ReHo Pulls the Sewko Holdings IPO

As a follow up to a previous post this summer, Retail Holdings ("ReHo") stated they were planning a sale of a portion of their equity interest in Singer Asia via a listing of a newly formed holding company Sewko Holdings (which in turn owns 100% of Singer Asia) in Singapore.  Unfortunately, the IPO date has been pushed back to sometime in 2014.  I'm not entirely sure what to make of this announcement as the markets, at least in the US, are at all time highs and it appears like a great time to come public.  I can only assume that they were unable to get a valuation close to the underlying value of the operating subsidiaries as that's been a target value in past annual reports.  ReHo has also done this before when they announced the sale of the Bangladesh subsidiary before terminating that agreement due to market conditions.  Is over promising and under delivering starting to become a pattern?

Checking in on the sum of the parts analysis of ReHo's valuation (cash has been reduced by the $1 per share dividend):

ReHo still seems very cheap at current levels, even if an IPO is a year off.  But why was the IPO delayed?

There was a Seeking Alpha article published a little over a month ago that did a good job of laying out the liquidation thesis, but a few commenters pointed out that an IPO might not close the valuation gap because Sewko would still be a holding company of publicly traded subsidiaries and still deserved a conglomerate discount.  I had the link to the preliminary prospectus, but its now dead, luckily I printed out the corporate structure and ownership as I was struggling with the question of whether Sewko deserves a discount.  The publicly traded subsidiaries are highlighted in yellow.  Hopefully its readable.

Sewko Prelim Prospectus

All of the operating subsidiaries other than Singer Thailand are controlled companies and majority owned.  Throughout the now dead draft prospectus, Sewko gave the impression that they control all of these subsidiaries and that they're essentially operated as one Singer.  I'd also argue that the market is relatively efficient and would price the operating subsidiaries at a discount in their home markets given the ownership structure and the minority shareholder position.  But it's still an issue that potentially prevents ReHo from realizing the full value out of a Sewko IPO.

I've also been corresponding with another ReHo shareholder that has concerns about the company's lack of operating cash flow for the past several years, which is certainly a bit concerning on the surface, but given the complexities of the consolidated accounting rules and different holding company structures I hope there's a good explanation?

Given the failed IPO, I think its wise to be a bit skeptical of the full NAV as a short term price target.  I'm open to any thoughts or comments from other holders on why the IPO might have been pulled, but these were a few thoughts I had today after hearing the bad news.  I'm still holding, but my conviction in the liquidation thesis has been taken down a notch, it might be time to take a closer look under the hood.

Disclosure: I own shares of RHDGF

Retail Holdings looking to IPO Singer Asia

A quick update on Retail Holdings (which I previously discussed back in January), despite general weakness in emerging markets and their underperformance this year, Retail Holding announced last week they are "considering" a potential IPO of Singer Asia (their primary asset) on Singapore's stock exchange.

The IPO is probably in its early stages, but it continues to highlight management's intent to close the valuation gap between Retail's NAV and the market price, which has only barely moved since the announcement.  Below is my updated valuation spreadsheet.  I added Singer Industries and Regnis as I mistakenly left them off before, Singer Finance is part of Singer Sri Lanka as far as I can gather from the annual report, either way they're small rounding errors.

The investment thesis on Retail is pretty straightforward.  Retail Holdings trades for a steep discount to its NAV and yet their stated strategy "is to maximize and monetize the value of its assets, with the medium-term objective of liquidating the Company and distributing the resulting funds and any remaining assets to its shareholders."  Unlike other liquidations, Retail's assets are very much operating businesses that should grow and increase in value over time (playing off the long term trend of the growth of the middle class in emerging markets).  Stephen Goodman, Chairman and CEO, owns roughly 25% of the shares and is in his late 60s, making him highly motivated to monetize Retail Holdings assets.  I continue to hold and look for opportunities to pick up more shares, not easy given the illiquidity.

Disclosure: I own shares of RHDGF

Subcontinent Consumer with a Margin of Safety

I recently attended a McKinsey & Company presentation on the "Five Global Forces of Innovation" that will drive the global economy for the next several decades.  One of the five forces is what they call "the great rebalancing", essentially how the emerging economies will catch up to developed economies, especially with respect to the creation of a consumer driven middle class.  This isn't a new or groundbreaking concept, as it's been forecasted for many years, however it's a great long-term trend to keep in mind when searching for investing opportunities.

