Ferronordic buying Rudd for the price they did seems like a pretty good deal. But when something like that happens, I always wonder: why are they "allowed" to buy it at the price they did?
I understand there might have been limited competition & FNM has Volvo's blessing... but do you have any info on why Rudd was for sale?
I don't know any details but it looks like estate planning to me. Mike Rudd, the second-generation owner-operator, has been the CEO for over 30 years, since just after he bought out other family members. Judging by comments from Ferronordic's CFO on the Q3 call, Rudd will step down pretty soon after completion. Maybe an upcoming lowering of federal gift and estate tax exemptions figure into it. By doing the transaction before year-end you have time to gift in 2023, 2024 and 2025 before the ceiling goes from about $13m to $5m in 2026. Just a guess.
Ferronordic promised no layoffs for 12 months, which indicates some level of care beyond the financial from the old owner. Also, clearing off the separately owned properties indicates an intent to put things in order, not just selling out at the most opportune moment. Although profits being at their highest point this cycle probably helped with the decision.
I'm not positive that they got it for a song, although the deck would be at least somewhat stacked if PE players were disqualified either by Volvo or by the former owner. Maybe the deal was value neutral in spite of the low multiple, but even if it looks like it was competently run all along, I think the Ferronordic team may do even better with the asset
Always fun to read your posts! Thanks for sharing!
About Ferronordic, I really like the company and have followed for some years now. It was exciting to see them sell their operations in Russia and now rebuilding in the US. I do see them quite levered now? Like, their net-debt after the acquisition will be 960M (from conference call 23q3), so an EV of around 2000M. Then if we assume an operating profit (after group costs) of 150M, then you get a 13x EV/EBIT? Not saying it is expensive, but not sure if cheap. Maybe you have a different assessment? Also, we know they have built up quite some inventory, maybe you are taking it into account?
Have to say though, that I am willing to pay a premium for this management.
If you value it like that, the inverse is that before the Rudd acquisition the Ferronordic operations were worthless because they were loss-making.
It additionally doesn't give any asset credit to the two extra properties bought as the rent paid on them has detracted from Rudd's profits up to now. So in essence, that way of valuing the company says that Ferronordic just lit on fire $10m when buying those properties (no asset value or increased earnings but added net debt). I don't think that makes sense.
It's not a risk-free situation but the risk is in my view lower than the leverage at a glance says, which I also explained in the post.
By making an assumption about future profitability in Germany and a growth path in the US. Also assuming that the properties bought over the last few years in Germany (133m SEK paid) and the US (2 properties for $10m and 6 additional ones with no price attached to them) are worth maybe 500m SEK total and that at least some of them can be monetized. Of course, selling off real estate would increase rent costs, but it can potentially decrease financial leverage significantly.
Whats your thoughts that the CEO of Gotlandsbolaget seems to suggest in his comments about the large amount of cash on the balance sheet that the majority will be invested in new ships as the last batch cost 3 billion and the more environment friendly ones will be even more expensive :/
The new contract doesn't demand new tonnage. But if they decide to do newbuilds anyway, which is probably likely, they shouldn't cost that much. The plan is for two hybrid catamarans from Austal almost identical in specification to what Molslinjen had delivered earlier this year from the same shipyard. That one cost €83.65 million when they ordered it in 2019. So maybe 2 billion SEK is a more accurate guesstimate. For delivery at the end of this decade.
And they usually use some debt. So while it's a lot of capex potentially, the capital intensity shouldn't be overestimated either. They do actually have an astonishing amount of surplus cash and if they win they will also have at least a handful of years of earnings before that too.
I see, thanks for info! The case looks compelling in many ways. The low ownership in management scares me a bit, and could result in that the "day" may linger. As a property fan I really like the prospect of continued investments in property development. But at the same time find it hard to calculate what they earn from this part, the earnings includes income from hotel operations as I understand?
And with the earlier transactions it is not a wild guess that there are some hidden value in the books aswell :)
It's the family that makes the big decisions and they own plenty of shares. I don't find management shareholding very relevant. The potential alignment issues go the other way -- that the family has such strong control and no apparent inclination to share fully with minority shareholders.
The property development is interesting and they may also be able to buy up some more assets on Gotland in the next little while. But it's not large enough to be of any great financial significance to the company at this point in terms of income from property management. In the latest quarterly presentation they had a slide on the owned properties.
Great read as always! Thank you!
