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Slim down – A favoured company’s falling share price can muddle investors’ thinking

16/04/2013

Nick Kirrage

Nick Kirrage

Fund Manager, Equity Value

Since we last considered the relationship between struggling Dutch telecoms group KPN and Mexican multi-billionaire Carlos Slim in bottom line, things have all gone rather quiet. This affords us the opportunity to speculate about what the world’s richest man may or may not be thinking with regard to his stake in the group

You may recall how, in May 2012, Slim increased his holding in KPN from 4.8% to almost 30%. Since he bought in – at €8 (£6.79) a share – the price has fallen to around €2.60, leaving the business magnate currently nursing paper losses of not far off €2bn.

As we have observed before, this story may still have some way to run but, as things stand, it looks like even Slim has been caught out by the fundamentals of the increasingly competitive Dutch telecoms market and the less than healthy state of KPN’s balance sheet, both of which had already caused the shares to fall to his initial €8 entry point.

The reason we are revisiting this uncomfortable situation on the value perspective is to wonder – perhaps a little presumptuously – whether Slim has fallen foul of a classic piece of muddled investment thinking that has caught out many investors and companies with a far less illustrious track record than him.

Clearly to have bought a 30% stake in KPN back in may last year for €8 a share, Slim must have thought the business was worth substantially in excess of that. Today, however, he could actually buy the entire business for less than the €2.7bn he originally paid for his 30% stake and yet there do not appear to be any serious overtures to buy the outstanding shares at the current, much lower, price.

Psychologically speaking, it is interesting that while Slim apparently loved the business at €8 a share, he does not seem to be quite so keen at €2.60 a share. None of this is to suggest he will not work out some clever structural answer or pull off another coup at a later date – Slim’s reputation (and fortune) is of course founded on four decades of turning around ailing businesses.

However, as things stand, this does seem a classic individual example of something we see all the time in a corporate context – the correlation between M&A activity and the investment market. If markets are thriving and share prices are elevated, companies and boards are apparently much more comfortable making acquisitions and buying back shares than when share prices and markets are low.

Slim has demonstrated an excellent eye for value in the past and clearly thought he was doing so again with KPN. He may well be proved right in the end and, if not, even the best investors make mistakes. Nevertheless, it is still worth noting that, since the business’s shares fell more than two-thirds, it has all gone very quiet at KPN.

 

Author

Nick Kirrage

Nick Kirrage

Fund Manager, Equity Value

I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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