Editorial
19.11.2015
By Aivars Jurcans

It is not that often when news from the Riga stock exchange trigger a public discussion. The public announcement in September when 43.25% of the shares outstanding (or, 45,187,392 shares to be precise) in Ventspils Nafta AS had been sold by Latvijas Naftas Tranzits AS to Euromin Holdings (Cyprus) Limited was an exception that caused a very heated debate. Just to remind, the total reported transaction value was EUR 79.98 million, while the price per single share was EUR 1.77. This price implied the enteprise value of EUR 304.20 million and valued the VN business at 5.1x its year 2014 earnings before interest, tax, depreciation and amortisation (EBITDA).

Is this an adequate price, or, as some claim, have we just witnessed a steal of the century?

Before trying to answer that, here are some hard facts and figures about Ventspils Nafta:

  • On a consolidated basis the Group has reported negative after-tax earnings of EUR (13.98) million on revenues of EUR 161.87 million in 2014 and EUR (66.24) million on revenues of EUR 166.73 million in 2013.
  • Only in 2015 the Group’s performance trend has reversed itself as it reported EUR 21.22 million in net profit on revenues of EUR 95.66 million in the first half of the year.
  • From the published financial statements it is not entirely clear how the Group calculates its EBITDA, but in their own estimate it has amounted to EUR 59.41 million and EUR 51.89 million in 2014 and 2013 respectively.
  • The Group has 104,479,519 shares outstanding, with a nominal value of EUR 1.40 each; its share capital is EUR 146.27 million, while the book equity amounted to EUR 476.37 million as at the end of 2014.
  • Over the first 6 months of 2015 the share price on the stock exchange has been fluctuating between EUR 1.01 and EUR 1.25, with the average being EUR 1.11.

A few weeks later Financial and Capital Market Commission ruled that the mandatory offer by Euromin to minority shareholders should be made at a price of EUR 4.56 per share. Simply put, the law requires that the price applied in such offers must be the highest of the following - the top price that Euromin had paid for the shares over the last 12 months, the weighted average price for the shares traded on the stock exchange over the last 12 months, or the value of the company’s net assets per share. The FCMC-approved price of EUR 4.56 per share reflects the net asset value as per the last audited financial statements of VN as at the end of 2014.

Thus we are having at least three different price points to consider – the average trading price of EUR 1.11, the transaction price of EUR 1.77 and the mandatory offer price of EUR 4.56. Which one, if any, would approximate the fair value?

According to corporate finance theory the market price of a publicly traded share is forward-looking, i.e., it reflects the market’s view on the ability of the company to generate positive returns to its shareholders. In other words, the value of any security reflects the present value of future cash flows that are discounted back by using a discount rate that reflects the riskiness of those cash flows. Of course, this comes with some caveats, one of them being that the market where said securities are traded is a transparent and a liquid one.

The average share price of EUR 1.11 has been calculated from 336 transactions with 86,370 shares changing hands, or from the turnover of mere EUR 94,648. Using this price level as a reference the transaction price would represent a 61% premium. But it is very hard indeed to argue that any price derived at this low a turnover would be the fair market value.

The net asset value, in comparison, is more backward-looking and reflects what the company has achieved and accumulated so far. And corporate finance teaches us that past results are no guarantee for future performance. The share price of EUR 4.56 implies a market capitalisation of EUR 476.73 million, or an enterprise value of the company of EUR 596.00 million. This would translate into an EV/ EBITDA ratio of 10.0x.

To assess whether this is high or low one needs to find a point of reference. Admittedly, there are not that many publicly quoted companies of a similar profile to compare with. One of the precious few, Royal Vopak, is among the biggest tank storage providers for oil and gas products globally, with 73 terminals in 26 countries and total assets of EUR 5.4 billion. In 2014 Vopak reported consolidated revenues of EUR 1.3 billion, EBITDA of EUR 707.7 million and earnings per diluted share of EUR 1.94. With its shares recently trading on the Euronext Amsterdam stock exchange at c. EUR 37.00, the company is valued at an EV/EBITDA multiple of 8.74x and a Price-to-Earnings (trailing twelve months) ratio of 17.94x, according to Bloomberg.

Premia and discounts are factors that make valuation less of a science and more of an art. Given the huge differences in size, diversification and profitability between Royal Vopak and VN it would hardly be appropriate to apply the Royal Vopak multiples without calibration. To make them more comparable it could probably make sense to adjust the multiple by, say, 20%. Such adjustment would produce an EBITDA multiple of 7.0x and would result in an EV of EUR 415.39 million and the price per share of EUR 2.83. This would represent a neat 60% premium over the Euromin transaction price.

Of course, the buyer with this transaction crosses the important thresholds of 50% and 75% of shareholding and acquires full control over the Group. Normally such transactions would call for a premium, ingeniously being named the “control premium”. Depending on the source, this premium is suggested as being in the range of 20-30%. But, again, what would be that benchmark share price to apply the premium to in this case? As already argued above, the market price level is not very representative. Also, in the case of VN any such premium might be offset partially or in full by a discount applied to compensate for the lack of liquidity.

A holder of 43.25% of shares has a strong minority position but not enough for exercising or acquiring control. When there is only one party familiar with the company, with an incentive to buy and the resources to afford it, the seller’s alternatives become somewhat limited. Selling the shares in smaller lots on the exchange is likely to depress the price even more and take too long a time to be feasible. Given the shareholder structure, seeking another buyer for the block of shares does not appear as too realistic an option either. None of the above supports the bargaining position of the seller, of course.

Any transaction has a rationale both for the buyer and for the seller, and both parties are guided by the considerations that we as general public are not privy to. It is conceivable that, because of the assymetry of information, the sellers know something that the buyer and the rest of us do not. And this “something” leads them to believe that EUR 1.77 is a good price to accept.

To conclude, for an outsider without a deeper knowledge and understanding of VN’s business prospects it is hard to peg with any degree of precision what the fair value of shares should be. The very back-of-envelope analysis might suggest a value corridor of up to 7.0x EBITDA which would place the actual transaction price at the lower end of the range. And the assymetric information combined with the differences in bargaining power for sure have had an impact on that as well!

Sincerely,
Aivars Jurcans
editor@mergers.lv

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