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Hochtief is HOT

October 21, 2010 | About:
Hochtief AG was founded in 1875 and is headquartered in Essen, Germany. The ticker for Hochtief in Frankfurt is HOT.


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. http://www.hochtief.com/hochtief_en/739.cnt?pid=8424

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

http://www.hochtief.de/hochtief/data/pdf/1009_company_presentation.pdf

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. http://www.hochtief.com/hochtief_en/pdfservice/8339

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.

http://seekingalpha.com/instablog/440552-panta-capital/33186-hochtief-ag-attractive-stub-trade-idea


Any and all questions welcome as usual.

About the author:

batbeer2
I define intrinsic value as the price I would gladly pay to own the business outright. With current management in place. For most stocks, that value is 0. As of September 2012, I'm the author of the monthly Buffett-Munger Best Bargains Newsletter. I can be reached at fvandenbroek AT gurufocus DOT com

Visit batbeer2's Website


Rating: 4.2/5 (12 votes)

Comments

stephens-larry
Stephens-larry - 3 years ago
i found his review very interesting. My question-why now
batbeer2
Batbeer2 premium member - 3 years ago
Thanks; good question, one I often miss. I think there are many possible answers.

1) You have cash to spare and this is your best idea.

2) You like to follow the gururs and Hawkins and Whitman bought some.

3) You think Australian infra stocks will rocket but you think Leighton is just a tad expensive.

4) You think Australian infra stocks are going to h*ll but you like to hedge your bets.

5) You have reliable informaion ACS will make a serious offer soon.

6) ...

Notice all my answers start with you. Answer #1 would be typical for me, but I don't have cash to spare so I'm not currently long.

Care to share what you are waiting for ?
indieinvestor
Indieinvestor - 3 years ago


Batbeer2, Is there a way to get in touch with you? I have some questions / comments about your posts and would love to chat live. I work in the photo industry and would love to compare notes.
batbeer2
Batbeer2 premium member - 3 years ago
batbeer at hotmail..... the only chatting I do is really live.

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