Ferronordic buying Rudd for the price they did seems like a pretty good deal. But when something like that happens, I always wonder: why are they "allowed" to buy it at the price they did?
I understand there might have been limited competition & FNM has Volvo's blessing... but do you have any info on why Rudd was for sale?
I don't know any details but it looks like estate planning to me. Mike Rudd, the second-generation owner-operator, has been the CEO for over 30 years, since just after he bought out other family members. Judging by comments from Ferronordic's CFO on the Q3 call, Rudd will step down pretty soon after completion. Maybe an upcoming lowering of federal gift and estate tax exemptions figure into it. By doing the transaction before year-end you have time to gift in 2023, 2024 and 2025 before the ceiling goes from about $13m to $5m in 2026. Just a guess.
Ferronordic promised no layoffs for 12 months, which indicates some level of care beyond the financial from the old owner. Also, clearing off the separately owned properties indicates an intent to put things in order, not just selling out at the most opportune moment. Although profits being at their highest point this cycle probably helped with the decision.
I'm not positive that they got it for a song, although the deck would be at least somewhat stacked if PE players were disqualified either by Volvo or by the former owner. Maybe the deal was value neutral in spite of the low multiple, but even if it looks like it was competently run all along, I think the Ferronordic team may do even better with the asset
Always fun to read your posts! Thanks for sharing!
About Ferronordic, I really like the company and have followed for some years now. It was exciting to see them sell their operations in Russia and now rebuilding in the US. I do see them quite levered now? Like, their net-debt after the acquisition will be 960M (from conference call 23q3), so an EV of around 2000M. Then if we assume an operating profit (after group costs) of 150M, then you get a 13x EV/EBIT? Not saying it is expensive, but not sure if cheap. Maybe you have a different assessment? Also, we know they have built up quite some inventory, maybe you are taking it into account?
Have to say though, that I am willing to pay a premium for this management.
Thanks.
If you value it like that, the inverse is that before the Rudd acquisition the Ferronordic operations were worthless because they were loss-making.
It additionally doesn't give any asset credit to the two extra properties bought as the rent paid on them has detracted from Rudd's profits up to now. So in essence, that way of valuing the company says that Ferronordic just lit on fire $10m when buying those properties (no asset value or increased earnings but added net debt). I don't think that makes sense.
It's not a risk-free situation but the risk is in my view lower than the leverage at a glance says, which I also explained in the post.
Good point. Still a bit curious from which perspective it is cheap for you?
By making an assumption about future profitability in Germany and a growth path in the US. Also assuming that the properties bought over the last few years in Germany (133m SEK paid) and the US (2 properties for $10m and 6 additional ones with no price attached to them) are worth maybe 500m SEK total and that at least some of them can be monetized. Of course, selling off real estate would increase rent costs, but it can potentially decrease financial leverage significantly.
Whats your thoughts that the CEO of Gotlandsbolaget seems to suggest in his comments about the large amount of cash on the balance sheet that the majority will be invested in new ships as the last batch cost 3 billion and the more environment friendly ones will be even more expensive :/
Good question!
The new contract doesn't demand new tonnage. But if they decide to do newbuilds anyway, which is probably likely, they shouldn't cost that much. The plan is for two hybrid catamarans from Austal almost identical in specification to what Molslinjen had delivered earlier this year from the same shipyard. That one cost €83.65 million when they ordered it in 2019. So maybe 2 billion SEK is a more accurate guesstimate. For delivery at the end of this decade.
And they usually use some debt. So while it's a lot of capex potentially, the capital intensity shouldn't be overestimated either. They do actually have an astonishing amount of surplus cash and if they win they will also have at least a handful of years of earnings before that too.
I see, thanks for info! The case looks compelling in many ways. The low ownership in management scares me a bit, and could result in that the "day" may linger. As a property fan I really like the prospect of continued investments in property development. But at the same time find it hard to calculate what they earn from this part, the earnings includes income from hotel operations as I understand?
And with the earlier transactions it is not a wild guess that there are some hidden value in the books aswell :)
It's the family that makes the big decisions and they own plenty of shares. I don't find management shareholding very relevant. The potential alignment issues go the other way -- that the family has such strong control and no apparent inclination to share fully with minority shareholders.
The property development is interesting and they may also be able to buy up some more assets on Gotland in the next little while. But it's not large enough to be of any great financial significance to the company at this point in terms of income from property management. In the latest quarterly presentation they had a slide on the owned properties.