Chargeurs Tender Offer.
CEO Michaël Fribourg lanches a tender offer at €12 per share with the aim to achieve a majority stake in the company.
Summary
CEO Michaël Fribourg, who controls almost 30% of the company through Colombus Holding, will launch a takeover bid for Chargeurs at €12 per share.
His aim is to achieve a majority stake while keeping the company listed.
The proposed price of €12 per share represents a premium of 36.2% to the wighted average share price over the last month and 50.5% over the last three months.
The tender offer comes after a rough 2023 for the stock price.
The weakness in Chargeurs Advanced Materials and the excessive leverage are affecting the results of the group.
The last year.
Last February I wrote a deep dive into Chargeurs, a small french conglomerate which I thought was a good investment at the moment. One of the reasons was CEO Michaël Fribourg, who also controls 29.52% of the voting rights: during his tenure at the top he has showed great business acumen reinvigorating the legacy businesses of Chargeurs and entering new niche markets.
Fast forward 10 months and the stock has been hammered back to 8-year lows for three main reasons:
Chargeurs Advanced Materials (CAM), its largest business, has vastly underperformed - inflation, raising interest rates (affecting the construction sector) and energy price increases in Europe have taken a huge toll in the business.
Excessive Leverage - under Fribourg management Chargeurs has followed a strategy of inorganic growth coupled with strong shareholder remuneration. Therefore, net debt is expected to reach €215.12M at the end of 2023 (a scary 4.02 net debt to EBITDA ratio), which in an environment of raising interest rates started to worry investors.
Chargeurs Healthcare Solutions (CHS) revenues dropping to zero - the highly profitable business launched in 2020 during the pandemic selling masks and other Personal Protective Equipment no longer adds to the group once COVID is over.
While the rest of the businesses have produced solid results, especially the newly created Chargeurs Museum Studio (CMS), it hasn’t been enough to fill the hole left by CAM and CHS. As a consequence, EPS expectations have been drastically lowered.
Under this depressing atmosphere, Fribourg has decided to take advantage of the low valuation of Chargeurs.
The Tender Offer.
On Thursday December the 14th, Michaël Fribourg announced a tender offer at 12€ per share vía Colombus Holding 2, a new investment vehicle formed alongside the Habert-Dassault Family (owners of the Dassault Group), BNP Paribas and other French institutional investors. By French law it is mandatory to launch a tender offer in case of crossing the 30% threshold, so if Fribourg wanted to increase its position he was obliged to put in place a takeover bid.
His aim is to achieve a material majority stake of the company shares without delisting the company. Taking into account the stake he already controls through Colombus Holding, he would only need around 6 million more shares. The offer will be declared obsolete if at least 50% of the capital or voting rights isn’t reached.
The Board of Directors, having welcomed the proposed offer in principle, has created an ad hoc committee and appointed Didier Kling Expertise & Conseil as an independent expert to prepare a report on which it will issue a reasoned opinion.
The timing of this offer is spotless in my opinion because Chargeurs is now in a place where its main business (CAM) is not delivering good results paired with several businesses which are in its early steps or going through a transformation:
CMS revenue is growing at fast pace but it still has many countries ahead to expand to; moreover, margins should improve in the coming years. In 3-4 years it could be a €200M revenue business with a double digit EBIT margin.
Chargeurs Luxury Fibers (CLF) is going to enhance its profitability thanks to the development of the higher-margin NATIVA brand.
Chargeurs Personal Goods (CPG) is still too small and its luxury brands are in the early stages of development. Swaine, its main acquisition, is not even consolidated yet.
Chargeurs PCC Fashion Technologies is showing resiliency and contributing to the bottom line. Nonetheless, management thinks that there’s still room for improvement.
Right now is the perfect moment to launch the offer, when the blood is running in the streets.
The Background.
Michaël Fribourg has been at the top of Chargeurs for 8 years so its management style is already well known: his strategy has been focused on acquisitions and premiutization. In the first years at the reins he strenghthened the Technologies segment of the group (CAM and Fashion Technologies) via acquisitions making them world leaders in their niche markets.
From 2018 the acquisitions were centered in the luxury segment, creating Chargeurs Museum Studio and Chargeurs Personal Goods. One of his best coups was to create Charguers Healthcare Solutions during the COVID pandemic selling PPEs. It allowed Chargeurs to have a record year in 2021.
Although I think his management has been good, looking at the numbers we can see that there’s something off: the rise at the EBIT level has not been matched at the EPS level, which is what ultimately matters.
The problem has been the increase in debt, from a net cash position of €23.30M in 2015 to a net debt position of €174.70M in 2022. Interest expense in 2022 alone has amounted to €19.10M, which is a huge amount for a company this size. The M&A activity plus the high dividends paid (more than 1€ per share in 2020 and 2021) plus some buybacks have eaten up the Cash Flow generated and much more.
