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Tuesday, May 20, 2014

The Marfin Group - A Great Place to Invest 250 MEUR?

My recent article about Pireaus Bank and the Marfin Group has lead me to take a look at the financial statements of the MIG Group. Warning: the below analysis is meant for readers who have never seen a balance sheet before. All others may excuse me for being so simple.

Like an individual person, a company has assets (things which it owns) as well as liabilities (monies which it owes). If assets exceed liabilities, there remains a net worth; also called equity.

MIG Holdings S.A. reported total assets of 1.523 MEUR at 31.12.2013. That is one-thousand-fivehundredandtwentythree-million-Euro; put differently - quite a lot! What were those assets? Brick and mortar? Machinery and equipment? Inventory? None of the above! The bulk of these assets (1,329 BEUR) consisted of paper; that is shares of other companies.

Against those assets, MIG reported total liabilities of 556 MEUR, most of which were borrowings. Sounds like a lot of liabilities but isn't a lot when compared to the total assets which exceed total liabilities by 957 MEUR; that was MIGs net worth or equity. Ninehundredfirtyseven-million-Euro is quite a bit of net worth. One would think.

MIG Holdings S.A.
(parent/holding company)

- in MEUR -


Investment in companies1.329
Other assets194


Total assets1.523

Other Liabilities59


Total liabilities556

Net worth (equity)957

The only thing is: if the paper assets were worth less than reported on the books, the net worth would be worth less, too. For example: if the paper assets were worth 957 MEUR less than reported on the books, MIG would have zero net worth. Thus, it all depends what those paper assets (i. e. the shares in companies) are worth. If they could be sold for 1.523 MEUR, the owners would indeed have a net worth of 957 MEUR.

Lesson 1: the balance sheet of the holding company of a group per se is meaningless because the holding company is no stronger/weaker than the sum of the companies which it holds. Anyone who lends to a holding company is lending against paper assets whose value is untested.

To assess the strength of the MIG Group, one has to add up all assets and all liabilities of all group companies. This is accomplished via the preparation of a consolidated balance sheet.

MIG Group Consolidated

- in MEUR -


Goodwill 318

Intangible assets 522

Investments in associates 65

Trading portfolio 8
Tangible assets 2.311


Total assets 3.284

Borrowings 1.857

Other Liabilities 711


Total liabilities 2.568

Net worth 716

Much to our surprise, we now see that the consolidated net worth (716 MEUR) is less than the net worth of the holding company (957 MEUR). Put differently, the sum of the parts is worth less than the overall sum reported.

But then there is another, much more critical, aspect: goodwill, intangibles, investment and trading portfolio (i. e. paper assets) amount to 913 MEUR. What are these assets worth?

Well, goodwill is exactly what the words say: good will. At some point in the past, MIG acquired companies and paid 318 MEUR more than the books said the companies were worth. They now show that 'goodwill' as an asset on the grounds that they represent future earnings. Once a year, companies are required to show that such goodwill is not impaired but that is relatively easy to accomplish: just put together financial plans which show that the company will earn a lot of money in the future. The more realistic way is to treat goodwill as worth zero; i. e. deduct it from the net worth.

Intangible assets can be all sorts of things. The original Coca-Cola recipe is an intangible asset and no one doubts that it is worth a lot. Patents can be intangbile assets; so can brand names be. The essence of an intangible asset is that it is not tangible; one cannot touch it like one can touch property/plant/equipment, inventory, etc. When push comes to shove, one often finds out that intangible assets are worth very little.

Lesson 2: liabilities are always worth at least as much as the books show; assets rarely are.

The MIG Group had consolidated liabilities of 2.568 MEUR; that's for sure. Against that, it reported tangible assets of 2.311 MEUR. Put differently, there is a positve consolidated net worth only if one attaches value to intangibles. Without a sufficient value of those intangibles, the group would be overdebted.

What is certain is that the group had consolidated borrowings of 1.857 MEUR, of which 1.375 MEUR had short-term maturities: technically, repayment could be mandated within one year. Consolidated current assets, i. e. assets which could be liquidated within one year, were 637 MEUR. Ask a kid from grammar school what happens if you have 1.375 MEUR bills to pay within one year but only 637 MEUR of assets which you can convert to cash during that time!

Lesson 3: if you don't have a strong net worth, you better make sure that you always have strong cash flows from operations and high profitability. Otherwise, you could be blown out of the water in no time!

As I have shown above, the MIG Group has more liabilities than tangible assets. Thus, there is less than zero cushion to buffer a crisis. How is the profitability of the operating companies?

MIGs operating companies are segregated into 8 industry groups (Vivartia, Attica, Hygeia, Singularlogic, Flight Ambulance, Sunce Bluesun, Robne Kuce and Real Estate). For 2013, these industry groups posted the below results:

Vivartia: net loss of 99 MEUR
Attica: net loss of 10 MEUR
Hygeia: net loss of 38 MEUR
Singularlogic: net loss of 7 MEUR
Flight Ambulance: net profit of 3 MEUR
Sunce Bluesun: net profit of 2 MEUR
Robne Kuce: net loss of 20 MEUR
Real Estate: break-even.

Well, can't get much worse than that!

In simple words: the MIG Group has a negative tangible net worth; its operating companies are incurring substantial net losses; its borrowings are 56% higher than the sales of one full year; and only 637 MEUR short-term assets back up 1.375 MEUR short-term borrowings. In short, the lenders are financing losses. The lenders will probably continue to extend financing because they have no way of getting their money back in the shorter term. Let the lenders become nervous and the entire MIG Group will be blown out of the water in no time.

Considerations for lenders
Only a foolish lender will make unsecured loans to the holding company because the holding company has no tangible assets and no cash flow on its own. Even if lenders to the holding company have the holding company's shares in subsidiaries pledged to themselves, in case of trouble they can write off their loans entirely: much of the group's debt is in the operating companies and lenders to the operating companies are always in a senior position to lenders to the holding company.

Lenders to the operating companies can put their hands on all the tangible assets in the operating companies and they will still not be fully covered. All they can hope for is that the operating companies will soon return to profitability.

PS for Piraeus Bank: to buy 250 MEUR convertible bonds of the holding company is like throwing money away (unless the proceeds were used to repay loans owed to Piraeus Bank). It is nothing other than speculating that a group which is currently incurring horrendous losses will eventually return to outstanding profitability. Good luck!

1 comment:

  1. .... ...relevant ? Irrelevant ? You decide....