Friday, March 18, 2011

ACAS: ECAS Making Money, Too

Recently, the Jaded Consumer posted on ACAS' recent year-end and Q4 results. One recurring feature of ACAS' finances is its undervalued holdings in European Capital (ECAS), its formerly (before early 2009) publicly-traded European investment subsidiary, which occasionally gets news releases of its own. (E.g., consider ACAS' 2Q2010 report, which discusses ECAS' valuation as a feature of ACAS' long-term prospects.)

Now, ECAS has released some 4Q2010 and full-year results of its own.

Just like ACAS, ECAS has raised its NAV over the reporting period. At the close of the fourth quarter of 2010, ECAS' NAV of €629m (for those on the left side of the pond, $890m) was up 8% over the prior quarter and up 19% over its NAV at the close of 2009. Not only have NAV increases resulted in SEC-reportable income (remember, unrealized appreciation in securities is now "income" for SEC purposes but not IRS purposes; in the case of this reporting period, it's €47m (31% ROE) on the quarter and €105m (18% ROE) over the year), but ECAS' consolidated financial statements have been boosted by its operating companies' results to a net operating income (NOI) of €29m ($41m) over the quarter and €48m ($68m) for the full year (a 29% increase over the 2009 result).

So, why is a 29% y/y increase in NOI a result to smile about? For starters, ECAS is ACAS' largest single investment. Returns like that on a large investment are much more interesting than a similar return at a portfolio company too tiny to materially impact ACAS' results. More importantly, ECAS isn't just some portfolio company: it's an application of ACAS' business model to European markets, and thus a signal both of (a) results one should expect from ACAS itself, and (b) how ACAS' management should be expected to perform across larger geographies going forward. In the near term, it shows that ACAS can grow a substantial investment's NAV from €528m to €629m in just a year, even as ACAS continues to report the investment as having a FAS-157-compliant "fair value" of $636m (that's not a typo; it really is about €449).

Since ECAS' NOI and NAV increases are not based on ACAS' "fair value" of ECAS but on the capital actually available to ECAS and the particular deals in which ECAS has that capital deployed, the NAV-discounted "fair value" of ECAS doesn't impact ACAS except to the extent that it makes it a better deal to buyers while the "fair value" ACAS continues to report trails not only the value one might assign on the basis of future cash flows but also the value ECAS would realize liquidating its holdings, or that ACAS would fairly report if it dissolved ECAS in favor of direct ownership by ACAS.

Another investment that ACAS investors will want to watch is Mirion Technologies (MION), ACAS' company that provides surveillance equipment and services to the nuclear industry. Events in Japan have raised awareness and concern about nuclear power and its safety, potentially making MION's products and services more valuable. Theoretically, Japan's recent experiences may create additional headwind for new nuclear projects, but let's face it: new nuclear projects weren't exactly queuing up to launch, and have long been subject to NIMBY opposition and regulatory hurdles of various sizes all around the globe. Japan's news will tend to prolong this trend against nuclear as a clean power option, by helping depict it as potentially frighteningly unclean. Nothing in the news out of Japan will drive existing nuclear power offline, however, but may make compliance and safety a bigger-profile issue going forward. How this impacts MION's eventual pricing as ACAS seeks to take it public is a definite must-see event for ACAS investors, because MION is ACAS' second-largest holding and – for that reason – has the potential to offer a material impact to ACAS' bottom line.

Much larger than MION, however, and much more reflective of ACAS' broader business and the success of its business model, is ECAS. Good news on ECAS – like that in the recent results – is good news indeed for ACAS.


Anonymous said...

Hey Jaded. There has been some takeover talk recently on ACAS. Comments?

Jaded Consumer said...

To the extent someone wants a private equity portfolio below NAV, it makes sense, but your comment is the first I've heard of it.

The question is whether takeover would occur below NAV or would be opposed by management in ways that would lead to the collapse of the deal. I knew they had shopped large investments like ECAS and MION, but didn't have the impression they were shopping the company itself.

Given ACAS' lukewarm reception to its effort to market ECAS not that long ago, I'm prepared to believe that the chatter is idle and not getting particularly excited. I would much rather be an investor for the next decade and enjoy resumed dividends and NAV-premium trading and above-NAV accretive issuance and so on, than I would want some turkey to try to buy me out at $10 or $11 or $12. In fact, just imagining it makes me irritated.

It's my investment! I found it first! Go buy your own company!

Ahh, well. We'll see.

Anonymous said...

The takeover talk is all over the wires as of current.....Seeking Alpha..Flyonthwall...etc.

Jaded Consumer said...

The buzz is definitely easy to hear at this time. Seeking Alpha has one article talking about the other now!

On 3/25 when the first post about it was made, though, I'd not yet heard about it.

The idea that GE Capital is being advised on the purchase and that the target price is about $15 is interesting, but I'd still rather be a long-term owner.