2020 as seen through the prism of manager stock purchases

Paris, 18 March 2021 – We pay special attention to the activities of managers of the companies in which we invest, in particular regarding corporate actions. Managers are, of course, well placed to know just how much their companies are worth and to assess both progress within their companies and trends on their underlying markets. That’s why we keep a close eye on when managers add significantly to their personal shareholdings.

Iliad, the ultimate example

Iliad, the parent company of Free, the French telecom operator, is one of the clearest examples. We have held shares in Iliad for more than three years. In 2018 and 2019, volatility in its shares was stoked by the aggressive price war launched by SFR, as it was migrating its business model from that of an MVNO to one in which it owns its own infrastructures.

Interestingly, Xavier Niel, Iliad’s main manager-shareholder, took advantage of its very low valuation in late 2019 and early 2020 to increase his stake drastically via a transaction that gave him 20% of the shares, including 40% of those in free float. This was an especially intriguing signal, not just for the size of the position, but mainly because it came amidst two trends that we were beginning to identify:

1. a slackening in competitive pressures, as prices began to turn up; and
2. an in-house revision of the group’s marketing & sales strategy, the impact of which was beginning to show up.

We believe that these two signals, combined with the stock’s low valuation, pushed Niel into action. And management’s optimism was confirmed by very good results that triggered a rally in the shares in 2020.

Opportunistic buying during the Covid dip

2020 was an especially eventful year, due to the economic fallout from Covid-19. The severe market correction of March 2020 was, at first glance, broad-based and undifferentiated. Some companies’ shares were being bought up rather aggressively, as insiders deemed that the valuations implied by the correction were quite overdone in comparison with the crisis’s impact on their companies underlying businesses.

There were many examples of this, beginning with SAF-Holland, a Germany-listed heavy truck equipment maker in which we have held shares since the second half of 2020. SAF-Holland gradually replaced its entire management team from early 2019 to mid-2020 after the underperformance of the previous team. Covid sent the share price very low, to about €3.5 (vs. €12 currently). At first glance, this extreme pessimism on the company’s prospects may have been justified by its poor track-record. Even so, we saw the new managers buy shares heavily during the March/April dip, particularly the chairman/CEO, who picked up almost 1 million euros in shares in a single transaction.

Apart from the low valuation, what was behind this level of confidence at a time when there was almost no visibility whatsoever? We believe that management was very well placed to spot two major turning points:

1. the restructuring plan implemented previously was beginning to pay off, thus enhancing the company’s resilience to a shock of this extent
2. the company’s liquidity was not at risk, as destocking driven by a slower production pace freed up working capital, which generated excellent cash flow.

The managing family of the French plastic packaging maker Guillin (who is also its main shareholder) also flagged its confidence in adding to its stake at a valuation that we estimate at about 4 times the company’s operating income in March and April. This was a big opportunity for a non-cyclical business that proved to be resilient during a year as challenging as 2020.

Waves of opportunistic takeover bids by manager-founders

During the summer, we saw a number of corporate actions that we would describe as opportunistic by majority shareholders or manager-founders backed by private equity funds. Some companies’ valuations had fallen to levels that were affordable or even very low, triggering more structured moves to raise stakes in the form of buyouts or share buybacks. Some manager-founders saw the crisis as a historic opportunity to raise their stakes through heavy buying.

In France for example, in the digital services sector, manager-founders of Devoteam and Groupe Open, in which we hold shares, joined with private equity funds to launch buyouts at premiums of 25% and 40%, in which they picked up 60% and 40% of all shares, respectively. The premiums may at first glance have looked overly generous, but we felt that the bids valued the companies at multiples that were still affordable, particularly in the case of Groupe Open.

We saw something similar in Germany, with the incubator Rocket Internet, whose founder and core shareholder, Oliver Samwer, had been adding to his stake for more than two years, both directly and indirectly. We felt he was right to do so. Nevertheless, he took us by surprise when he launched a mandatory squeeze-out bid without a premium, valuing the company at its net cash. Unfortunately, German market rules, which are highly unfavourable to minority shareholders, allow this type of unscrupulous behaviour. This unpleasant experience reminded us that an overly positive interpretation of a share-buying signal may not work out in countries whose securities market laws do not provide sufficient protection to minority shareholders.

Managers used to buying their company's shares continued to do so

Bolloré companies (Odet-Bolloré-Vivendi) are among the convictions that we have held for some time now, in part for the value of Vivendi’s stake in Universal Music Group, which controls one third of the global recorded music industry. UMC has risen constantly in value since the music industry found a sustainable monetising business model via streaming platforms like Deezer and Spotify. We saw heavy buying in Financière de l'Odet (the listed entity controlling Bolloré Investissements) by its parent holding company, Sofibol, beginning in March 2020. Sofibol acquired 5% of the free float between March and May. More unusually, the Bolloré family began to buy shares in Financière de l’Odet directly in August and ended up acquiring 12.5% of its free float in 2020!

We interpreted this as a harbinger of some reshuffling within the Odet-Bolloré-Vivendi galaxy. And, indeed, Vivendi just recently announced the spin-off of Universal (in which Bolloré Investissements will become a direct shareholder) and believe that Odet could very well be delisted, now that its free float is smaller and smaller (now just 7.5% of all shares).

We might also mention Econocom and Tessenderlo, two Belgian companies whose core shareholders have raised their stakes constantly in recent years, including during the 2020 market dip.

The opposite is happening in the US, with a few exceptions

In the US, many managers also bought up shares in their own companies in March/April 2020, but over the past two years divestments have been even greater than during the 2000 market boom. This is all the more impressive in the case of Nasdaq-listed tech stocks, most of which are currently trading at multiples that reflect unbridled optimism. We are rather wary of this trend at the moment. In fact, the only Nasdaq company that we have managed to add to our portfolios is Upwork, the world leader in free-lance employment. We were able to build up a holding in late March 2020, encouraged by heavy buying by two managers (about 1 million euros each). Moreover, in 2020, this was one of the few US tech companies whose managers bought more than they sold. In addition, as a result of the Covid-driven acceleration in growth, combined with the new management’s initiatives, Upwork was able to make up its valuation lag by yearend.

Does manager selling tell us more than manager buying?

What the signal sent out by manager selling? Should we have considered it symmetrically? This is not as easy a question to answer, as there are several reasons why a manager might want to sell down his stake. He may indeed want to sell into excessive market optimism to lower his exposure, but he may have other reasons, as well, such as monetising a portion of his entrepreneurial risk. Obviously, manager-founders often have a large portion of their wealth tied up in company shares and may naturally want to reduce this exposure, while monetising part of that risk. Managers also sell some shares after exercising stock options and use the proceeds to pay the tax bill resulting from their options-based compensation packages or to finance personal plans. In short, we believe there is less predictive value in divestments than in acquisitions, as there is often only one reason why managers want to increase their holdings – their view that their company’s current valuation does not reflect its fundamentals. And they are often the best-placed persons to know.

The aforementioned information is derived from a study conducted by Amiral Gestion and under no conditions is to be construed as an investment recommendation.