powerland AG [1PL]: Fraud or opportunity?

Powerland AG is a holding company based in Germany for leather goods manufacturing companies based in China.

After a long period of postponing of the Annual Report 2012, they issued a statement on the 02.07.2013 saying they auditor ( BDO AG WpG) denied the testate and issued a negative auditors opinion.

Today Monday 15.07.2013  at 18:01 after market-close they issued yet another statement explaining the reasons given by the auditor for not accepting the report.

One of the reasons is that the auditors were not allowed by PL to confirm the bank account statements with the headquarters of the banks involved. The auditors could only visit the local branches of the bank.

I know from a partner of EY who was posted for 3 years in China told me it is indeed normal to go into the banks and talk directly with bank representatives.
In Germany standard procedure is to simply accept an official statement coming from the bank. Not so in China, where risk of forgery is immanent. However I do not know whether it is also standard procedure to talk to the HQs of the banks. From my point of view it does make sense, esp. if PL is a important client or if there is personal interest.
PL justifies the denial with the statement that such a process is very unusual for Chinese audit procedures.Furthermore no business association exists to HQ, therefore they could not asks HQs to provide such documents.

As a last point they announce a share purchase of up to 1,5 Mio shares beginning from the 25.07.2013.
Shares outstanding is 15 Mio, accordingly 10% of all shares could be bought back.
The buyback price shall not exceed 8 EUR.

Chances:
+8 EUR provides effectively a floor to share price (given the liquidity of course)
+The buyback was approved during AGM 2012

Risks:
-Chinese bank accounts are indeed bogus resulting in insufficient capital for buyback
-German holding only had 0,48 Mio cash as of 31.12.2011 (Bundesanzeiger.de, latest HGB statement)
-No directors dealings during the period of extremely depressed share prices


/Edit: There also seems to be heavy insider trading before the announcement +26,58% on XETRA until 17:36:09. Date of announcement: 18:01.
Also higher trading volume, however not very strong.
Still: Its always leaking somewhere. EMH..

/Edit2: New CFO. Seems competent, reputation to loose, might help share price further.

/Update 16.10.2012: No news so far. Powerland release unaudited statements for Q2.13 and furthermore appointed EY / Ernst & Young as auditor. I'm surprised they took on such a high risk mandate, especially with their Sino Forest experience...
Out the buyback there is no information available at all, often companies have information on their webpage, not in this case.