Pargesa and GBL: A Tale of Two Discounts

by: Clemens Scholl

This article is both an update to an earlier article from a few months ago about the European holding companies Pargesa and GBL, and an attempt to more thoroughly untangle the cash positions of both companies. This turned out to be a little more difficult than I originally thought and is perhaps an interesting lesson for readers that may not be too familiar with consolidated accounting.

Let me first once again clarify the inner structure of these companies. Pargesa Holding (OTCPK:PRGAF), a Swiss company, and Groupe Bruxelles Lambert [GBL] (OTCPK:GBLBF), a Belgian company, are multibillion-dollar holding companies that have a long and colourful history. Both companies and their ultimate majority shareholders, the family members of Baron Albert Frère of Belgium and Paul Desmarais of Canada, in conjunction with French bank BNP Paribas (OTCQX:BNPQY) have significant influence among some of the world’s largest companies, especially France’s top blue chips. Today, GBL controls a portfolio of eight listed blue chips worth nearly $20 billion.

GBL’s history is nearly as old as Belgium itself. In 1860, an Alsatian Jew named Léon Lambert joined a family member in Belgium that was a correspondent for the Rothschilds in Antwerp and Brussels. His descendants further grew the family business, which became the Banque Lambert. Another Léon Lambert, born in 1928, dramatically influenced the group after the Second World War. He bought out the bank of the Fabri family (Banque de Reports et de Dépôts) in 1953, absorbing the banking business and gaining control of a large investment portfolio.

In 1964, baron Lambert started the first takeover battle in Belgian history, seeking to gain control of Sofina (OTCPK:SFNXF), another very important holding company at that time. His move clashed with the interests of the powerful Société Générale de Belgique, the dominant holding company in Belgium. The Société Générale succeeded in wrestling control of Sofina from the Lambert group. The assets of Société Générale and Sofina were acquired in the last decade by French group Suez, which merged with Gaz de France [GDF] in 2008 to form GDF Suez (GDFZY.PK), one of the world’s largest utility companies. Today, Sofina has little connection to its once dominating role in the world’s electric utility space, and operates as the holding company for the assets of the Boël, Janssens and Goblet d'Alviella families.

In 1972, the Compagnie Lambert merged with Brufina and Cofinindus (the “groupe de Launoit”) to form what became the Groupe Bruxelles Lambert. Three years later, in 1975, the banks of the two groups, Banque Lambert and Banque de Bruxelles merged to form Banque Bruxelles Lambert [BBL]. This bank is at the origin of the current ownership structure of GBL. Indeed, BBL had in the 1970s incurred a heavy loss due to a speculative position taken by a rogue trader. To cover the loss, the bank had borrowed a corresponding amount in Swiss Francs. The appreciation of the Swiss currency against the Belgian Franc made the debt burden heavier, at the worst possible time. In 1980, the bank’s results and the revenues from the industrial portfolio companies were heavily impacted by the economic crisis resulting from the 1979 energy crisis. The group faced a life-threatening situation. The sale of some of its important holding seemed the only issue, but baron Lambert is fiercely opposed to this idea. The only solution thus seems to seek new capital. GBL needed an investor able to inject about three billion francs into the company.

Enter Albert Frère, a self-made man from Charleroi that amassed a fortune through his business interests in the steel industry. He left the steel industry in before the heavy crisis that hit it in the 1980s and had capital to invest. In 1981, Albert Frère is not part of the financial Establishment, but GBL is desperate enough to seek the help of a parvenu. In 1982, Frère and his allies in Pargesa become 35% shareholders of GBL and inject 2.65 billion Francs in new capital into the group.

In the following decades, Frère and Desmarais make good use of the group’s assets and use the dominant stakes in Belgian national companies to exchange them for minority stakes in international blue chips. Frère sells the BBL bank to the dutch company ING (NYSE:ING) and the stake in the insurance company Royale Belge is sold to the French insurance giant AXA (OTCQX:AXAHF). GBL’s stakes in Electrafina, Petrofina, Tractebel and Suez-Lyonnaise des Eaux were progressively exchanged for what are now a 4% stake in oil major Total (NYSE:TOT) worth about 3.6bn EUR and a 5.2% stake in utility GDF Suez (GDFZY.PK) worth 2.8bn EUR – as well as 6.1% and 7.1% stakes in their respective spin-offs, Arkema (OTCPK:ARKAY) and Suez Environnement (OTCPK:SZEVY). More recently, GBL acquired large stakes in leading cement company Lafarge (OTCPK:LFRGY) and spirits company Pernod-Ricard (OTCPK:PDRDY), as well as a dominant stake in materials company Imerys (previously Imétal) (OTC:IMYSF) from the parent, Pargesa Holding.

