Comment, question or quotation of the day

10-08-2022 : The pre-emption right: the right to pay more?

When a business is sold, a third party may have a statutory or contractual right of pre-emption which allows it, if it so wishes, to pre-empt the sale at the same price as that offered by a third party.

This right naturally complicates a sale process since buyers can never be sure that at the price they offer the beneficiary of the pre-emptive right will not use it to acquire the company put up for sale, and that they will then have lost their time. In our experience with mergers and acquisitions, we have often observed that this actually leads to higher prices because the buyer, who knows that a pre-emptive right can be exercised at the price he/she is offering, has every interest in going to the limit of his/her financial possibilities if he/she really wants to acquire the asset.

This is probably what we are seeing with the sale of Suez's waste assets in the UK by Veolia, who announced a price of €2.4bn offered by Macquarie, opening a 30 working day period for the new Suez to (re-)acquire them at the same price. The latter is well above what was expected with a multiple of 16.9 times 2021 EBITDA, pushing Veolia's share price up by 2% compared to 0.8% for the CAC 40. This multiple is above the multiple paid by Veolia to acquire Suez (9.5 times), although the comparison of the two multiples cannot be direct, as Veolia has acquired many different assets with different multiples within Suez. 

This transaction also shows that private equity funds, rightly or wrongly, continue in a number of cases to pay higher prices than trade buyers.

Have a nice day. 



29-07-2022 : SEB and the inflation

At 30 June 2022, SEB's working capital jumped by €700 million (to €1.8 billion) compared with 30 June of the previous year, with a roughly stable level of activity. The working capital thus rose from 14.8% of sales to 22.3%, its highest level for 10 years. And the debt has increased accordingly. Inflation explains most of this phenomenon, which is concentrated almost exclusively in stocks, with different effects.

Firstly, the rise in the price of raw materials, components and freight, which increases the amount of stocks for equal volumes, since these incorporate more expensive materials, components and transport costs. Secondly, a change in the behaviour of consumers in the face of inflation, who either buy less as a precaution or because of reduced real resources, or who buy cheaper products with lower margin. Hence, stocks of finished products are higher than expected, taking into account these changes in buyer behaviour. In addition, bottlenecks in the supply chain lengthen the transport time of finished products, thus delaying the time when they can be sold.

Higher material and freight costs and a change in the product mix to lower margin products lead to a drop in the operating margin by a good third from 8.9% to 5.4% of sales.

It should be noted, and this is impressive for a group which is not one of the world's largest, that SEB was able to publish its consolidated half-year results as early as 21st July, which is an indication of very good management. Well done to SEB's financiers, who certainly don't take their holidays at the beginning of July!

Have a nice day. 


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The Letter

Number 143 of July 2022

News : The new 2022 edition of the Vernimmen

News : Roundtable on SPACs

Statistics : World corporate income tax rate

Research : Do investors care about carbon risk?

Q&A : Can a conventional bond be converted into a green bond?

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