10 underperforming french companies that could be targeted by activists funds

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10 underperforming French companies that could be targeted by Activists

February 15, 2016

Strictly private & confidential

Research note

© JO&K Partners 2 Strictly private & confidential

The context

Since the global financial crisis, shareholder activism has surged


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The rise of activists

0

20

40

60

80

100

120

140

2009 2010 2011 2012 2013 2014

Total activist funds’ Asset Under Management (USDbn)

Sources: JP Morgan, HFR Industry Reports © HFR, Inc.

x3 in 5 years

Comments

•  A few activist funds managing less than a total of USD 12 billion in 2003 has seen the activist asset class balloon to more than USD 120 billion in assets under management for activist hedge funds

•  This growth has been fueled by the overall good performance of these funds. Over the last five years, activists have achieved an annualized excess return of more than 15%.

Sources: JP Morgan, SharkRepellent, FactSet, 13D Monitor

The context

Almost 150 companies in Europe have been targeted by activists over the last 5 years


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The European landscape The context

Comments

•  Europe is a relatively unfriendly place for activists and represents only 8% of activist hedge fund focus, contrary to 41% in North America. Yet as the US landscape becomes crowded, many are turning their eyes to Europe

•  The UK, which attracts more than half of activists investing in Europe, is considered the most activist-friendly jurisdiction in Europe, judged on its regulatory regime and institutional investor sentiment

•  Other countries are less friendly and present more challenges but are not entirely closed. Nordic countries and Switzerland in particular have shown a relatively high level of activist campaigns. France and Germany remain the second and third most important markets for activists.

Companies publicly targeted in Europe over the last 5 years

Source: Skkaden

UK; 54%

France; 9%

Germany; 9%

Switzerland; 6%

Italy; 4%

Others; 18%

One of the least activist-friendly jurisdictions


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Shareholder activism in France The context

Comments

•  Although by European standards the level of activism in France is high, almost 40% of activists’ demands are left unsatisfied, making it one of the least activist-friendly jurisdictions

•  Management and employee protection, the role of the state in a number of companies and the relatively passive behavior of French institutional investors can explain the comparatively low level of activism

•  However, increasing institutional investor accountability and changes in French legislation however, are raising France's profile for ‘long term’ activism

•  In particular the recent law that provides automatic double voting rights for shares held in registered form for more than two years. This can prove a useful tool in increasing activist influence on the board without putting up additional capital.

Main companies publicly targeted in France over the last years

- 2015: Gameloft, Ubisoft

- 2014: Vivendi, Nexans

- 2013: Airbus, Accor

- 2012: Safran, Technicolor

- 2010: Lagardère

- 2008: Carrefour, Accor, Saint Gobain

- 2007: Atos, Valeo

- 2006: Arcelor

Some very specifics players in addition to traditional activist hedge funds


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Activist shareholders in France The context

BPI, Bolloré and the Private Equities

•  BPI, the investment arm of the French state, can be considered France’s main ‘activist’. The firm, which has taken minority stakes in more than 20 public companies, is acting as a long-term investor but generally favors management and status-quo over shareholders.

•  Bolloré, a French investment and industrial holding group, has been the main activist in recent years. Despite not being a specialist fund, the group has taken direct and indirect minority positions in several French listed companies and imposed strategic and management change.

•  Private equity and venture capital firms have significant minority positions in many French listed companies. They are particularly active in small and micro caps, but some firms such as Colony Capital, APAX, Eurazeo or Apollo have bought minority positions in large caps and succeeded in obtaining board seats.

French investors associations

Aside the activist shareholders, French investors associations play an important role in initiating legal action and being vocal during AGM.

L’ADAM (L’Association Des Actionnaires Minoritaires), in particular, have been collaborating regularly with hedge fund activists. As stated by Colette Neuville, the association’s leader, collaboration is offered “as long as [activists’] objectives go beyond the short term and help to create value for all the shareholders.”


10 French companies

Less than 5% of listed companies could be targeted


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Screening 10 French companies

250 listed companies

Screening 1: Company with no significant reference shareholder i.e. main shareholder (private equity, family, founder…) with less than 10%

40 listed companies

Screening 2: Becoming the main shareholder to request less than EUR 1 billion. In addition, low liquidity and small biotech excluded.

25 listed companies

Screening 3: Significant share price underperformance over the last three years.

10 listed companies

Less than EUR500m required to become the most influential shareholder


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Technip 10 French companies

Reference shareholders -  BPI (French State): 5.2% -  IFP (French State): 2.5%

Share price performance (over 3 years) -49%

Market capitalization EUR 4.8bn

Business Technip engages in the fields of project management, engineering and construction for the energy industry. The company operates its business through two segments: Subsea (pipe system) and Offshore/Onshore (construction and engineering).

