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Thesis
Hochtief has a market cap of about $6B and a 55% stake in the dominant and publicly traded Australian infrastructure contractor Leighton holdings. Leighton has a market cap of $11B. The european and american assets of Hochtief are in effect free.
Hochtief and Leighton are both well entrenched, have a long history and are availabe as ADRs. Hochtief also trades OTC as HOCFF. Hochtief has a $ 50B backlog and raises its dividends regularly. Leighton holdings builds most of the public infrastructure in Australia and operates important mines all over the world under contract for big mining companies.
Why is this cheap ?
1) ACS holds about 30% of Hochtief and made a lowball bid to buy the remaining shares at a price that valued the entire company at about $5B. German law required ACS to make that bid because their stake recently crossed the 30% threshold. ACS bid at the absolute minimum price required by law. Importantly, if they take control, they automatically and immediately have to make a bid for the remaining shares of Leighton.... Hochtief management has of course pointed this out to current Hochtief shareholders. IMHO ACS does not wish to take control just yet.
2) There is a large seller. Hochtief Pension Trust is selling a lot of shares. [www.hochtief.com]
3) Mr. Market applies a "holding discount" to Hochtief. As is often the case, the price is less than the sum of the parts. If this does not change, it's of no use to the stock flipper.
What we get for free
[www.hochtief.de]
1) The US and Canada operations AKA "Flatiron" and "Turner"; Flatiron works on expansion of Sacramento and San Diego airports.
2) Hochtief concessions collects "royalties" from airports (among others, Duesseldorf, Hamburg and Sydney), toll roads etc.
3) European commercial real estate development. Among other things:
- Hochtief Facility Mgmt and Hochtief Energy supply the heat for a business park in Munich.
- Hochtief Property development developed Munich bus station. It's now operated by Hochtief Services.
etc. etc.
If we value the free assets at ± 7x cashflow we get a value of about 3B. The concessions business alone could have been IPOed for about $1.2B recently. [www.hochtief.com]
That IPO was cancelled becuase management thought the price was not right.
Catalysts
ACS gets serious.
Someone makes a bid for Leighton.
Some of Hochtiefs other busiesses are sold or IPOed.
Hochtief sells more of the real estate now on the balance sheet.
Specific risk
An Australian crash with a significant reduction in the value of Leighton.
Time.... ACS may never get serious
A major meltdown of European commercial real estate.
The 143792 other risks I have not thought of.
Arbitrage
A classic value play would be to short Leighton against Hochtief. The gap MUST widen over time.
[seekingalpha.com]
Any and all questions welcome as usual.
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