Business Breakdowns
· Krishna Mohanraj
[00:00:00] S1: If you start with Juventus, I have a lot of positive things to say about capital allocation in general, but Juventus always raises some eyebrows. It is a storied asset. Over the long term, it seems to be worth a lot more than at least recent troubles and valuations would suggest. But you have to definitely ask the question economically, does it move the needle in terms of Exor's chosen metric, NAV per share? It is definitely a quote unquote legacy asset. I can't find a better word for it. And you have to ask why they need to own a stake in a football club with a very checkered recent history, not just in performance, but also in terms of corporate governance scandals. The entire board, including the president, had to resign. The president was an Agnelli. To add to everything, this is clearly a family passion. Football and the family's relationship with Juventus goes back generations, so it's a tiny part of asset value. So a fair question is, why bother? Isn't it just a headache that takes away from what is really crucial for NAV per share growth? And the only possible reason it's in the portfolio is because it's a family passion. So it is what it is. Clarivate is a lot more interesting. Clarivate is an analytics company spun off from Thomson Reuters. They serve the academic market, the scientific market, life sciences, intellectual property assets around it. It's a subscription business. It provides things like literature reviews, competitive intelligence, data on patents, trademarks, et cetera. Now, if you think about where Exor is thinking about going in the future, in places like healthcare technology, Clarivate not only is an interesting investment in itself, but it provides one of the building blocks, I think, for them in that ecosystem where they want to step into the future. We will talk about Philips and Institut, bioMérieux, other investments in that space, and they all seem to kind of fall in that bucket. So it is quite an interesting investment in the context of the portfolio and where they want to take the portfolio.
· Zack Fuss
[00:00:00] S0: I think this is maybe a good point to check in on broadly valuation here. What's always striking about these publicly listed holding companies is when they trade at such a significant discount to what the listed constituents would support on valuation. And then of course, this is a business that also has investments that are not listed, which we'll discuss in some level of detail. But what is the setup here as it relates to their published NAV and the listed interests and the way that the stock trades, and then further, how they are making efforts to close that discount to NAV in a way that are material?
· Krishna Mohanraj
[00:00:00] S1: The mechanics of the valuation is super simple. The asset base is dominated by publicly listed companies. A full 70% of assets is listed. You have a market price for them. You can make reasonable assumptions on the private assets based on disclosures, subtract net debt, and you end up with a reasonable estimate of spot NAV. You don't need to be too precise here because the stock trades at a big discount to this NAV, anywhere from 50 to 60% depending on your assumptions, and you're going to find the discount quite attractive. So the mechanics of the valuation itself is pretty straightforward, but you have some big questions. The big question is the underlying assets, both the listed ones and the unlisted ones, what are the true valuations for them? But also, what should the discount be? What should the NAV discount be for a publicly listed holding company like this? So, starting with the first question, if you look at the big four public assets—Ferrari, Stellantis, CNHI, Philips—Ferrari is of course a unique asset. We said that it's an exceptional business, but it trades at a steep multiple and they seem willing to trim at these prices. So that's something to think about. The other three are all global businesses—Stellantis, CNHI, Philips—each facing a difficult business cycle and in the midst of turnarounds. None of them are trading at steep multiples. So if I put all of these together, I would say all in, you're getting a diverse mix of global businesses at reasonable prices. Now, to the NAV discount, I think it's interesting to see what the market is saying now. Having a NAV discount is part and parcel of being a holding company. There's no getting away from it. Having said that, in the case of Exor, that discount has been unusually high for a very long period of time. So why is that discount high? The market, of course, loves companies that are doing unique things and are exceptional at them. Ferrari, of course, Hermès would be another example. But if you think about it, a holding company is the exact opposite of a pure play exceptional business. I would say the NAV tells you the asset value of today, but for a holding company, it's hard to tell where it would be in five years from now. And it appears the market is saying they don't believe that they can maintain that NAV per share growth like in the recent past.
· Krishna Mohanraj
The NAV growth at Exor in the last three, four years, even longer, has all come from Ferrari. If you remove Ferrari, this ends up being an odd collection of turnarounds in markets that have both cyclical and structural headwinds. And then you have this collection managed by a third party who acts with a time horizon that might be much, much longer than what most market participants want. So why bother when you can own Ferrari directly if you want an exceptional company at a steep multiple, or if you want to play value on Philips or CNHI selectively, depending on your conviction? So that is the debate, really, and it's a fair debate. In all this, what I like is how pragmatic Elkann is when he talks about the discount. Not defensive, not complaining that the market is wrong, but I think correctly recognizing that the discount is an amazing opportunity for them, an opportunity for Exor to invest in themselves, to invest in something that they know very well, and buy back their own stock. The decision this year to trim Ferrari to buy back stock raised some eyebrows but was an excellent one in this context because it allowed them to buy back stock at very steep discounts to NAV. As an investor, if you need to be in this, you need to have a long time horizon and you need to believe that there is alignment between Elkann and the minority shareholders. Over time you will see NAV per share growth. You shouldn't be in it hoping for a narrowing of the discount because that is not in management's control.
· Zack Fuss
[00:00:00] S0: So go a bit deeper on that topic as it relates to their broader capital allocation policy, but also governance. Because one of the reasons that holdcos tend to trade at a discount to their sum of the parts is because people don't trust management to either treat their minority shareholders well and or focus on growing NAV instead of serving the best interests of the family themselves. And so how do you think about that here given John Elkann has a demonstrated track record of creating value? But to your point, a lot of that value has come through value appreciation at Ferrari. What does the go forward capital allocation strategy look like and how do you think about governance as it relates to their minority shareholders?
· Krishna Mohanraj
[00:00:00] S1: Capital allocation is the key question here. You have a holding company right now with really an odd mix of assets. What you're asking is what will this look like in five to 10 years? And that comes down to capital allocation. There are one or two negatives. I mentioned Juventus. They are small in my opinion. Once I've gotten that out of the way, almost everything I would say on capital allocation is positive. The way they define the investment approach itself is very systematic and very clear. They frame their approach as a duality, entrepreneurial spirit on one side and financial discipline on the other. If we start with the entrepreneurial spirit, they define their purpose as building great companies with great people, which really means buying and owning companies which are great or potentially will become great. And they measure their success with a very clear metric, per share growth in NAV and benchmark it against the MSCI World benchmark, which recognizes that they're global and their canvas is really the whole world. But building great companies with great people sounds nice, but it's not an easy thing to do. And they've definitely had exceptional success in turning a mess that was Fiat into a more manageable group of global companies. They've done generally well with several investments over time and of course on their chosen metric, they've done really well, benefiting from the value unlock in Ferrari, but it's still a work in progress. That is an open question as to where this goes in 10 years. The second part of that purpose is the people. And to your question on corporate governance, more than half of their role is about finding the right people, finding the right leaders, understanding their plans and then giving them the space to execute. They are looking for people who can think long term, but can act in the now. The greatest success again, Sergio Marchionne was one of the greatest CEOs ever. He was an outside CEO, but they're also open to people who come both from within and from outside. Benedetto Vigna at Ferrari was an outsider. His selection was super interesting. Very strong technical leader, many patents in sensors and microelectronics. He seemed a very inspired choice, again, not auto, to lead Ferrari into the EV world. At the same time there are also homegrown leaders.