Comments As with many oil services companies, Technip is facing a challenging environment. Order intake decline has led to major restructuring. Yet contrary to many, Technip remains solid. The company still has a long-term backlog and a positive net cash position. This is currently a comfortable situation, but it could typically be challenged by activist funds.

Key financials*

Valuation multiples*

Based on I/B/E/S

EURm 2013 2014 2015E 2016E

Sales 9336 10725 11922 10445 EBITDA 1078 1108 1217 1099 Net income 563 437 175 527

Net cash 663 1125 811 965

x 2015E 2016E

EV/sales 0.33 0.36 EV/EBITDA 3.2 3.5 P/E 29.2 9.2



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Arkema 10 French companies

Reference shareholders -  FSI (French State): 6.5% -  Employees: 4.4%



Business Arkema engages in the manufacture and supply of chemical products. It operates through the following segments: High Performance Materials, Industrials Specialties and Coating Solutions.

Comments Like many basic materials companies, the group’s share price has been impacted by the Chinese economic slowdown. Nevertheless the company has performed relatively well, particularly in the integration of its acquisition of Bostik. Unfortunately investors appear not to recognize this and activist funds may at some point step in.

Key financials*


Based on I/B/E/S

EURm 2013 2014 2015E 2016E


Net debt 923 154 1784 1677

x 2015E 2016E


EUR135m required to become an influential shareholder


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Rexel 10 French companies

Reference shareholders -  Employees: 0.9%



Business Rexel engages in the distribution of electrical products. They are grouped into the following families: Electrical Installation Equipment, Cables and Conduits, Lighting, Security and Communication, Climate Control, Tools and White and Brown Products.

Comments For almost five years, in a difficult environment, Rexel has been regularly disappointing with sales stagnations and earnings declines. Suffering from a relatively high debt level, the company has little growth ambition and seems to be out of ideas. This could typically trigger the arrival of an activist.

Key financials*


Based on I/B/E/S

EURm 2013 2014 2015 2016E


Net debt 2192 2213 2199 2084

x 2015E 2016E

EV/sales 0.7 0.36 EV/EBITDA 8.6 8.0 P/E N/S 18.3

Less than EUR30m required to become an influential shareholder


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Neopost 10 French companies

Reference shareholders -  Employees: 3%


Market capitalization EUR 619m

Business Neopost engages in the provision of delivery solutions, mailing services and equipment. It operates through the following activities: Mail (print finishing solutions), Communication and Shipping Solutions (logistics services).

Comments Positioned on a declining market, the company has compensated the fall of its core business by investing in shipping and digital communication. So far, Neopost has succeeded in expanding its sales but has suffered margin decline. Even if its strategy appears to make sense, investors appear disappointed and could welcome an activist. .

Key financials*


Based on I/B/E/S

EURm 01/2014 01/2015 01/2016E 01/2017E


Net debt 808 964 947 935

x 2015E 2016E




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Solocal 10 French companies

Reference shareholders -  Employees: 0.2%



Business Solocal engages provision of local digital communication, digital content, advertising solutions and transactional services to connect consumers with local business. It operates business through the business segments: Internet and Print & Voice.

Comments Despite a strong historical position on the internet search market, Solocal faces constant sales and earnings declines due to multiple strategic mistakes. The company issues regular profit warnings and has lost investors’ trust. It represents a typical case for an activist fund to step in.

Key financials*


Based on I/B/E/S

x 2015E 2016E


EURm 2013 2014 2015 2016E


Net debt 1580 1136 1091 1028



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Soitec 10 French companies

Reference shareholders -  BPI: 9.5% -  Founder: 2.3%



Business Soitec engages in the manufacture and sale of silicon and integrated circuits for the electronic and energy industries. It operates through the following business segments: Electronics, Solar Energy, and Lighting.

Comments Facing fierce competition and major difficulties in its solar division, Soitec recorded heavy losses for many years and financed them with regular capital increases. After a change in CEO, Soitec focused on electronic products and cost cutting, and succeeded in recording a positive EBITDA. As it seeks new funding again, an activist fund may step in.