I think the debt was manageable as long as CAM could deliver good results, but once it has showed signs of weakness, it has rattled investors. The rest of the businesses have not been able to carry the weight. Thus, revenue for 2023 is expected to be just €678M with EPS of 0.35€. Net debt is expected to reach €215M, implying a whopping 4.02x Net Debt/EBITDA ratio.
That’s the reason the share price has collapsed in the last months.
The Future.
Although the present doesn’t look too rosy, there must be something good when the CEO of the company is ready to double its position. In this article Fribourg shares its rationale behind the takeover bid and what would change in Chargeurs afterwards.
A though road ahead - in the article Fribourg admits that the total recovery of the activities (I think he refers mainly to CAM) will take time. The tender offer is a way out for the investors who don’t want to wait for the turnaround or who cannot stomach the volatily in the small cap sector. Until now the official narrative was that 2023 was a transition year before coming back to more normal levels in 2024.
Simplification of the group - For the first time Fribourg discloses that divestments are now in the table. The group is very diverse and there’s a need to streamline it. There is a recent report from Exane BNP Paribas (sponsored by the company) which reinforces this view: the potential candidates for a disposal would be CAM and Fashion Technologies, with an EV of €245M and €134M respectively.
New Strategic Plan - Fribourg clearly states that a new strategic chapter will open for Chargeurs after the tender offer. Despite the fact that the 2025 Strategic Plan goals seem unachiveable (€1,000M in revenues and 10% EBIT margin), management will work in a new strategic plan with an horizon 2030-2035. The plan to acquire a larger company in the luxury segment is out of the question with this level of leverage.
My personal view is that his plan is to get rid of CAM in the next upswing cycle to focus on the luxury segment because it is a cyclical business that doesn’t fit in with the rest of the group. Additionally, as long as CAM has a strong weight within the group, Chargeurs will not be seen and valued as a luxury company.
For people who are not familiar with the business climate in France, let me tell you that for them owning a luxury company is the pinnacle. Luxury to France is what Tech is to the US; their reference is Bernard Arnault instead of Elon Musk or Steve Jobs.
The fact that Fribourg is not strange to this way of thinking can be sensed in every interview or earnings call: most questions from analysts and reporters are centered on CAM and he is always trying to put the light on the luxury segment on the group. It will not be easy, but can be done. The proceeds from the CAM sale could be used to buy a company in the luxury sector to finally reposition Chargeurs as a luxury company.
Again, this is just speculation from my part and I can be wrong but having followed the company very closely for quite some time I think that’s where Fribourg wants to place Chargeurs.
What its sure it’s that a new chapter would open for Chargeurs if the offer is successful, for better or worse. The next years could witness a radical change in the group that could greatly change the perception of the company. And it looks like Fribourg wants to have free hands to execute what he thinks is better for the long-term of the company.
The Decision.
In the end when an offer of this kind arrives a decision has to be made. Due to the recent track record of the stock, there are two kind of investors which will see the offer quite differently:
The short term investor who bought the stock in the last three months could pocket a fast 30%-90% gain (depending on where they bought in the €6.29-€9.20 range). In this case I think most of them will sell their shares.
On the other hand we have the investors with an average purchase price above €12 with a long-term investment horizon. Let’s not forget that the stock was trading at almost €30 just 2 years ago: many investors will be not be willing to sell the stock at a steep discount.
Having in mind that Fribourg only needs around 6 million shares it is very likely that the offer will be succesful. Good news is that if you don’t want to sell your shares you will not be forced to.
Let’s also not forget that the Board of Directors still has to issue its reasoned opinion based on the report by the independent expert. Until then nothing has to be taken for granted.
My Decision.
In my case I am a bit between the two scenarios: I started my position in Chargeurs around 15€ per share but have added lately taking advantage of the share price collapse, lowering my average purchase price to €10.52. But I am not planning on selling. The fact that the main insider of the company is willing to almost double its position is a strong enough argument for me to hold to my shares.
I have always viewed my investment in Chargeurs as a long-term bet, with an investment horizon of 10 years or even longer.
I am well aware that the reality of Chargeurs is far different from what I wrote back in February. My investment thesis back then was plainly wrong. The Chargeurs of the future will be different to what I predicted back then, but the potential of the group is still there in my opinion.
Conclusion.
After a rough 2023, CEO Michael Fribourg has decided to increase its position in Chargeurs with the aim to achieve a material majority stake in the company. The recent collapse of the stock price has allowed him to launch a takeover bid at €12 per share, more than a 50% discount compared to where the stock was trading just two years ago.
Under his tenure, Chargeurs has grown very rapidly through acquisitions, solidifying its legacy businesses and adding new businesses in the luxury segment whichwhich are growing fast but are still too small to carry the weight of the group. That’s why when Chargeurs Advanced Materials has hit a difficult phase leverage has skyrocketed, affecting the valuation of the company.
Personally, I am going to hold to my shares. The fact that the CEO of the company is ready to double its position is a strong signal to the market that the stock is clearly undervalued.