Pargesa Holding is an intermediate holding company that was used in 1981 as a vehicle to save some French assets from nationalization by the socialist government. Today, its only use is to hold a controlling 50% stake in GBL. Pargesa has no assets other than 80.680.729 shares of GBL worth a little more than 4.8 billion Euros. Pargesa has public shareholders holding 32.2% of the capital, but only 18% of voting rights. 56.5% of Pargesa’s capital are held by Parjoincto, the joint-venture of Albert Frère’s family holding CNP (recently taken private) and the Desmarais’ Power Financial Corporation (OTCPK:POFNF). BNP Paribas still holds about 11% of Pargesa’s capital. Since Pargesa serves no real useful purpose anymore as an intermediary holding company, it is very possible that it will, at some point, cease to exist in its current form. This could take the form of a takeover bid by Parjointco, or a dissolution of Pargesa and the distribution of the underlying GBL shares to shareholders or Pargesa.

control structure

Pargesa does not produce financial accounts based on its holding of GBL shares, but consolidates GBL’s accounts into its own. Therefore, the net asset values published by Pargesa, as well as the stated cash position, are based on GBL’s ultimate holdings.

What would be Pargesa’s net asset value if we only base it on its holding of GBL shares?

To obtain this value, we need to calculate the value of the GBL shares held by Pargesa, and deconsolidate the cash holdings of GBL and Pargesa. Because of the consolidated accounting, and the fact that Pargesa’s accounts are published in Swiss Francs and GBL’s accounts are published in Euros, this exercise becomes slightly messy.

Based on the market price of GBL shares (59.07 EUR on June 24), the total value of Pargesa’s stake in GBL is around 4.8 billion EUR, and as of April 29 (date of the Q1 results and latest detailed NAV publication), the consolidated cash position of Pargesa was -578 million EUR (-741m CHF, converted at the then prevalent exchange rate). Luckily, we also know from GBL’s Q1 results what its cash position was at the same date: -1,055 million EUR. This amount includes the dividend paid by GBL, and the Pargesa cash position includes the dividend received from GBL.

GBL itself receives a lot of its dividends in the May-July period from its holdings (see table below).

dividends, portfolio

Until the end of June, GBL has thus pocketed around 280 million EUR in dividends (a further 60 million will be paid in July by Lafarge). GBL has not paid any tax on these dividends in the past years, so I will assume in the following that the full amount of these dividends can be added to the cash position.

After these dividend payments, GBL’s cash position should thus be around -774 million EUR. Pargesa’s share in this position is 50%, thus -387 million EUR. Given Pargesa’s consolidated cash position of -578m, Pargesa’s net cash position should be around -191m EUR. Adding to that a dividend of 193.8m EUR (230m CHF) that Pargesa paid to its shareholders in May, the current treasury of Pargesa should be around -385m EUR. The detailed calculation is given below:

deconsolidation of cash

If we only base the value of Pargesa on its holding of GBL shares, which is the physical reality, then the net asset value of Pargesa should be about 4.4 billion EUR, or 51.8 EUR per share – the market is currently according a nearly 20% premium to this value, probably based on buyout speculations. On the other hand, the share trades at a discount of about 18% to the consolidated net asset value that is based on GBL’s stakes in Total, GDF Suez, Lafarge, Imerys, Pernod etc.

This paradoxical situation is due to the fact that GBL’s own discount to NAV is far larger, at about 26.4% - based on the latest published NAV from June 24.

This is thus really a tale of two cities (Brussels and Geneva) and of two discounts. Historically, the discounts to the consolidated NAV at the holding companies CNP, Pargesa and GBL have been very similar. Recently, with the going-private transaction of CNP, the valuations have begun to take different paths. The takeover offer for CNP was at a 7.5% discount to the consolidated net asset value, which has probably led the market to grant Pargesa a higher valuation than GBL since it comes next in the chain of control. It is also possible that many shareholders of CNP decided to reinvest the proceeds of the CNP offer into Pargesa, thus inflating its valuation.

Personally, I still think that Pargesa will probably not have a long future in its current form (a holding vehicle for just one company). But I am not sure into which form Paribas-Genève SA will transform itself. Could it become a Swiss holding vehicle for Paribas’ private equity investments, like Cobepa? Will Pargesa’s remaining public shareholders receive a cash takeover bid based on the consolidated NAV or a proportionate spin-off of GBL shares? Would Frère and Desmarais really be willing to pay a premium of nearly one billion Euros to the market value of GBL shares that they could buy on the open market?

I currently prefer an investment in GBL to Pargesa because of these open questions and the respective valuation. The funds we will receive in July from the CNP squeeze-out will mainly be redeployed into GBL. As a major European holding company with low leverage and great assets, trading at a substantial discount to assets already very cheaply valued by the market, it is a conservative investment and a good pick for anyone interested in a stable long-term European holding.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I hold shares of GBL, ING, Suez Environnement and GDF Suez