Key financials*


Based on I/B/E/S

EURm 03/2013 03/2014 03/2015 03/2016E

Sales 263 247 223 241 EBITDA -62 -79 -68 44 Net income -209 -237 -259 -40

Net debt 67 207 150 147

x 2015E 2016E

EV/sales 1.08 0.92 EV/EBITDA 5.9 4.6 P/E N/S N/S

EUR4m required to become the most influential shareholder


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Prologue 10 French companies

Reference shareholders -  Founder 4.4% -  CEO 2.3%

Share price performance (over 3 years) +2%


Business Prologue engages in the provision of Cloud, IP Communications, and Enterprise Content Management and Exchange solutions. It operates through the following segments: Cloud, License, Support contract, Applications and infrastructure.

Comments Following an ambitious growth strategy (investment in Cloud Computing technologies, internationalization) and M&A (merger with O2i), the company has multiplied its sales threefold. Prologue has recorded net losses over the last three years however, and disappointed investors who may welcome the arrival of an activist fund.

Key financials*


Based on I/B/E/S

EURm 2013 2014 2015E 2016E

Sales 20,2 22,2 65,0 70,0 EBITDA -0,7 1,3 0,5 2,5 Net income -0,3 -0,3 -1,0 1,0

Net Cash 9,1 11,9 7,5 8,0

x 2015E 2016E

EV/sales 0.44 0.40 EV/EBITDA 57.0 11.2 P/E N/S 36.0

EUR3.5m required to become the most influential shareholder


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Mauna Kea Tech 10 French companies

Reference shareholders -  Seventure Partner: 4.1% -  Founder 3.7%



Business Mauna Kea Technologies engages in the design, development, and sale of optical biopsy devices and tools to visualize and detect abnormalities in the gastro-intestinal and pulmonary tracts primarily in cancer patients.

Comments Since its IPO in 2011, Mauna Kea has changed strategy and failed to deliver almost every year. Forced to reduce its cost and cash burn, the company has drastically cut its sales force and given priority to commercial partnerships. This new strategy has not yet delivered. Investors may be running out of patience and welcome an activist fund.

Key financials*


Based on I/B/E/S

EURm 2013 2014 2015E 2016E

Sales 10,9 11,0 8,5 12,9 EBITDA -10,8 -12,9 -11,9 -10,2 Net income -11,5 -14,0 -12,6 -10,9

Net cash 25,8 11,8 7,6 0,0

x 2015E 2016E

EV/sales 2.9 2.6 EV/EBITDA N/S N/S P/E N/S N/S



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Stentys 10 French companies

Reference shareholders -  BPI: 7.1% -  Founders: 4.2%



Business Stentys engages in the design, development, and marketing of self-expanding stents used in treating cardiovascular diseases. It provides solutions to cardiologists to treat patients with acute myocardial infarction and other complex coronary disease.

Comments Forced to discontinue its main clinical study in the US in 2014 due to a change in market trend, Stentys has lost investors’ trust. Despite rapid development of new products and continuing sales growth, the company is burning cash and will soon see its capital raised. Instead, an activist fund may step in and request that the company seeks out a buyer.

Key financials*


Based on I/B/E/S

EURm 2013 2014 2015E 2016E

Sales 3,4 3,9 6,1 8,6 EBITDA -12,0 -13,3 -10,8 -9,8 Net income -11,7 -17,8 -11,1 -10,1

Net cash 31,9 18,6 10,7 5,0

x 2015E 2016E

EV/sales 3.5 3.1 EV/EBITDA N/S N/S P/E N/S N/S



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Archos 10 French companies

Reference shareholders -  Founder 9.1%



Business Archos manufactures consumer electronics and portable digital entertainment solutions. Its products include Android tablets, smart-phones and connected objects. Archos is also the majority owner of PicoWAN, a network provider start-up for connected objects.

Comments Once a pioneer in the portable audio and tablet market, the company has suffered major difficulties in the face of strong mobile phone competition. Despite increasing its sales again due to new low cost products and a targeting of African markets, the company remains in loss. This and the low share price could trigger the entrance of an activist. .

Key financials*


Based on I/B/E/S

x 2015E 2016E

EV/sales 0.26 0.21 EV/EBITDA N/S N/S

P/E N/S N/S

EURm 2013 2014 2015E 2016E

Sales 143,7 132,1 158,6 200,0 EBITDA 1,9 -2,4 -2,0 0,1 Net income -1,4 -13,0 -2,5 -0,5

Net Debt 2,2 16,9 10,0 10,0


Appendix

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JO&K Partners

•  JO&K Partners is a unique consulting firm which offers advisory services to listed companies in corporate governance, strategy, finance and investor relations with the goal to achieve sustainable share price re-rating and fair valuations.

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•  In 2015, he founded JO&K Partners

•  Contact details: [email protected] +33 6 24 24 75 71


Appendix

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