With that backdrop in mind, Retail Holdings NV ("ReHo") presents a compelling emerging market investment opportunity with a reasonable margin of safety and a potential liquidation catalyst.  Retail Holdings NV is a holding company incorporated in Curacao with no operating activities and three main assets:

1. 56.13% equity interest in Singer Asia Limited
2. Seller notes, arising from the sale of the Singer worldwide sewing business and trademark in 2004
3. Cash and cash equivalents at the holding company level with no external debt outstanding

Below is an excerpt from the 2011 Annual Report which outlines how the management thinks of the value of Retail Holdings:

"The Company's net asset value at December 21, 2011, attributable to ReHo Shareholders, was $87.6 million, equivalent to $16.51 per Share outstanding.  This essentially reflects the book value of the Company's investment in Singer Asia, the notional amount of the SVP Notes and the cash at the ReHo holding companies.  Using the $157.1 million Market Valuation for Singer Asia attributable to the ReHo shareholders, the $26.8 million notional value amount of the SVP Notes, and the $2.9 million in cash at the ReHo holding companies, the corresponding figure would be approximately $186.8 million, equivalent to $35.20 per Share.  There can be no assurance that the Company's shareholders will ever realize either the $16.51 per Share or the $35.20 per Share amounts given the substantial contingencies and uncertainties"

With that valuation framework, I'll dive a little deeper into Singer Asia and the SVP Notes.

Singer Asia Limited
Retail Holdings' main asset is a 56.13% equity stake in Singer Asia Limited.  Singer Asia Limited has ownership stakes in 5 separate publicly traded consumer durable product companies located in Bangladesh, India, Pakistan, Sri Lanka, and Thailand.  The Singer brand name is most highly associated with sewing machines, and in 2004 Retail Holdings sold the trademark and sewing machine business to SVP (fka KSIN Holdings), more on this transaction later.  Singer Asia, through its subsidiaries, now is a premier seller of consumer products (think washing machines, refrigerators, televisions) for the home, and as the emerging middle class continues to desire home conveniences of developed market consumers, Singer should be positioned capture a good amount of this long-term growth trend.  

Singer Asia's major subsidiaries are all publicly traded in their respective countries, providing easy assistance in valuing each:

The value to Singer Asia comes out to $240.55 million, with Retail Holding's 56.13% ownership of Singer Asia coming out to $135.02 million (or more than 20% above the current market capitalization alone).  In a sense the value of these underlying publicly traded companies is hidden like a Russian nested doll, with the 5 publicly traded companies partially nested within Singer Asia, and then Singer Asia partially nested with Retail Holdings. 

SVP Notes
In September 2004, Retail Holdings sold the Singer sewing business and trademark to SVP Holdings ("SVP", fka KSIN Holdings) for $65.1 million in cash, and $22.5 million of unsecured notes ("SVP Notes") which it still holds.  The question is how much are the SVP Notes currently worth?

During the 2008 bear market, SVP's operations were negatively impacted by the economic downturn resulting in an Event of Default in October 2009.  SVP cured the Event of Default in May 2010, and is now current on the notes.  As a result of the default, the interest rate on the notes increased from 10.0% to 12.0%, with minimum cash interest payments of 7% with the remaining being capitalized.  SVP has elected to pay these minimum cash interest payments since the Event of Default, and has capitalized the remainder.  These notes are clearly still distressed and unlikely to be equal to par.

In the June 30th semi-annual report, Retail Holdings disclosed they had made the following transaction with SVP:

"In June 2012, as part of an increase and extension of the financing facilities at SVP, ReHo agreed to extend the maturity of the SVP Notes from February 2014 to September 2018.  The interest rate on the SVP Notes remains at 12% with a minimum cash interest payment of 7% of the outstanding principal.  Concurrent with the refinancing, SVP made a cash payment to ReHo of USD 5,000 thousand in consideration of a reduction in the principal amount of the SVP Notes by USD 5,882 thousand, representing a 15% discount to notional value."

This transaction reduced the principal value of the remaining SVP notes to $21.598 million.  While extending the maturity hopefully gives SVP enough runway to eventually make good on the entire amount, the 15% discount is a reasonable benchmark of the current value of the SVP notes.  

Valuation
Adding together Retail Holdings three primary assets:

1. Singer Asia Limited = $135.02 million
2. SVP Notes (discounted 15%) = $18.36 million
3. Cash at the holding company level = $9.8 million (per the June 30, 2012 report)

Totaling three up yields an NAV of $163.18 million (or $30.74 per share), representing a 31% discount to the current market capitalization of $112.38 million.  

Medium-Term Liquidation 
If the discount to NAV and long term trend of the emerging middle class aren't enough, there's also the potential hard catalyst of the liquidation of the company.

"ReHo's strategy is to maximize and monetize the value of its assets, with the medium-term objective of liquidating the Company and distributing the resulting funds and any remaining assets to its shareholders."

Besides owning roughly 25% of the shares outstanding, CEO Stephan Goodman also has a special bonus in place to liquidate the company:

"ReHo has put in place a special bonus program for the Company's Chief Executive Officer which provides a cash award following the liquidation, dilution, wind-up, merger or sale of the Company, in the event that aggregate dividends and distributions to shareholders, including any final dividend or distribution, exceed a certain threshold amount."

Retail Holdings has economic trends at its back, a significant discount to NAV, and a potential value realization catalyst of a liquidation.  What's not to like?

Disclosure:  No current position, but will likely add shortly.