Newsletters - Asset Value Investors

AGT

Pargesa • Newsletter April 2020

During the month, we exited the position in Pargesa, the Swiss-listed holding company whose sole asset is a
stake in Groupe Bruxelles Lambert, a Belgian holding company with a portfolio of high-quality, large-cap,
European businesses.

We initiated a position in Pargesa in 2015 when the spread between it and GBL’s discount widened to what we
considered to be an unsustainable level. The investment allowed us to gain exposure to GBL’s portfolio of
companies (Adidas, Pernod Ricard, LafargeHolcim, among others) while also benefitting from any tightening of the
discount spread between Pargesa and GBL. In March 2020, the controlling Frère and Desmarais families
announced measures which would collapse the Pargesa structure and we took advantage of this opportunity to
exit the position. Over the lifetime of the investment, Pargesa generated an IRR of +5% in CHF terms and +9% in
GBP, vs. 2% (CHF)/6% (GBP) for the MSCI ACWI ex-US.

AGT

Pargesa • Newsletter March 2019

Pargesa Holding was the final significant detractor, reducing returns by
13bps. The NAV fell by -2% over the month which, combined with the
discount moving from 32% to 34%, resulted in share price returns of –
5%. Positive performance from adidas and Pernod Ricard (19% / 18%
of NAV) were more than outweighed by Imerys (11% of NAV), the
stand-out detractor whose share price declined -11% over the month.
Imerys, a provider of minerals to industrial customers, has had a difficult
period, with its share price down -42% over the past twelve months.
There have been problems on various fronts, including: (a) a poorly
performing Energy Solutions & Specialties division (28% of sales); (b)
uncertainty about the success of the group’s strategic shift towards
higher-margin, value-add minerals; and (c) the overhang from ongoing
litigation against Imerys regarding asbestos in talc products. Imerys’
new CEO will present an update on the company’s strategy at its Capital
Markets Day in London in June, which we expect to be a positive
catalyst for the shares.

The spread between Pargesa and Groupe Bruxelle Lambert’s discount
widened from 7% to 11% over the month. Given that the two companies
own the same portfolio of assets, we view this discrepancy as inefficient
and believe that the spread will narrow over time, adding another
element to returns from Pargesa.

AGT

Pargesa • Newsletter April 2018

Pargesa’s anomalously wide discount has finally started to narrow. To
recap, Pargesa is a Swiss-listed holding company jointly controlled by the
Frère and Desmarais families. Its only asset is its 50% stake in Groupe
Bruxelles Lambert (GBL), a Belgian-listed holding company with stakes in
European blue-chip companies including Imerys, Adidas, and Pernod Ricard
among others. In the ten years up until early-2015, Pargesa’s discount to
NAV was on average 1 percentage point tighter than GBL’s. Beginning in
April 2015, Pargesa’s shares de-rated and, since then, its discount has
averaged 11 percentage points wider than GBL’s. It is difficult to be certain
why this discount widening has occurred, but possible theories include
confusion regarding how the Swiss Franc-Euro devaluation in 2015
impacted on Pargesa, and the existence of a bond exchangeable into
Pargesa shares which created an overhang. Regardless of the reasons, we
owned a position in GBL at the time and were quite happy to switch into a
security higher up the holding structure in order to own the same underlying
portfolio at a significantly wider discount. The spread between the two
discounts narrowed by 3.6 percentage points over the month, leaving
Pargesa on a still-very-wide discount to (look-through) NAV of 31%. We
continue to be impressed by the management team, and their revived
strategy which for the last few years has focussed on taking large stakes in
smaller companies than in the past and using their influence to drive returns.

AGT

Pargesa • Newsletter March 2018

We regularly discuss our active engagement with the boards and
management of investee companies in these monthly updates, but more so
in relation to closed-end funds than holding companies. This is
understandable given that our holding company investments are controlled
by family shareholders with our investment theses predicated more on an
alignment of interest than on our ability to effect change. Essentially, we see
the families and management of the holding companies as the activists
themselves, playing key roles in driving changes at their own investee
companies. That said, we often make recommendations to holding
company managers/families in our regular meetings with them, and usually
find them to be a receptive audience given our deep experience in investing
in structures likely to attract discounts. Two such meetings occurred this
month, with the management of Pargesa (Swiss-listed holding company
trading on a 34% discount to NAV) and Swire Pacific (HK-listed holding
company whose B shares, which we own, are priced at a 41% discount to
NAV). Both trade at discounts far in excess of their average levels, and we
can see several levers that management could pull to spark a re-rating.

AGT

Pargesa • Newsletter July 2017

Pargesa performed well, with its NAV pushed higher by its holdings in
Adidas, LafargeHolcim, and Umicore. In an environment of tightening
discounts across many of the European holding companies, Pargesa’s 32%
discount stands out as an anomaly particularly given its near-100% listed
portfolio (via its sole asset, a 50% stake in Groupe Bruxelles Lambert – GBL)
and the success to-date of GBL’s shift in strategy towards a more engaged
ownership model. Tokyo Broadcasting System’s shares were up on no
news but perhaps on the creeping recognition of how chronically
undervalued its shares are, while Fondul Proprietatea (FP) announced the
sale of its stakes in the Electrica-owned distribution and supply subsidiaries
to the parent company. While the sale came at a c. 3% effective discount to
carrying value, the proceeds will be used to buy back shares and fund
tender offers – given the current 28% discount, the transaction will be
accretive to FP’s NAV.

AGT

Pargesa • Newsletter June 2015

We have continued to switch out of GBL in favour of its cheaper
parent, Pargesa, although overall exposure to the group is lower than previously as we have preferred to add to some of the
companies described earlier.